Edexcel A Level Economics A:复习笔记3.5.3 Wage Determination in Competitive & Non-competitive Markets

• Labour market equilibrium occurs where the demand for labour (DL) is equal to the supply of labour (SL)
  • The DL is the demand by firms for workers
  • The SL is the supply of labour by workers
• Individual firms are price takers in the labour market as they have to accept the wage rate that workers are being paid in the industry
  • If they offer a lower wage, they will likely struggle to recruit workers
  • If they offer a higher wage there will be a large number of workers applying to work there

In the labour market for graphic designers, the equilibrium wage rate is W and the equilibrium quantity is Q. At this point the DL = SL

Diagram Analysis

• The market for graphic designers is in equilibrium where DL = SL
• The equilibrium wage is W and the quantity of labour is Q
• There is no excess supply of labour
• There is no excess demand for labour

• The labour market is extremely important as jobs provide income to households, which directly impacts the standard of living in an economy
• Changes to conditions in the labour market can be traumatic as they may result in changes to wage rates, working conditions and/or the benefits associated with a particular job
  • These changes can possibly decrease the standard of living for many people

Current Labour Market Issues in the UK

Maximum & Minimum Wages

• The UK Government usually intervenes in the labour market in order to improve equity & avoid the exploitation of workers
  • A maximum wage is a government imposed price ceiling below the market price & is rarely used
    • There has been some discussion recently to set maximum wages for CEOs as their wages in early 2022 were 86x the average wage of full-time employees
    • If CEOs were paid less then the average pay per worker may increase
  • A minimum wage is a legally imposed wage level that employers must pay their workers
    • It is set above the market rate
    • The minimum wage/hour varies based on age

A national minimum wage (NMW1) is imposed above the market wage rate (We) at W1

Diagram Analysis

• The market equilibrium wage & quantity for truck drivers in the UK is seen at WeQe
• The UK government imposes a national minimum wage (NMW) at W1
• Incentivised by higher wages, the supply of labour increases from Qe to Qs
• Facing higher production costs, the demand for labour by firms decreases from Qe to Qd
• This means that at a wage rate of W1 there is excess supply of labour & the potential for real wage unemployment equal to QdQs

Public Sector Wage Setting

• The UK government is the largest employer in the nation
  • In April 2022 there were 5.74 million public sector workers out of a total of 29.6 million employed workers (19.39%)
• In many industries, the UK Government is the dominant employer & so is able to exercise monopsony power in setting the wage rates
• There are several implications of this public sector wage setting
  • If the government increases the NMW, they are significantly increasing their own wage bill
  • The private sector often uses public sector wages as a benchmark for their own wage calculations
  • If public sector wages increase & private sector ones do not, it can create tension between workers in the different sectors
  • Increases to public sector pay often have to be paid for by increases in tax rates for the entire working population
• In June 2022, public sector workers were striking due to issues with the pay increases offered by the Government
  • Worker's wages were frozen from 2010 to 2015 after the 2008 global financial crisis
  • This was followed by rampant inflation & wage increases well below the level of inflation

 Policies To Tackle Labour Market Immobility

• There are many individual policies that the UK Government employs in order to reduce labour market immobility & together they help reduce the labour market failures

Examples Of Policies Used To Tackle Labour Market Immobility

The elasticity of demand for labour

•  This refers to how responsive a firms demand for labour is to a change in the price of labour (wage rate)
  • If the demand for labour is elastic, then an increase in the wage rate will result in a more than proportional decrease in the quantity of labour demanded by firms
  • If the demand for labour is inelastic, then an increase in the wage rate will result in a less than proportional decrease in the quantity demanded of labour demanded by firms
• If demand is elastic firms will be very responsive to changes in wage rates, rapidly hiring workers when wages fall and firing workers when wages rise
• If demand is inelastic firms will have a much smaller response to rising or falling wages

Factors That Influence PED of Labour

The elasticity of supply of labour

• This refers to how responsive the supply of labour is to a change in the price of labour (wage rate)
  • If the supply of labour is elastic, then an increase in the wage rate will result in a more than proportional increase in the quantity of labour supplied
  • If the supply of labour is inelastic, then an increase in the wage rate will result in a less than proportional increase in the quantity of labour supplied
• In low skilled occupations the quantity of labour supplied is very responsive to a change in wage rates i.e. supply of labour is elastic
• Occupations which require a longer & higher level of training tend to have an inelastic supply of labour i.e even if wage rates increased significantly, there would be a less than proportional increase in the supply of labour in the short run