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Labour Markets,
Wages and
Industrial Relations
Labour Markets,
Wages and
Industrial Relations
The UK Labour MarketThe UK Labour Market
• Trends in the UK labour market
– sectoral shift
• from agriculture to manufacturing
• from manufacturing to services
• Trends in the UK labour market
– sectoral shift
• from agriculture to manufacturing
• from manufacturing to services
0
5
10
15
20
1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Mill
ions
Agriculture
Mining, energy and construction
Manufacturing
Services
Employment in different sectors of the UK economyEmployment in different sectors of the UK economy
0
5
10
15
20
1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Mill
ions
Agriculture
Mining, energy and construction
Manufacturing
Services
Employment in different sectors of the UK economyEmployment in different sectors of the UK economy
0
5
10
15
20
1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Mill
ions
Agriculture
Mining, energy and construction
Manufacturing
Services
Employment in different sectors of the UK economyEmployment in different sectors of the UK economy
0
5
10
15
20
1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Mill
ions
Agriculture
Mining, energy and construction
Manufacturing
Services
Employment in different sectors of the UK economyEmployment in different sectors of the UK economy
0
5
10
15
20
1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Mill
ions
Agriculture
Mining, energy and construction
Manufacturing
Services
Employment in different sectors of the UK economyEmployment in different sectors of the UK economy
The UK Labour MarketThe UK Labour Market
• Trends in the UK labour market (cont.)
– rise in part-time employment
• Trends in the UK labour market (cont.)
– rise in part-time employment
0
5
10
15
20
25
30
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Em
plo
yme
nt
(mill
ion
s)Full-time and part-time employment in the UKFull-time and part-time employment in the UK
0
5
10
15
20
25
30
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Em
plo
yme
nt
(mill
ion
s)
Total employment
Full-time and part-time employment in the UKFull-time and part-time employment in the UK
0
5
10
15
20
25
30
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Em
plo
yme
nt
(mill
ion
s)
Total employment
Full-time employment
Full-time and part-time employment in the UKFull-time and part-time employment in the UK
0
5
10
15
20
25
30
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Em
plo
yme
nt
(mill
ion
s)
Total employment
Full-time employment
Part-time employment
Full-time and part-time employment in the UKFull-time and part-time employment in the UK
The UK Labour MarketThe UK Labour Market
• Trends in the UK labour market (cont.)
– rise in part-time employment
– rise in female participation rates
• Trends in the UK labour market (cont.)
– rise in part-time employment
– rise in female participation rates
The UK Labour MarketThe UK Labour Market
• Trends in the UK labour market (cont.)
– rise in part-time employment
– rise in female participation rates
– rise in temporary employment
• Trends in the UK labour market (cont.)
– rise in part-time employment
– rise in female participation rates
– rise in temporary employment
The UK Labour MarketThe UK Labour Market
• Trends in the UK labour market (cont.)
– rise in part-time employment
– rise in female participation rates
– rise in temporary employment
– effects of downsizing
• Trends in the UK labour market (cont.)
– rise in part-time employment
– rise in female participation rates
– rise in temporary employment
– effects of downsizing
Market-determined Wage rates and EmploymentMarket-determined Wage rates and Employment
• Perfect labour markets
– assumptions of a perfect labour markets
• everyone is a wage taker
• freedom of entry
• perfect knowledge
• homogeneous labour
– determination of the market wage
• horizontal supply curve to individual employers
• horizontal demand curve for individual workers
• Perfect labour markets
– assumptions of a perfect labour markets
• everyone is a wage taker
• freedom of entry
• perfect knowledge
• homogeneous labour
– determination of the market wage
• horizontal supply curve to individual employers
• horizontal demand curve for individual workers
Sall workers
in the market
Dall firms
in the market
O
Labour hours
Ho
urly
wa
ge
Wm
A labour market: whole marketA labour market: whole market
Dindividual employer
O
Labour hours
Ho
urly
wa
ge
Q1
Wm
Slabour
A labour market: individual employerA labour market: individual employer
O
Labour hours
Ho
urly
wa
ge
Q2
Wm
Dlabour
Sindividual worker
A labour market: individual workerA labour market: individual worker
• The supply of labour
– the supply of hours by an individual worker
• marginal disutility of work
• income and substitution effects of wage changes
• the shape of the individual’s supply curve of labour
• The supply of labour
– the supply of hours by an individual worker
• marginal disutility of work
• income and substitution effects of wage changes
• the shape of the individual’s supply curve of labour
Market-determined Wage rates and EmploymentMarket-determined Wage rates and Employment
The marginal disutility of hours workedThe marginal disutility of hours worked
O
Hours worked
Dis
util
ity
MDU
The supply of hours workedThe supply of hours worked
O
Hours worked
Ho
urly
wa
ge
S
Backward-bending supply curve of labourBackward-bending supply curve of labour
S
WI
Ho
urly
wa
ge
HoursO
• The supply of labour
– the supply of hours by an individual worker
• marginal disutility of work
• income and substitution effects of wage changes
• the shape of the individual’s supply curve of labour
– the supply of labour to an individual employer
• The supply of labour
– the supply of hours by an individual worker
• marginal disutility of work
• income and substitution effects of wage changes
• the shape of the individual’s supply curve of labour
– the supply of labour to an individual employer
Market-determined Wage rates and EmploymentMarket-determined Wage rates and Employment
• The supply of labour (cont.)
– the market supply of a given type of labour
• position of the curve
– number of qualified people
– non-wage benefits
– desirability of alternative jobs
• elasticity of the market supply of labour
– the mobility of labour
• The supply of labour (cont.)
– the market supply of a given type of labour
• position of the curve
– number of qualified people
– non-wage benefits
– desirability of alternative jobs
• elasticity of the market supply of labour
– the mobility of labour
Market-determined Wage rates and EmploymentMarket-determined Wage rates and Employment
• The demand for labour: marginal productivity theory
– the profit-maximising approach
– measuring the marginal cost and revenue of labour
• marginal cost of labour (MCL)
• the marginal revenue product of labour (MRPL)
– the profit-maximising level of employment
• The demand for labour: marginal productivity theory
– the profit-maximising approach
– measuring the marginal cost and revenue of labour
• marginal cost of labour (MCL)
• the marginal revenue product of labour (MRPL)
– the profit-maximising level of employment
Market-determined Wage rates and EmploymentMarket-determined Wage rates and Employment
OQ of labour
Out
put
MPPL
x
Marginal physical product of labour curveMarginal physical product of labour curve
Diminishing returnsset in here
O
£
Wm
MCL= W
QeQ of labour
MRPL
The profit-maximising level of employmentThe profit-maximising level of employment
MRPL = MPPL × Pgood
• The demand for labour: marginal productivity theory
– the profit-maximising approach
– measuring the marginal cost and revenue of labour
• marginal cost of labour (MCL)
• the marginal revenue product of labour (MRPL)
– the profit-maximising level of employment
– derivation of the firm's demand curve for labour
• The demand for labour: marginal productivity theory
– the profit-maximising approach
– measuring the marginal cost and revenue of labour
• marginal cost of labour (MCL)
• the marginal revenue product of labour (MRPL)
– the profit-maximising level of employment
– derivation of the firm's demand curve for labour
Market-determined Wage rates and EmploymentMarket-determined Wage rates and Employment
O
Q of labour
£
MRPL
W1 MCL1
Q1
MCL2W2
MCL3W3
Q2 Q3
a
b
c
Deriving the firm’s demand curve for labourDeriving the firm’s demand curve for labour
Profits maximisedwhere MRPL = MCL
D
O
Q of labour
£
W1 MCL1
Q1
MCL2W2
MCL3W3
Q2 Q3
a
c
The MRPL curve tracesout the demand curve
b
Deriving the firm’s demand curve for labourDeriving the firm’s demand curve for labour
• Elasticity of demand for labour
– determinants
• price elasticity of demand for the good
• ease of factor substitution
• elasticity of supply of complementary factors
• elasticity of supply of substitute factors
• ratio of wage costs to total costs
• time period
• Wages and profits under perfect competition
• Elasticity of demand for labour
– determinants
• price elasticity of demand for the good
• ease of factor substitution
• elasticity of supply of complementary factors
• elasticity of supply of substitute factors
• ratio of wage costs to total costs
• time period
• Wages and profits under perfect competition
Market-determined Wage rates and EmploymentMarket-determined Wage rates and Employment
O
MCL = W
Surplus for firmSurplus for firm
WagesWages
W
QeQ of labour
£
MRPL
Wages and a firm's surplus over wagesWages and a firm's surplus over wages
Firms with Power in the Labour MarketFirms with Power in the Labour Market
• Types of labour market power
– monopsony power of employers
– monopoly power of trade unions
• Firms with monopsony power in employing labour
– MCL > W
• Types of labour market power
– monopsony power of employers
– monopoly power of trade unions
• Firms with monopsony power in employing labour
– MCL > W
O
Q of labour
£
MRPL
ACL W (supply curve)
MCL
MonopsonyMonopsony
Firms with Power in the Labour MarketFirms with Power in the Labour Market
• Types of labour market power
– monopsony power of employers
– monopoly power of trade unions
• Firms with monopsony power in employing labour
– MCL > W
– effects on wages and employment
• Types of labour market power
– monopsony power of employers
– monopoly power of trade unions
• Firms with monopsony power in employing labour
– MCL > W
– effects on wages and employment
O
Q of labour
£
MRPL
ACL W (supply curve)
Q1
MCL
MonopsonyMonopsony
W1
Q2
W2
The Role of Trade UnionsThe Role of Trade Unions
• Unions with monopoly power
• Unions facing competitive employers
– effects of wage increases on employment
• Unions with monopoly power
• Unions facing competitive employers
– effects of wage increases on employment
O Q of labourQ1
S
D
£
W1
Monopoly union facing producersunder perfect competition
Monopoly union facing producersunder perfect competition
O Q of labourQ1
W1
S
D
£
W2
Q2 Q3
Monopoly union facing producersunder perfect competition
Monopoly union facing producersunder perfect competition
Unemployment
The Role of Trade UnionsThe Role of Trade Unions
• Unions with monopoly power
• Unions facing competitive employers
– effects of wage increases on employment
– productivity deals
• Unions with monopoly power
• Unions facing competitive employers
– effects of wage increases on employment
– productivity deals
The Role of Trade UnionsThe Role of Trade Unions
• Unions with monopoly power
• Unions facing competitive employers
– effects of wage increases on employment
– productivity deals
• Bilateral monopoly
• Unions with monopoly power
• Unions facing competitive employers
– effects of wage increases on employment
– productivity deals
• Bilateral monopoly
The Role of Trade UnionsThe Role of Trade Unions
• Unions with monopoly power
• Unions facing competitive employers
– effects of wage increases on employment
– productivity deals
• Bilateral monopoly
– no unique equilibrium
• Unions with monopoly power
• Unions facing competitive employers
– effects of wage increases on employment
– productivity deals
• Bilateral monopoly
– no unique equilibrium
The Role of Trade UnionsThe Role of Trade Unions
• Unions with monopoly power
• Unions facing competitive employers
– effects of wage increases on employment
– productivity deals
• Bilateral monopoly
– no unique equilibrium
– relationship between wages and employment
• Unions with monopoly power
• Unions facing competitive employers
– effects of wage increases on employment
– productivity deals
• Bilateral monopoly
– no unique equilibrium
– relationship between wages and employment
O Q of labour
£
W1
Q1
MRPL
MCL1
No
un
ion
S1 (=ACL1)
No unio
n
Bilateral monopolyBilateral monopoly
Monopsony:no union
W2
xMCL2
= ACL2
O Q of labour
£
W1
Q1
MRPL
MCL1
No
un
ion
S1 (=ACL1)
No unio
n
Bilateral monopolyBilateral monopoly
Bilateralmonopoly
Q3
W2
xMCL2
= ACL2
O Q of labour
£
W1
Q1
MRPL
MCL1
Bilateral monopolyBilateral monopoly
Wage can riseto W2 with no fallin employment
The Role of Trade UnionsThe Role of Trade Unions
• Unions with monopoly power
• Unions facing competitive employers– effects of wage increases on employment
– productivity deals
• Bilateral monopoly– no unique equilibrium
– relationship between wages and employment
– how a rise in wage rates could lead to an increase in employment
• Unions with monopoly power
• Unions facing competitive employers– effects of wage increases on employment
– productivity deals
• Bilateral monopoly– no unique equilibrium
– relationship between wages and employment
– how a rise in wage rates could lead to an increase in employment
W2
x
MCL3 = ACL3
O Q of labour
£
W1
Q1
MRPL
MCL1
Bilateral monopolyBilateral monopoly
Wage can risefrom W1 to W3
and employmentrises to Q2
W3
Q2
The Role of Trade UnionsThe Role of Trade Unions
• Collective bargaining– union threats and promises– employers’ threats and promises
• The outcome of negotiations– power– attitudes– union's membership– scope for movement– bargaining skills– information
• Role of government
• Collective bargaining– union threats and promises– employers’ threats and promises
• The outcome of negotiations– power– attitudes– union's membership– scope for movement– bargaining skills– information
• Role of government
The Efficiency Wage HypothesisThe Efficiency Wage Hypothesis
• Meaning of efficiency wage rates
• Why might higher wage rates lead to higher productivity?
– less ‘shirking’
– reduced labour turnover
– self-selection
– morale
• In which parts of the labour market are efficiency wage rates likely to be paid?
• Meaning of efficiency wage rates
• Why might higher wage rates lead to higher productivity?
– less ‘shirking’
– reduced labour turnover
– self-selection
– morale
• In which parts of the labour market are efficiency wage rates likely to be paid?
Low Pay and DiscriminationLow Pay and Discrimination
• Low pay– identifying workers who are low paid– evidence on low pay– the growth in low pay
• unemployment due to recession• unemployment due to technological change• the growth in part-time employment• changes in labour laws
• Minimum wages– effects in competitive markets– effects in monopsonistic markets– evidence on the effects of a minimum wage
• Low pay– identifying workers who are low paid– evidence on low pay– the growth in low pay
• unemployment due to recession• unemployment due to technological change• the growth in part-time employment• changes in labour laws
• Minimum wages– effects in competitive markets– effects in monopsonistic markets– evidence on the effects of a minimum wage
Low Pay and DiscriminationLow Pay and Discrimination
• Discrimination
– types of discrimination
– differences in pay not related to productivity
– differences in productivity arising from discrimination in social opportunity
• Discrimination
– types of discrimination
– differences in pay not related to productivity
– differences in productivity arising from discrimination in social opportunity
Low Pay and DiscriminationLow Pay and Discrimination
• Gender and the labour market– evidence on wage inequality
• Gender and the labour market– evidence on wage inequality
Average gross hourly earnings for full-time adultUK employees (pence per hour): 1970-2002
Average gross hourly earnings for full-time adultUK employees (pence per hour): 1970-2002
Average gross hourly earnings for full-time adultUK employees (pence per hour): 1970-2002
Average gross hourly earnings for full-time adultUK employees (pence per hour): 1970-2002
Average gross hourly earnings for full-time adultUK employees (pence per hour): 1970-2002
Average gross hourly earnings for full-time adultUK employees (pence per hour): 1970-2002
Average gross hourly earnings for full-time UK employees on adult rates (2002)
Average gross hourly earnings for full-time UK employees on adult rates (2002)
Average gross hourly earnings for full-time UK employees on adult rates (2002)
Average gross hourly earnings for full-time UK employees on adult rates (2002)
Average gross hourly earnings for full-time UK employees on adult rates (2002)
Average gross hourly earnings for full-time UK employees on adult rates (2002)
Low Pay and DiscriminationLow Pay and Discrimination
• Gender and the labour market (cont.)
– causes of inequality between the sexes
• types of employment (including part time)
• career breaks
• differences in mobility
• union membership
• custom and practice
• training
• prejudice
– effects of equal pay legislation
• Gender and the labour market (cont.)
– causes of inequality between the sexes
• types of employment (including part time)
• career breaks
• differences in mobility
• union membership
• custom and practice
• training
• prejudice
– effects of equal pay legislation
The Flexible Firm and the Market for LabourThe Flexible Firm and the Market for Labour
• Flexible labour markets
– the flexible firm
• functional flexibility
• numerical flexibility
– core workers and peripheral workers
– Implications for wages
• Flexible labour markets
– the flexible firm
• functional flexibility
• numerical flexibility
– core workers and peripheral workers
– Implications for wages
The flexible firmThe flexible firm
Core groupPrimary labour
marketFunctionalflexibility
Core groupPrimary labour
marketFunctionalflexibility
The flexible firmThe flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
First peripheral groupSecondary labour market
Numerical flexibility
Core groupPrimary labour
marketFunctionalflexibility
Core groupPrimary labour
marketFunctionalflexibility
The flexible firmThe flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
First peripheral groupSecondary labour market
Numerical flexibility
Self-employmentSelf-employment
Core groupPrimary labour
marketFunctionalflexibility
Core groupPrimary labour
marketFunctionalflexibility
The flexible firmThe flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
First peripheral groupSecondary labour market
Numerical flexibility
Self-employmentSelf-employment
Core groupPrimary labour
marketFunctionalflexibility
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
gen
cyte
mp
ora
ries
The flexible firmThe flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
First peripheral groupSecondary labour market
Numerical flexibility
Self-employmentSelf-employment
Core groupPrimary labour
marketFunctionalflexibility
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
gen
cyte
mp
ora
ries
Su
b-con
tractin
gS
ub-
contra
cting
The flexible firmThe flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
First peripheral groupSecondary labour market
Numerical flexibility
Self-employmentSelf-employment
IncreasedoutsourcingIncreased
outsourcing
Core groupPrimary labour
marketFunctionalflexibility
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
gen
cyte
mp
ora
ries
Su
b-con
tractin
gS
ub-
contra
cting
The flexible firmThe flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
First peripheral groupSecondary labour market
Numerical flexibility
Second
Second
peripheralperipheral
grou
pgr
oup
Self-employmentSelf-employment
IncreasedoutsourcingIncreased
outsourcing
Core groupPrimary labour
marketFunctionalflexibility
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
gen
cyte
mp
ora
ries
Su
b-con
tractin
gS
ub-
contra
cting
The flexible firmThe flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
First peripheral groupSecondary labour market
Numerical flexibility
Short-
term
contractsS
hort-
term
contracts
Second
Second
peripheralperipheral
grou
pgr
oup
Self-employmentSelf-employment
IncreasedoutsourcingIncreased
outsourcing
Core groupPrimary labour
marketFunctionalflexibility
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
gen
cyte
mp
ora
ries
Su
b-con
tractin
gS
ub-
contra
cting
The flexible firmThe flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
First peripheral groupSecondary labour market
Numerical flexibility
Short-
term
contractsS
hort-
term
contracts
PublicSubsidyTrainees
PublicSubsidyTrainees
Second
Second
peripheralperipheral
grou
pgr
oup
Self-employmentSelf-employment
IncreasedoutsourcingIncreased
outsourcing
Core groupPrimary labour
marketFunctionalflexibility
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
gen
cyte
mp
ora
ries
Su
b-con
tractin
gS
ub-
contra
cting
The flexible firmThe flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
First peripheral groupSecondary labour market
Numerical flexibility
Short-
term
contractsS
hort-
term
contracts
PublicSubsidyTrainees
PublicSubsidyTrainees
Delayedrecruitment
Delayedrecruitment
Second
Second
peripheralperipheral
grou
pgr
oup
Self-employmentSelf-employment
IncreasedoutsourcingIncreased
outsourcing
Core groupPrimary labour
marketFunctionalflexibility
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
gen
cyte
mp
ora
ries
Su
b-con
tractin
gS
ub-
contra
cting
The flexible firmThe flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
First peripheral groupSecondary labour market
Numerical flexibility
Short-
term
contractsS
hort-
term
contracts
PublicSubsidyTrainees
PublicSubsidyTrainees
Delayedrecruitment
Delayedrecruitment
Job
sharingJob
sharing
Second
Second
peripheralperipheral
grou
pgr
oup
Self-employmentSelf-employment
IncreasedoutsourcingIncreased
outsourcing
Core groupPrimary labour
marketFunctionalflexibility
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
gen
cyte
mp
ora
ries
Su
b-con
tractin
gS
ub-
contra
cting
The flexible firmThe flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
First peripheral groupSecondary labour market
Numerical flexibility
Short-
term
contractsS
hort-
term
contracts
PublicSubsidyTrainees
PublicSubsidyTrainees
Delayedrecruitment
Delayedrecruitment
Job
sharingJob
sharing
Part
timePa
rttim
e
Second
Second
peripheralperipheral
grou
pgr
oup
Self-employmentSelf-employment
IncreasedoutsourcingIncreased
outsourcing
Core groupPrimary labour
marketFunctionalflexibility
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
gen
cyte
mp
ora
ries
Su
b-con
tractin
gS
ub-
contra
cting
The flexible firmThe flexible firm
The Flexible Firm and the Market for LabourThe Flexible Firm and the Market for Labour
• The Japanese model
– total quality management
– elimination of waste, 'just-in-time' methods
– team work
– functional and numerical flexibility
• The Japanese model
– total quality management
– elimination of waste, 'just-in-time' methods
– team work
– functional and numerical flexibility