Labour Market Failure and Government Intervention: OCR Unit 3

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When does LMF occur?
free market forces fail to allocate scarce resources efficently, resulting in the loss of economic and social welfare.
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Government Failure is...
when Gov't intervention to correct market failure fails.
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What are the economic effects of LMF
higher costs to firms, higher prices for consumers, reduction in consumer surplus/ international competativeness, worse BoP, Higher G.
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What is a monopsony?
Single buyer market
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How does a monopsony cause LMF?
reduces W below MRP, reduces Q below PC level, Q is where MRP=MC to max profit
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What is a Trade union?
a group of workers that collectively bargain to achieve a common purpose
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What do TUs try to do?
Increase W, better working conditions, increase job security, more performance related pay agreements etc.
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How does a TU cause LMF (negative)
In a PC market increase in wage causes excess supply so unemployment occurs
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How does a TU cause increase in wage without unemployment
can increase wage by increasing productivity which right shifts D.
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What is a Bilateral Monopoly
Single buyer & Single seller
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How is a bilateral monopoly LMF
The market is failing same as monopsonist market, but TU increases wage so W is closer to PC level
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Factors influencing bargaining strength of a monopsonist
Financial reserves of firm compare to TU, % of Labour force in the TU, ease of factor substitution, rate of unemployment, effect of TU on revenue, legislation
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Factors influencing bargaining strength of a TU?
Financial reserve of TU, % of labour force in TU, aggresiveness and ability to disrupt production, rate of unemployment, legislation
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What is wage discrimination?
when employers with monopsony(Price maker) power pay different wages to different workers
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What is LM discrimination?
when a specific group of workers is treated differently to other workers in the same job.
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What is the effect of LM discrimination on workers?
Discriminated workers, accept lower wages or lower paid jobs that they are overqualified for (misallocation of resources)
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What is the effect of LM discrimination on employers?
Higher Cost of production, those that don't discriminated have greater access to supply.
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What is the effect of LM discrimination on the Govt and Economy
Gov have to increase welfare payments, lower tax revenues, lower productivity, fall in output and efficiency.
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How does economic inactivity lead to LMF?
discouraged workers increase welfare costs
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How does imperfect information lead to LMF?
Workers in jobs they arent best fit for, in jobs with lower pay than PC, No job at all
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How does a skills shortage cuase LMF?
employs those not best fit for the job, leads to low job satisfaction, low productivity, low quality levels.
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How does unemployment cause LMF?
waste of scarce resource, excess supply.
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How does geographical immobility cause LMF?
inability to move to different locations, causes regional wage differentials
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How does occupational immobility cause LMf?
difficult to switch jobs.
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What are the recent rends in TU membership?
Peak of 13 million in 1979, 80s maggie thatcher reduces TU powers to make LM flexible and competative, 80s and 90s manufacturing decline hence lower TU, since 90s stable around 7 mil.
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What is Labour market flexibility?
A market that adjusts quickly and smoothly to changes in market forces.
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What are the types of LM flexibility?
Numerical- physical no of workers, temporal- hours of work, locational, functional, wage
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What are the advantages of flexibility?
Firms more efficient and competative, increase output and exports, can attract FDI, some workers will prefer flex, less structrual unemployment.
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What are the disadvantages of flexibility?
Wage inequality exists, periods of significant SR n, poor job security, workers must be mobile, economy remains productively inefficent.
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How do the Govt create flexibility?
Provide LM info, increase training and education, reduce direct labour taxation, reduce n benefits, remove employment protection
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How flexible is the UK labour market?
Relatively flexible
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Why does the Govt intervene in the LM?
Correct LMF, Raise efficiency, Promote equality and social cohesion
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What are the types of intervention in the UK LM?
Gov as an employer, provide information, regional policy, improve training, education, discrimination legislation, TU legislation, Taxes and benefits, NMW
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How does the Govt as an employer solve LMF?
employ labour for council/ parliament or cause competiton in LM
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How does information provision solve LMF?
help those looking for new jobs to make an informed decision
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How does Regional policy solve LMF?
balances opportunity and wages amongst the country
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How does training and education solve LMF?
increase occupational mobility and reduce skills shortages
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How does discrimination legislation solve LMF?
make discrimination illegal
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How does TU legislation solve LMF?
increase/decrease TU power
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How do taxes and benefits solve LMF?
incentivise work
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How does the NMW solve LMF?
incentivise work, prevent exploitation of workers, increase distribution of income, increase S of L
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What is income?
flow of money going to factors of production
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What is wealth?
current value of all assets owned by someone
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Factors affecting income distribution?
different wages, unwaged dependant on benefits, tax and state benefits.
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Wealth is more unevenly distributed that income as...
High wealth generates higher income hence spiral, assets increasse value quicker than income rises, income is taxed wealth is not
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What is equality?
everyone is treated the same
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What is equity? and what are the types?
Equity is everyone treated fairly(they get what they need). Horizontal equity is same circumstances treated fairly and the same, vertical equity is diff circumstances treated fairly but differently.
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What are the negatives of unequal distribution of income and wealth?
High absolute andf relative poverty, restricts economic growth and wastes the talent of the poor, increased imports hence leakage from circular flow, increase in crime
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What are the positives of unequal distribution of income and wealth?
incentivises hard work hence increasing productivity, encourages enterprise, encourages work over benefits, Trickle down effect
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What is the trickle down effect?
Rich get richer, buy more goods, hence increases income of poor, increases relative poverty but reduces absolute poverty.
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How to measure distribution of income and wealth?
Lorenz Curve or Gini coefficient.
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What is relative poverty?
Low income relative to the rest of the country
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What is absolute poverty?
not enough wealth or income to meet basic needs
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What are the causes of poverty?
Unemployment, low wages, state benefits rising slower than wages, poverty trap.
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What are the effects of poverty?
Poor physical and mental health, lower life expectancy, lower level of education, removal from society, government intervention costs, reduced productivity.
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How is poverty measured?
No of people in households with income less than 60% average disposable income, Life expectancy, lieracy level.
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How does NMW tackle poverty
If set at sensible level it will; reduce poverty, provide work incentive, provide reasonable standard of living for poor.
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How does NMW impact on the economy?
counteracts monopsony power/ay reduce D, increase n, increase poverty/ doesnt benefit those unemployed.
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How does progressive taxation tackle poverty?
redistributes income, reduce relative poverty
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How does progressive taxation effect the economy?
can contribute to poverty trap, if tax is too high then firms will move abroad and n will increase
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How does state provision tackle poverty?
reduces inequalities casued by diff. in the income
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How does state provision effec tthe economy?
Those in poverty can access services they wouldn't be able to afford. but free services disincentivises worl
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How do benefits tackle poverty?
redistribute income and reduce poverty.
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How does Economic Growth tackle poverty?
creates jobs, leads to higher wages, increase tax revenue.
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Positives of Ageing Population
Workers have experience, tend to stay at existing employer, less sick days
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Negatives of Ageing Population
Outdated skills, more likely to be economically inactive, less tax revenue, increased cost on welfare, increased dependancy ratio
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Effects of Ageing Population on the Economy
increase in; Welfare costs, NHS, Dependancy ratio, wages of younger people due to scarcity. Decrease in; tax revenue, labour supply,
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Government responses to Ageing Population
Increase retirement age; Discourage early retirement; increase labour force; promote private pension scheme; encourage salary structure changes.
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EU Directives include;
Working Time Directive; Freedom of Movement Act.
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What is the EU Working Time Directive?
limit working week to 48 hours; minimum 4 weeks paid leave a year; minimum daily rest period of 11 hours, Average working hours for night workers shouldn't exceed 8 hours.
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Disadvatage of Working Time Directive
can increase AC of labour
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Advantages of Net migration
Overcome skills shortages; reduce dependancy ratio; increase tax revenues; increase AD leads to growth.
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Disadvantages of Net Migration
pressure on public services (ie. NHS- Health tourism); downward pressure on wages of already low paid workers
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Card 2


Government Failure is...


when Gov't intervention to correct market failure fails.

Card 3


What are the economic effects of LMF


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Card 4


What is a monopsony?


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Card 5


How does a monopsony cause LMF?


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