F583 4 Market Failure and the Role of the Government and Unions in the Labour Market

8/20/2019 F583 4 Market Failure and the Role of the Government and Unions in the Labour Market

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Quantity of labour

W a g eR

at e

W

Q

MCL

ACL

MCL1

MRPL

W1

Q1

OCR A2 Economics Module 3 Revision Notes –Market Failure and the Role of the Government

and Unions in the a!our Market

a!our Market Failure• Labour Market Failure occurs when supply and de and don!t result in an

e"cient allocation of labour resourceso #his can be seen in instances where there is a either a surplus or a

shortage of labour$ as well as cases where workers are in the wrong %obs$ workers are poorly&aren!t trained$ and where wage rates arelow

• #he causes of labour arket failure are'o Abuse of labour arket powero ( perfect infor ationo )kill shortageso *cono ic inacti+ityo ,ne ploy ento -iscri inationo .ccupational i obility of labour

Abuse of Market Power

• #rade ,nions are a source of power in the sale of labour ser+ices$ and theyay abuse their arket power by pushing the wage rate abo+e its

e/uilibriu le+el$ and thereby cause une ploy ent• ,nions ay also engage in %ob de arcation$ which is where workers will

only perfor tasks outlined in their %ob description$ and hence$ labour0e ibility will decrease2

• Market power is also present on the de and sideo Monopsonists and .ligopsonists are buyers of labour who ha+e the

power to deter ine the wage rate$ which is likely to be lower than itwould be in a perfectly co petiti+e arket2

"he #etermination of $a%es and Em&lo'ment

•

For onopsonists and oligopsonists to e ploy ore workers$ they ha+e toincrease the wage rate

• */uilibriu point is where MRPL 3-4 5 MCL3)4$ and this is where the 6r will e ploy$WR is ACL at this point

• A ,nion can raise the wage rate 3ACL4without reducing une ploy ent

• (n the absence of a union$ the wage7rate isMCL$ and hence$ the nu ber of workers

e ployed will be Q$ and wage rate will be W3MRPL 5 MCL4

• A union can raise the wage rate to W 1$which then beco es the new MCL

• * ploy ent will therefore rise to Q 1• (t also eans$ howe+er$ that once the wage

rate has been settled by negotiation$ the


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Quantity of labour

W

Q

MCL

ACL

Lower Li it

MRPL

W1

Q1

W a g eR

at e ,pper Li it

Bilateral Monopoly

• When a trade union negotiates with a onopsonists e ployer$ thesituation is referred to as a bilateral onopoly

o A bilateral onopoly is a arket with a single buyer and seller• (n this case$ the wage rate will be deter ined by the relati+e bargaining

strength of the two sideso (f the onopsonists is +ery powerful$ the outco e will be a wage

rate close to that which the onopsonists would ha+e chosen topay without any union inter+ention 3low rate4

o #he stronger the union is$ the closer the wage rate is likely to be tothe upper li it

8owe+er$ the union ust take into account the ad+erse e9ectthat pushing up the wage ay ha+e on the /uantity of labourde anded

Factors (n)uencin% an Em&lo'er*s +ar%ainin% ,tren%th

• An e ployer will be stronger'• #he greater the 6nancial reser+es it has with which it can last out any

dispute• #he lower the proportion of its workers who are in a union or

professional body• #he greater the degree of substitution between capital and labour• #he higher the rate of une ploy ent$ since this will ean it can

substitute e isting workers with une ployed workers• #he lower the support workers ha+e fro the public• #he lower the disruption any industrial action would cause to the

producti+e process• #he ore branches the 6r has which e ploy non7union labour or

labour in di9erent unions$ so that production can be o+ed in the case

of a dispute• #he ore legislation fa+ours e ployers

• #he lower7li it for wage7rate is W$ which isderi+ed the sa e way as in the pre+iousdiagra

• #he upper li it is the a i u theonopolist can pay without threatening the


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Quantity of labour

W

Q

)

:

-

W1

Q1

W a g eR

at e

"rade Unions

• #rade ,nions are labour organisations that seek to pro ote the interests of their e bers

• #heir ain function is to negotiate the wage rate and conditions of

e ploy ent for their e bers• #rade unions ay also

o )er+e as a channel for co unication between workers ande ployers

o tend to reduce labour turno+ero Raise the le+el of trainingo Reduce inco e ine/uality2

• Pay scales in unionised 6r s tend to be 0atter than in non7unionised ones

The E ect of Trade Unions on Wages and Employment

• (f all the workers in a labour arket are e bers of a trade union$ theunion will act as a onopoly seller

o #his will alter the supply cur+e of labour

• A union ay also raise the wage rate by pressing for e ployers to raise

the /uali6cations or skills re/uired to do the %obo )uch an approach would shift the supply cur+e of labour to the left$

which would increase the wage rate

• #he e9ect that a trade union will ha+e on e ploy ent will depend uponthe arket structure in which the e ployers sell their products

• (f under conditions of perfect or onopolistic co petition a unionincreased the wage rate$ it would likely ha+e an ad+erse e9ect on the 6r

o #his is due to the 6r only aking nor al pro6t in the long run$ soa rise in their costs will cause arginal 6r s to lea+e the industry$causing output and e ploy ent to fall

• #his diagra shows a union increasing thewage7rate to W 1

• #he union e bers will now work for W 1 orabo+e$ so their supply cur+e beco es W 1:)

• #he diagra also shows e ploy ent fallingfro Q to Q 1


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• (n any arket structure$ a union ay both increase e ploy ent of itse bers and wage rate by either increasing the labour producti+ity 3e2g2

training4 or by increasing de and for the product 3e2g2 aiding ad+ertising4o (n both cases$ the de and cur+e would shift to the right

Factors (n)uencin% "rade Union*s +ar%ainin% -o.er• A trade union will be stronger'

• #he greater the 6nancial reser+es of the organisation• #he higher the proportion of workers in the organisation• #he ore inelastic the de and for the 6r !s product• #he lower the degree of substitution between capital and labour• #he lower the proportion of labour costs in total costs• #he lower the rate of une ploy ent• #he greater the support the workers ha+e fro the general public• #he ore legislation fa+ours the rights of workers• #he ore disruption any industrial action would cause2

mperfect nformation

• Workers ay be in %obs that are less well paid and aren!t fully suited tothe $ or one could be une ployed because one doesn!t know of thesuitable %ob +acancies a+ailable2

• Likewise$ an e ployer ay not ha+e the most producti+e workforce si plybecause they are not in touch with all of the potential workers2

• ;oth groups ha+e to consider the bene6ts of searching for a better

e ploy ent situation against the costs of searchingo For an e ployer$ these costs could be inter+iews$ ad+ertising %ob

+acancies$ inducting new sta9 etc2o For a worker$ this could be 6lling out application for $ attending

inter+iews$ looking for new %obs$ etc2

!kill !hortages

• )kill shortages occur when 6r s ha+e di"culties recruiting people with there/uired skills

o #his usually results in an increase in the costs of productiono #his is because due to the scarce resource that is skilled labour$

6r s ay bid up the wage rate of sta9$ whilst others ay try to 6llthe +acancies with less e"cient$ unskilled workers2

• .ne cause of skill shortages is a lack of training$ which is a erit good < ithas greater pri+ate bene6ts than consu ers realised$ and has positi+ee ternalities

o (f left to arket forces$ training would be under7consu ed$ as so e6r s and works underesti ate the bene6ts of training

o )o e 6r s are also afraid of other 6r s =poaching! their sta92

Economic (nactivit'


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Quantity of labour

W

Qb

A)L

A-L

Qa

W a g eR

at e

• Most for s of econo ic inacti+ity are not labour arket failureo *2g2 people looking after fa ily and ho e ha+e chosen to do so and

are pro+iding a key ser+ice$ and a rise in the nu ber of full7ti estudents will likely help the econo y in the long run

• -iscouraged workers and people classi6ed as long7ter sick or disabled$but are still capable to do so e work$ represent a waste of resources anda burden to ta payers

o >etting these people into the labour force would increase aggregatesupply$ and increase their inco e2

Unem&lo'ment

• ,ne ploy ent eans that labour arkets aren!t clearing 3)5-4o )o e of those willing and able to work cannot obtain a %ob

• #his eans that a country is not producing all that it!s capable of? it!s notproducing on its PPC$ and hence it won!t be achie+ing producti+ee"ciency2

• #he e tent to which une ploy ent causes labour arket failure dependson the nu ber of people une ployed$ and how long they!+e been out ofwork

o #he longer so eone is une ployed$ the ore they get out of touchwith the skills re/uired$ and the chance of the getting a %obdecreases2

• ,ne ploy ent can arise as a result of a lack of aggregate de and forlabour

o #his is known as dise/uilibriu une ploy ent$ and occurs whenaggregate supply of labour at the going wage rate is greater thanaggregate de and for labour

• (t ight appear that a way to reduce une ploy ent would be to decrease the

wage rate

•

A)L e ceeds A-L at the gi+en wage rate$and hence$ une ploy ent of Q b7Qa is a


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Quantity of labour

W

Qc

A)L

A-L

Q

W a g eR

at e ALF

o #his ight not only be di"cult$ but with workers wanting to resist a cutin their wages$ a de0ationary spiral could occur

#he cut in wages would reduce aggregate de and$ which in turnwould lower A-L 3deri+ed de and$ etc24$ which would lead to afurther cut in wages$ which would222$ etc2

• Con+ersely$ une ploy ent can arise due to proble s related to thesupply of labour

o )o e people ay be une ployed due to the ' not knowing about %ob +acancies? not being suited to the +acancies$ or are unwilling totake up certain +acancies2

• (n other words$ they are e periencing +oluntary$ frictional and structuralune ploy ent2

• (n such a situation$ there will be a gap between the aggregate labour force3ALF4 and the aggregate supply of labour 3those that are prepared to work

at the going wage rate4o #he gap between ALF and A)L narrows as the wage rate rises$ as

ore of the labour force would be prepared to work at the re/uiredwage rate2

• #he une ploy ent that e ists where A)L 5 A-L at the going wage rate isso eti es referred to as the e/uilibriu une ploy ent or the non7accelerating in0ation rate of une ploy ent 3@A(R,4

o #hese both e ist when the labour arket is in e/uilibriu• @A(R, is the le+el of une ploy ent at which these is no upward pressure

on the wage rate and in0ationo (f$ for e a ple$ the go+ern ent raises aggregate de and to

increase e ploy ent$ the rate of in0ation would increase2o #o contrast$ if une ploy ent rises abo+e @A(R,$ the wage rate and

rate of in0ation will fall2

#iscrimination

• #he di9erence between e ploy ent is Q7Q c


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• -iscri ination results in an ine"cient allocation of resources andine/uitable wage di9erentials

• #he group that!s discri inated against are likely to be paid less for doingthe sa e %ob$ and are likely to 6nd it harder to gain e ploy ent2

o #hey ay be o+erlooked for pro otion$ ha+e to do less de anding %obs$ ay not go on selected training courses$ etc2

• #he producers who discri inate will ha+e a s aller pool of labour to selectfro $ and ay not ake the best use of black workers they do e ploy

o As a result$ their costs of production will increase which will akethe less co petiti+e

• Consu ers will e perience higher prices if producers discri inate 3if theproducers pass their costs onto the consu er 3elasticity 44

o (f consu ers the sel+es discri inate$ they will 6nd the sel+eswith less choice to buy fro $ and so higher prices2

• #he go+ern ent ay ha+e to pay out ore oney to groups that are

discri inated against in ter s of welfare$ and they ay ha+e to spendoney on anti7discri ination legislation2

• .+erall$ the econo y will lose out as a result of the isallocation ofresources

o .utput will be below the potential output that could be achie+ed ifthe groups were not discri inated against in ter s of e ploy ent$pay$ pro otion and training2

Theories of "iscrimination

• ;ecker!s theory states that so e people ay be prepare to e periencehigher costs rather than to co e into contact with e bers fro aparticular group

o For e a ple$ a 6r ay ha+e lower pro6ts due to not e ployingwo en workers$ and higher costs due to not buying fro 6r se ploying wo en workers2

• )tatistical discri ination states that 6r s ake generalisations aboutspeci6c groups

o *2g2 a 6r ay not e ploy o+er B s$ as it belie+es that they!re lessproducti+e that younger workers2 #he sa e ay apply when o+erB s lose out on pro otions$ or get ade redundant o+er younger

workers2

,e%mented a!our Markets

• #here are barriers that e ist to the free o+e ent of workers betweendi9erent sections of the labour arket

o (n reality$ there are also a nu ber of di9erent labour arkets• (f there were no barriers to entry of e it in labour arkets$ workers would

o+e fro low7wage %obs to high7wage %obs$ which would e/ualise wages2• 8owe+er$ so e barriers to entry increase e"ciency of labour arkets

o For e a ple$ one would want a surgeon to be fully /uali6ed$ andone would want a ta i dri+er to ha+e a license2


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• )o e barriers$ howe+er$ ay be unnecessary and could be used to %ustpush up particular workers! wages2

(mmo!ilit' of a!our

#here are two kinds of i obility of labour• >eographical i obility of labour is barriers to the o+e ent of workers

between di9erent areaso When this occurs$ shortages of workers in one area and surpluses in

others are not corrected$ leading to regional une ploy ent andgeographical wage di9erentials continue to e ist2

o >eographical i obility occurs for a nu ber of reasons$ ostnotably are things like house prices or personal&fa ily ties to thearea2

• .ccupational i obility is the barriers to workers changing occupationso #hese obstacles can co e in the for of the skills and /uali6cations

re/uired to do particular %obso #hese barriers contribution to occupational wage di9erentials and

structural une ploy ent2

Other Causes of a!our Market Failure

• Attach ent between workers and e ploy ento )o e workers ay stay in less paid %obs because they like working

for their e ployers 3transfer earnings 4o #his attach ent reduces the obility of labour and akes supply

ore inelastic(t ay$ howe+er$ increase producti+ity2

• (nertiao Workers ay not o+e to higher paid %obs and e ployers ay not

seek for ore producti+e sta9 si ply because they can!t be arsed2

"he Economic E/ects of a!our Market Failures

• Labour arket failures can result une ploy ent$ skill shortages$ andworkers in the wrong %obs

o #his increases a 6r !s costs of production and reduces consu ersurplus

• .n a acro scale$ in reduces the 6r !s international co petiti+eness andhas an ad+erse e9ect on the country!s trade position2

• (ne"cient labour arkets also raise go+ern ental costs in ter s of statebene6ts$ legislation$ and spending on education$ training and regionalpolicy

"he "rends in "rade Union Mem!ershi& in the U0

• #he general trend is downwardso #his is thought to be because of the decline in union power$ ainly

due to #hatcher!s supply side policies


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o Also because of 6r s not recognising unions$ and hence the uniondoes not ha+e the right to negotiate on behalf of its e bers

• Within professional organisations$ such as accountancy and teaching$e bership of trade unions is stronger

• A higher proportion of fe ale workers are e bers of trade unions thanen < D E to GE

• #he last four decades ha+e seen a decline in labour disputeso As well as working days lost$ there are two other easures of labour

disputes'@u ber of stoppages@u ber of workers in+ol+ed in stoppages

Forms of +ar%ainin%

• ,nions fa+our national collecti+e bargaining$ as this gi+es the greaterpower and enables the to take ad+antage of econo ies of scale innegotiations2

o (t would be e pensi+e for a union to negotiate separate agree entswith a large nu ber of e ployers

• (n ost of the *,H collecti+e bargaining is undertaken where unions willnegotiate with associations of e ployers on industry7wide agree ents2

• (n the ,)A and Iapan 3and so eti es ,J4$ local agree ents are oreco on? especially in the pri+ate sector

o For local agree ents$ there is a single e ployer bargaining$ withagree ents being ade at the co pany le+el2

"'&es of a!our Market Fle1i!ilit'

• A 0e ible labour arket is one that ad%usts /uickly and s oothly tochanges in de and and supply

• #ypes of 0e ibility include'o @u erical 0e ibility < the ability to change the nu ber of workers$

or ease of hiring and 6ringo #e poral 0e ibility < the ability to change the hours people worko Locational 0e ibility < the ability to change where people work < at

ho e$ so ewhere else or at the an place of worko Functional 0e ibility < the ability to change the tasks workers

perforo Wage 0e ibility < the ability to change the a ount paid to workers

The #onse$uences of %le&ibility

• A 0e ible labour arket allows 6r s to atch their production closely tode and

o #his should keep their a+erage costs low$ as they won!t beo+ersta9ed during periods of low de and$ and will be able to raiseoutput when de and rises

• For workers$ labour 0e ibility can a good thing


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o (t can create ore e ploy ent$ as 6r s are likely to want to recruitore workers at ti es of rising de and if they know they can get

rid of the when they!re not neededo A 0e ible labour arket can attract foreign in+est ent that is likely

to boost e ploy ent• (t can also be a bad thing

o ;ecause you can be e ployed /uickly in a 0e ible labour arket$you can also be out of work /uickly < less %ob security

o #his would ean that a worker would need to be oreoccupationally and geographically obile$ which can put stress onworkers

o >reater wage 0e ibility tends to result in a greater wage ine/uality2

The %le&ibility of the U'(s )abour Market

• #he ,J!s labour arket is ore 0e ible than ost of the *,!so #he least four decades ha+e seen an increase in te porary

e ploy ent$ part7ti e e ploy ent$ 0e ible hours$ %ob sharing$career breaks and ho eworking

• (n the G s$ the go+ern ent introduce legislation so that hiring and 6ringpeople beca e easier$ aking the labour arket ore 0e ible

*o+ernment Measures to Achie+e )abour Market %le&ibility

• >o+ern ent can inter+ene and increase the 0e ibility of the labour arketin se+eral ways'

o

(ncrease labour arket infor ation$ training and education shouldake workers ore obile$ and hence ake labour oreresponsi+e to de and

o Cutting the une ploy ent bene6t or link it ore closely to thesearch for e ploy ent

• (f the supply of labour beco es ore wage7elastic$ 6r s will be able torespond to changes in de and faster

• Reducing inco e ta will encourage workers to work ore hours$ and theune ployed to look for work$ and for those looking to retire to stay in theworkforce

o #his will work if the o+erall e9ect of the substitution e9ect is greaterthan the o+erall e9ect of the inco e e9ect 3i2e2 ore people chooseto work ore hours than choose to work fewer4

o )tudies ha+e shown$ howe+er$ that changes in ta rates don!t reallyalter the hours worked

• Cutting %ob seeker!s allowance ay reduce the ti e that the une ployedspend searching for a %ob$ as it akes it less attracti+e$ but this would onlywork if there are %obs a+ailable2

• Re o+ing protecti+e e ploy ent legislation can ake the labour arketore responsi+e

o *2g2 aternity lea+e laws increase the cost of e ploying workers$

and allowing workers to appeal against dis issals akes theprocess ore e pensi+e


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o * ploy ent protection bene6ts those who ha+e %obs but akes itore di"cult for the une ployed to gain work

Government (ntervention in a!our Markets

• A go+ern ent ay inter+ene in the labour arket to correct arket failureand so raise e"ciency$ and also pro ote e/uity and social cohesion

• >o+ern ent inter+ention a9ects wages in a nu ber of ways'o * ploy ent of public sector workerso #he pro+ision of infor ationo Regional policyo #rainingo *ducationo @ational ini u wageo Anti7discri ination legislationo #rade union legislation

The *o+ernment as an Employer

• >o+ern ent e ploys a lot of people 3e2g2 @8)$ teachers4$ and thedecisions on its workers! wage rate will a9ect pri+ate7sector wage rates

o *2g2 raising the pay of public sector teachers will put pressure forthe pay of pri+ate school teachers to increase2

)abour Market nformation

• #he go+ern ent pro+ides infor ati+e ser+ices such as careers ad+ice$

infor ation about pay and working conditions$ and %ob centres that inforworkers of +acancies

,egional Policy

• Regional policy seeks to in0uence the distribution of 6r s and people• #o reduce the proble of geographical i obility of labour and regional

une ploy ent$ the go+ern ent usually takes the action of =bringing thework to the worker!$ by gi+ing 6nancial assistance to 6r s willing torelocate to areas of high une ploy ent

Training

• #he go+ern ent can seek to raise the le+el of training to the allocati+elye"cient le+el in a +ariety of ways

o (t can subsidise indi+iduals to engage in training and&or 6r s topro+ide training

o (t can pass legislation re/uiring 6r s to pro+ide trainingo (t can directly train its own e ployees and the une ployed2

Education


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Quantity of labour

W

Qs

-

@MW

Q

W a g eR

at e )

W

Qd

Quantity of labour

W

-

@MW

Q

W a g eR

at e ACL

W

Q

MCL

• Pro+iding education to youths should increase the occupational obility oflabour$ reduce the shortage of skilled labour and raise the producti+ity oflabour

• Measures to raise /uali6cations and skills in workers are known asin+est ents in hu an capital

Minimum Wage )egislation

• Mini u wage legislation is introduced to help raise the pay of low paidworkers

• #o ha+e any e9ect$ the ini u wage has to be set abo+e the arkete/uilibriu wage rate

• (f a ini u wage is established$ 6r say seek to cut the cost of e ploying low skilled workers by decreasing

fringe bene6ts• (t ay also encourage workers who earned near the new ini u wage

to press for a wage rise

• #here are other reasons why a @MQ ay not cause une ploy ent

• )o e econo ists say that inter+ention inthe operation of free arket forces raises6r s! costs of production$ and so causeshigher une ploy ent

• W 3@MW4 is abo+e the e/uilibriu wagerate of W$ and causes an e tension insupply of labour$ but a contraction inde and$ causing a shortfall of e ploy entfro Q s7Qd

• ;efore the inter+ention$ e ploy ent was Q$

• .ther econo ist argue that introducing aini u wage will decrease

une ploy ent• Low7paid workers often ha+e low bargaining

power relati+e to their e poyers$ who areoften oligo& onopsonists

• (n such a case$ the introduction of a @MQwould raise both the wage rate ande ploy ent

• @MW of W beco es the new arginal cost


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Quantity of labour

W

-1

@MW

Q

W a g eR

at e

)

W

Q

-

o A @MW increases wages$ and this$ in turn$ will increase aggregatede and for goods and ser+ices$ which$ due to the deri+ation ofde and for labour$ would increase de and for labour

o #he higher wages ay also encourage people to not iss out 3bybeing sick4 and raise orale$ and hence increase producti+ity

• As ost low wage earners are wo en who work part7ti e$ a @MW ayreduce the gender gap in pay

o (t ay$ therefore$ not ha+e uch of an i pact on inco e ine/ualityif a relati+ely high proportion of these wo en are fro iddle to

high inco e households2

"iscrimination )egislation

• Legislation has ade it illegal for e ployers to discri inate on thegrounds of gender$ race$ arital status and age

• As a result e ployers ay 6nd that a group which had pre+iously beendiscri inated against is ore producti+e than they 6rst thought

• 8owe+er$ so e e ployers ay still discri inate$ and in practise$ suchlegislation is hard to legally enforce

Trade Union )egislation• (f a go+ern ent thinks trade unions ha+e been weakened too uch by

pre+iously legislation$ and so they ha+e little bargaining power in relationto e ployers$ then a go+ern ent ay repeal so e legislation

• (f the opposite is true$ then the go+ern ent can introduce new legislationthat reduces the industrial action unions can take$ and weakens the 2

(ncome #istri!ution

• ;oth inco e and wealth are distributed une+enly in the ,J • Wealth is ore une+enly distributed

• A wise in the wage rate 3+ia the @MW4 aycause a rise in de and for goods andser+ices

o #his is represented by - o+ing to - 1• #his will then create a new e/uilibriu

point$ where both /uantity of labour


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o While one can sur+i+e without owning any assets 3e2g2 renting ahouse4$ one couldn!t sur+i+e without any inco e

• Within an econo y$ distribution of inco e can be considered in ter s ofhow inco e is shared out between'

o #he factors of production 3functional distribution of inco e4o ;etween households 3siKe distribution of inco e4o ;etween di9erent regions 3geographical distribution of inco e4

The %unctional "istribution of ncome

• (nco e is the 0ow of oney o+er a period of ti eo (t can be earned by labour in the for of wages$ by capital in the

for of interest$ by land in the for of rent and by entrepreneurs inthe for of pro6t

o .ut of these$ it is often wages that account for the largestpercentage of total inco e2

• People can also recei+e inco e in the for of state bene6ts

The !i-e "istribution of ncome

• #his has beco e ore une+enly distributed o+er ti e

The *eographical "istribution of ncome

• (nco e is une+enly distributed between regions of the ,J • Causes of di9erences in the geographical distribution of inco e include

the +ariation in'o ,ne ploy ent rateso #he proportion of the population clai ing bene6tso #he /uali6cations and the skills of the labour forceo (ndustrial structureo .ccupational structureo Li+ing costs that gi+e rise to di9erences in pay

• #here are also +ariations within regionso *2g2 London on the whole has a high inco e per capital$ but it also

has so e of the ost depri+ed districts in the ,J

#auses of ncome ne$uality Between .ouseholds

• ,ne/ual holdings of wealtho Wealth can generate inco e in the for of pro6t and interest$ and

so di9erentials in wealth cause di9erences in inco e• -i9erences in the co position of households

o )o e households ha+e adults in full7ti e e ploy ent$ whereasothers ha+e no7one in e ploy ent

• -i9erences in skills and /uali6cationso #hose with high skills and /uali6cations are likely to be able to earn

high inco es•

-i9erences in educational opportunities


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o #hose who ha+e the opportunity to stay in education for longer arelikely to increase their earning potential

• -iscri inationo #he inco e of so e groups is ad+ersely a9ected by discri ination

in the for of e ploy ent opportunities$ pro otion chances andpay

• -i9erences in hours workedo Most full7ti e workers earn ore than part7ti e workers$ and those

who work o+erti e earn ore than those who work standard hours2

$ealth

• Wealth is a stock of assets that ha+e a 6nancial +alue• #here is arketable wealth and non7 arketable wealth

o #he for er is wealth that can be transferred to another person$ e2g2a house or shares

o #he latter is speci6c to a person and cannot be transferred$ e2g2pension rights2

• #he distribution of wealth can be considered in ter s of'o 8ow it!s distributed a ongst the population 3siKe distribution4o #he for s in which it is heldo #he characteristics of those holding wealth

The !i-e "istribution of Wealth

• Wealth is +ery une+enly distributed a ongst the ,J!s population

Wealth "istribution Between Assets

• Wealth can be held in for s such as life insurance$ pension funds$ shares$etc2

• )o e for s of wealth$ such as life insurance and pension funds are oree+enly distributed than things like shares and land

Wealth "istribution Between "i erent *roups

• People can beco e wealthy through inheritance$ sa+ing$ and using their

entrepreneurial skills• Wealth is une+enly distributed between age categories$ but it is to bee pected? people in their s and B s ha+e had ore ti e to accu ulatesa+ings than younger people$ and so ha+e greater wealth

• Wealth also +aries between ethnic groups? en ha+e ore wealth thanwo en$ etc2

#auses of Wealth ne$uality

• (ne/uality of inco eo Work o+ertook inheritance as a source of wealth in the ,J o 8a+ing a high inco e akes it easier for people to sa+e$ and so

gain higher interest rates on their sa+ings2


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Cu ulati+e E of pop2

B

Line of e/uality

C u

ul at i + e E of i n

c o

e

1

A

;

• -i9erences in entrepreneurial skillso )o e people are self7 ade illionaires as a result of building up a

business• #he pattern of inheritance

o (n the ,J$ wealth has traditionally passed down to the eldest son$

and hence kept wealth in the hands of the fewo (n other countries where the property and other assets are

distributed a ongst the children$ wealth is ore e+enly distributedo+er ti e2

• Marriage patterns of the wealthyo #he wealthy tend to arry other wealthy people$ and this further

concentrates wealth in the hands of the few2

Measurin% (ne ualit'

• Wealth and inco e ine/uality can be easured in a nu ber of wayso #he distribution of wealth owned or inco e earned by a gi+en

percentage can be co pared(t can also be co pared in percentage groups$ e2g2 thebotto /uartile shows the share of inco e of the poorest

BE of householdso Another way is the '1 ratio$ which takes the inco es of people

1 E fro the top and 1 E of the botto #his ethod eli inates the e tre es that you get at eitherend

#his ratio was '1 in N and 1 No A further easure is the >ini coe"cient$ which can be used to ake

international co parisons of inco e ine/uality2(t is found by using a LorenK cur+e

)oren- #ur+e

• Line of e/uality < B E of population earnB E of inco e

• #he greater the e tent of ine/uality$ thegreater the cur+e will be fro the line ofe/uality

• #he >ini coe"cient is the ratio of the areabetween the LorenK cur+e and the line ofe/uality to the total area below the line 3A&A

O ;4


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Government (ntervention to A/ect #istri!ution +et.een(ncome and $ealth

• #he e tent to which a go+ern ent inter+enes to a9ect the distribution ofinco e and wealth depends on'

o #he e tent to which it belie+e that the free arket distributionwould be ine/uitable

o #he e9ects that such ine/uality will ha+e on societyo #he e9ects it belie+es any inter+ention will ha+e on incenti+es and

e"ciency• *cono ist who belie+e in the e"ciency of arkets do so because the

belie+e that the di9erences in inco e act as signals which encourageworkers to change %obs$ and di9erences in wealth pro ote sa+ings and

in+est ent• #he contrast$ other econo ists belie+e that inter+ention is %usti6ed$ as

arket forces won!t ensure an e"cient allocation of inco e and wealtho #hey belie+e low le+els of inco e can a9ect the household a

signi6cant a ount$ like a9ecting the educational perfor ance ofthe children

o -i9erences in wealth and inco e can also cause social di+ision$ asthe poor ay feel socially e cluded2

Ways in Which *o+ernment A ect the "istribution of ncome andWealth

• #a ationo #he o+erall e9ect of the ta syste is to reduce ine/ualityo Progressi+e ta es such as inco e ta ake distribution ore e/ualo Regressi+e ta es such as A# ake distribution ore une/ual

• Pro+ision of state bene6tso Means tested bene6ts reduce ine/uality and uni+ersal bene6ts for

a larger percentage of the inco e of the poorMeans tested bene6ts are pro+ided to those whose inco e isbelow a certain le+el$ and can co e in the for as things like

working ta credit,ni+ersal bene6ts are applied to e+eryone in a particulargroup$ regardless of their inco e? all pensioners get a winterfuel allowance2

• Pro+ision of bene6ts in kindo #hese co e in the for of health care$ education$ school eals$ etc2o #he take7up of these bene6ts depends on the age of the household

< a household with no children isn!t going to take up education andschooling$ whereas an older household is likely to use the @8)

ore2• Labour arket policy

o @MW$ anti7discri ination legislation$ subsidising training < all ofthese reduce inco e ine/uality


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• (t i poses a burden on the go+ern ent$ as they ha+e to spend ore

*o+ernment Policy Measures to ,educe Po+erty

• >o+ern ent ay seek to reduce absolute po+erty by introducing

easures that raise the inco e of the poorest groups• #hey ay reduce relati+e po+erty by introducing easures that narrow

the gap between the rich and the poor• A ongst the easures they ight use are'

o .perating a @MW #his will help the low paid who stay in e ploy ent8owe+er$ ost people earning ini u wage are secondaryearners fro iddle and high inco e households

o Cutting the botto rate of inco e taMay reduce the po+erty trap and pro+ide a greater incenti+efor people to work

o (ncreasing e ploy ent opportunitiesA a%or cause of po+erty is une ploy ent

#here is no easy way of increasing the nu ber of %obs ono9er

o ( pro+ing the /uantity and /uality of training and education #his is a long ter easure but will increase producti+ity

o Making use of trickle7down e9ectContro+ersial$ but basically eans cutting ta es likecorporation and inheritance ta so that rich entrepreneurswill take business +entures that will hopefully ean a greater

aggregate de and for %obso (ncreasing bene6ts for the une ployed

)o e econo ists argue that this could raise aggregatede and in the econo y$ as the une ployed will spend ore$thus creating ore %obs.thers$ howe+er$ belie+e it can increase +oluntaryune ploy ent

o (ncreasing the pro+ision of a9ordable childcare #his would enable ore lone parents to undertake full7ti ee ploy ent and raise the out of po+erty2

An A%ein% -o&ulation• .lder workers ha+e e perience and tend to stay with e isting e ployers

and lose fewer days through illness2• .n the other hand$ they tend to be less geographically and occupationally

obile and their skills ay need to be updated• -(S stores and super arkets tend to e ploy o+er B s$ as they realise that

these workers ha+e a lot to o9er and thus it increases the pool of workersthey can draw upon

• With the population aging$ that eans a higher proportion of citiKens are

likely to be econo ically inacti+e and clai ing a pension$ thus decreasing


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the re+enue the state gets +ia ta ation$ and yet increasing the o+erallcosts of state bene6ts

o #his is known as the dependency ratio 3proportion of the populationthat are reliant on the output of other workers4$ and puts pressureon go+ern ent spending

o #his is also known as the =de ographic ti e bo b!

Pensions

• #he go+ern ent is considering a nu ber of ways to try an aintainpensioners! li+ing standards$ while reducing the 6scal pressure of anageing population2 )o e ethods include'

o Raising the retire ent age #his reduces the nu ber of pensioners and increases thenu ber of workers$ thus reducing the dependency ratio

o -iscouraging early retire ento (ncreasing the labour force by other eans

#his could include increasing the econo ic acti+ity rate oflone parents and the disabled$ and per itting orei igration

o Pro oting occupational and personal pension sche eRelying on pri+ate funding of pension sche e reduces the6scal burden on the go+ern ent

o *ncouraging a change in salary structures

EU #irectives

• #hese are instructions to e ber countries to achie+e particularoutco es

• #hey usually allow e ber countries so e 0e ibility in ter s of the lawsthey draw up to achie+e the desired result

• #hese directi+es often protect workers! rights and ay correct so e for sof labour arket failure$ including discri ination

• #here is$ howe+er$ a risk that e cessi+e protection for those in work aydepress econo ic growth and %ob creation2

Mi%ration

• #he supply of labour for an econo y is in0uenced by the net i igrationo (f ore people co e into the country than lea+e$ the labour force

will increase in siKeo #his increase can'

.+erco e skill shortagesReduce the dependency ratio(ncrease go+ern ent ta re+enue8elp the econo y to e pand without encountering in0ation

o 8owe+er$ e igration can cause proble s$ as the labour force willsu9er a contraction in supply 3e2g2 in >hana$ D& s of trained doctorse igrate4


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• ( igration can disad+antage low paid workers$ as so e of thei igrants will be prepared to work for lower wages

o ( igration can therefore put downwards pressure on wages• ( igration ay also put pressure on public ser+ices such as the @8)$

especially if they!re concentrated in a speci6c area2• (t is said that a lot of i igrants that work in low7skilled %obs are o+er7

skilled for these$ and ay o+e onto ore de anding occupations in thefuture

o #hey could$ howe+er$ be working in the ,J whilst they wait forecono ic prospects in their original country to i pro+e2

F583 4 Market Failure and the Role of the Government and Unions in the Labour Market

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