14. labour markets wages & industrial relatons

Labour Markets,

Wages and

Industrial Relations

The UK Labour Market

• 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 economy

0

5

10

15

20

1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003

Mill

ions

Agriculture


Manufacturing

Services


0

5

10

15

20

1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003

Mill

ions

Agriculture


Manufacturing

Services


0

5

10

15

20

1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003

Mill

ions

Agriculture


Manufacturing

Services


0

5

10

15

20

1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003

Mill

ions

Agriculture


Manufacturing

Services



• 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 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 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


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





– rise in female participation rates





– rise in temporary employment





– rise in temporary employment

– effects of downsizing

Market-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

Sall workers

in the market

Dall firms

in the market

O

Labour hours

Ho

urly

wa

ge

Wm

A labour market: whole market

Dindividual employer

O

Labour hours

Ho

urly

wa

ge

Q1

Wm

Slabour

A labour market: individual employer

O

Labour hours

Ho

urly

wa

ge

Q2

Wm

Dlabour

Sindividual worker

A 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 marginal disutility of hours worked

O

Hours worked

Dis

util

ity

MDU

The supply of hours worked

O

Hours worked

Ho

urly

wa

ge

S

Backward-bending supply curve of labour

S

WI

Ho

urly

wag

e

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 (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 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


OQ of labour

Out

put

MPPL

x

Marginal physical product of labour curve

Diminishing returnsset in here

O

£

Wm

MCL= W

QeQ of labour

MRPL

The 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


O

Q of labour

£

MRPL

W1 MCL1

Q1

MCL2W2

MCL3W3

Q2 Q3

a

b

c

Deriving 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 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


O

MCL = W

Surplus for firm

Wages

W

QeQ of labour

£

MRPL

Wages and a firm's surplus over wages

Firms 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

O

Q of labour

£

MRPL

ACL ≡ W (supply curve)

MCL

Monopsony

Firms 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

O

Q of labour

£

MRPL

ACL ≡ W (supply curve)

Q1

MCL

Monopsony

W1

Q2

W2

The Role of Trade Unions

• 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

O Q of labourQ1

W1

S

D

£

W2

Q2 Q3

Monopoly union facing producersunder perfect competition

Unemployment





– productivity deals






• Bilateral monopoly







– no unique equilibrium







– 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 monopoly

Monopsony:no union

W2

xMCL2

= ACL2

O Q of labour

£

W1

Q1

MRPL

MCL1

No

un

ion

S1 (=ACL1)

No unio

n

Bilateral monopoly

Bilateralmonopoly

Q3

W2

xMCL2

= ACL2

O Q of labour

£

W1

Q1

MRPL

MCL1

Bilateral monopoly

Wage can riseto W2 with no fall

in employment



• Unions facing competitive employers– effects of wage increases on employment


• 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 monopoly

Wage can risefrom W1 to W3

and employmentrises to Q2

W3

Q2


• 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 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?

Low 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


• Discrimination

– types of discrimination

– differences in pay not related to productivity

– differences in productivity arising from discrimination in social opportunity


• 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 UK employees on adult rates (2002)




• 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 Labour

• Flexible labour markets

– the flexible firm

• functional flexibility

• numerical flexibility

– core workers and peripheral workers

– Implications for wages

The flexible firm

Core groupPrimary labour

marketFunctionalflexibility

The flexible firm

First peripheral groupSecondary labour market

Numerical flexibility



The flexible firm



Self-employmentSelf-employment



The flexible firm






Ag

ency

tem

por

ari

esA

ge

ncy

tem

por

ari

es

The flexible firm






Ag

ency

tem

por

ari

esA

ge

ncy

tem

por

ari

esS

ub

-con

trac ting

Sub

-co

ntrac ting

The flexible firm




IncreasedoutsourcingIncreased

outsourcing



Ag

ency

tem

por

ari

esA

ge

ncy

tem

por

ari

esS

ub

-con

trac ting

Sub

-co

ntrac ting

The flexible firm



Second

peripheral

grou

p



outsourcing



Ag

ency

tem

por

ari

esA

ge

ncy

tem

por

ari

esS

ub

-con

trac ting

Sub

-co

ntrac ting

The flexible firm



Short-

term

contracts

Second

peripheral

grou

p



outsourcing



Ag

ency

tem

por

ari

esA

ge

ncy

tem

por

ari

esS

ub

-con

trac ting

Sub

-co

ntrac ting

The flexible firm



Short-

term

contracts

PublicSubsidyTrainees

Second

peripheral

grou

p



outsourcing



Ag

ency

tem

por

ari

esA

ge

ncy

tem

por

ari

esS

ub

-con

trac ting

Sub

-co

ntrac ting

The flexible firm



Short-

term

contracts


Delayedrecruitment

Second

peripheral

grou

p



outsourcing



Ag

ency

tem

por

ari

esA

ge

ncy

tem

por

ari

esS

ub

-con

trac ting

Sub

-co

ntrac ting

The flexible firm



Short-

term

contracts


Delayedrecruitment

Job

sharin

g

Second

peripheral

grou

p



outsourcing



Ag

ency

tem

por

ari

esA

ge

ncy

tem

por

ari

esS

ub

-con

trac ting

Sub

-co

ntrac ting

The flexible firm



Short-

term

contracts


Delayedrecruitment

Job

sharin

g

Part

time

Second

peripheral

grou

p



outsourcing



Ag

ency

tem

por

ari

esA

ge

ncy

tem

por

ari

esS

ub

-con

trac ting

Sub

-co

ntrac ting

The flexible firm

The 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

Education

14. labour markets wages & industrial relatons