Aspects of Labour Market Failure

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Aspects of Labour Market Failure

  1. 1. Labour Market Failure A2 Economics
  2. 2. Market Failure – The Labour Market • What is market failure? • The failure of the market mechanism to reach a socially efficient and equitable allocation of scarce resources • Failure can lead to – Welfare losses for society – A misallocation of resources – Worsening of economic performance • Higher unemployment • Slower growth – Social problems – negative externalities High marks at A2 for finding links between micro and macro topics!
  3. 3. The most important market in the economy?
  4. 4. Potential causes of market failure • 1. Labour immobility and skills gaps • 2. Disincentives to work – “traps” • 3. Discrimination in the labour market • 4. Monopsony power of employers • There are other causes – but time only allows me to focus on these four and then on different options for government intervention
  5. 5. Labour immobility • Occupational immobility – (i) Skills mismatch – (ii) Loss of skills and motivation from long term unemployment – (iii) Artificial barriers to entry • Lawyers • Medics • Accountants
  6. 6. Geographical immobility • (i) Regional house price differences • (ii) Family and social ties • (iii) Language barriers • (iv) Differences in living costs • Which is the world’s most expensive city to live in? World’s most expensive cities in 2008 1. Moscow 2. Seoul 3. Tokyo 4. Hong Kong 5. London 6. Osaka 7. Geneva 8. Copenhagen 9. Zurich 10.Oslo 11.New York
  7. 7. Skills gaps • Market often under-provides skills training • The free-rider problem • Lack of finance for people wanting to invest in ‘human capital’
  8. 8. Evaluation: Why does immobility matter? • (a) Structural unemployment – has economic and social costs • (b) Makes the labour market less flexible • (c) Persistent labour shortages in some areas and surpluses in others – Creates inflationary pressures on wages – Forces up the costs of infrastructure projects e.g. Olympics – Depresses income in regions of high unemployment – Hits the provision of public services e.g. NHS dentists • (d) Rising inequality / relative poverty • (e) Deepens the regional economic divide • (f) Damages the potential output of the economy
  9. 9. Disincentives - Traps • For many people there are deep-rooted disincentives to look for and accept paid work • Poverty trap • Unemployment trap • The two are linked …. And you wont be penalised for assuming that they are the same!
  10. 10. Poverty Trap • Earning extra income may have little positive effect on a person’s disposable income – You earn more money…. But 1. Start paying income tax and national insurance 2. Start to lose income-related welfare benefits 3. Add in costs of childcare and travel to work expenses • Result is that the effective marginal rate of tax might be very high (perhaps > 75%) • Paradox: Poorer people face higher tax rates than the rich • Consequences: Fewer people in work ►risk of poverty
  11. 11. Discrimination in the labour market • Race • Gender • Height • Weight • Age • Ethnicity • Religion • Sexual preference • Other forms of discriminatory behaviour
  12. 12. Labour market discrimination
  13. 13. Discrimination • Often reflects deep-seated prejudice – Glass-ceilings • But also the result of information failures – Difficulties in measuring and monitoring people’s contribution at the workplace – So employers fall back on prejudice as a proxy • Requires legislation and enforcement • And changes in social values and tolerance
  14. 14. Using analysis diagrams in the exam Employment of group A Wage MRPL MRPL Dis Lab Supply We Wd EeEd
  15. 15. Using analysis diagrams in the exam Employment of group A Wage MRPL MRPL A Lab Supply Employment of group B Wage MRPL MRPL B Lab Supply We Wd EeEd We Ee Wm Ew
  16. 16. Monopsony power • Major (dominant) employers in an industry or a local town might use their ‘buying power’ to drive wages below a level that might exist in a more competitive market. • Examples: • Gang masters • Public sector employers • Employment agencies • Major employer in a local town • National health service • Royal Mail
  17. 17. Monopsony analysis Employment of labour (E) Wage rate £ Marginal revenue product Average cost of labour Marginal cost of labour E1 £180 £350
  18. 18. Workers may get paid less than their MRPL Employment of labour (E) Wage rate £ Marginal revenue product Average cost of labour Marginal cost of labour E1 £180 £350
  19. 19. How a minimum wage might create jobs! Employment of labour (E) Wage rate £ Marginal revenue product Average cost of labour Marginal cost of labour E1 £180 £350
  20. 20. How a minimum wage might create jobs! Employment of labour (E) Wage rate £ Marginal revenue product Average cost of labour Marginal cost of labour E1 £180 £350 Pay Floor = £220Pay Floor
  21. 21. How a minimum wage might create jobs! Employment of labour (E) Wage rate £ Marginal revenue product Average cost of labour Marginal cost of labour E1 £180 £350 Pay Floor = £220Pay Floor E2
  22. 22. Government intervention & market failure • Intervention justified because 1. Market failure causes loss of efficiency 2. On grounds of equity 3. Key evaluation is whether the intervention works!
  23. 23. Government intervention • Policies to protect the rights of trade unions to be recognised at work • Investment in education and training – Modern apprenticeships – Incentives to stay on in sixth form • Legislation – National minimum wage – Immigration points system – Licensing of gang masters – Equal Pay Act and other laws to protect people’s rights at work • Reform to taxation and benefits systems • Measures to make housing more affordable • In the exam • Avoid being excessively political / extreme in your answers • Always have costs and benefits of each policy to hand for evaluation
  24. 24. Tutor2u Keep up-to-date with economics, resources, quizzes and worksheets for your economics course.

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