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Government Intervention in Labour Markets
Government intervention in labour markets affects wages and employment in a number of ways :
1)
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The government (public sector) is a significant employer in the UK. The pay and the
number of people employed in the public sector (nurses, teachers, civil servants, etc)
is affected by the level of government expenditure.
Government policy measures to increase A.D. tend to boost employment and,
therefore, wages.
Changes in tax rates and welfare benefits also affect wage rates. Monetarists believe
that a cut in tax and benefits will increase the labour supply and reduce upward
pressure on wages. Keynesians, on the other hand, believe that tax cuts stimulate A.D.
(and employment) but benefit cuts reduce A.D. (and, therefore, employment).
Government policies in particular markets can affect wage rates and employment in
those markets. For example, raising tax rates on cigarettes is likely to result in a fall
in demand for cigarettes and, therefore, a fall in employment and wages in the
industry.
The government also operates A.C.A.S, which often becomes involved in disputes
between employers and employees over wage rates and employment levels.
2)
The government provides information in a number of ways in an attempt to overcome the
lack of labour market information. For example :
 A state funded careers service (providing details about requirements and
qualifications needed, working conditions and pay)
 Careers education in state schools
 Job centres (providing information about job vacancies and how to apply for them).
3)
This policy seeks to influence the distribution of firms and people across the country.
Governments use a variety of measures to increase the geographical mobility of workers
(and, therefore, reduce regional unemployment) :
 Financial assistance to workers to relocate to areas where there are vacancies
requiring their skills
 Businesses are encouraged to relocate to areas of high unemployment
 Businesses are encouraged to set-up in areas of high unemployment.
 F.D.I. is encouraged to areas of high unemployment.
4)
The government may seek to increase the level of training to the allocatively efficient level
in a number of ways :
 It provides training to its own (public sector) workers, to the unemployed (New
Deal) and to those workers looking to change jobs.
 It can subsidise individuals to start a training course.
 It can subsidise the cost of providing training for firms.
 It can pass legislation requiring firms to provide a certain level of training on-thejob.
5)
The qualifications and skills-level of workers can be increased and improved by improving
the quality and depth of state education. This should increase the occupational mobility of
the labour force, reduce the shortage of skilled labour and, hopefully, raise the productivity
rates of labour.
Measures taken to raise the qualifications and skills of workers are referred to as
investment in human capital. If there is investment in developing the abilities of a wide
range of people, then the economy should be more productive as a result.
6) Minimum Wage Legislation.
This is introduced to help raise the pay of low-paid workers. To have an effect, it MUST be
set above the market equilibrium wage rate. New classical economists (Monetarists) believe
that such government intervention in the operation of free market forces raises firms’
costs of production and will result in higher unemployment (as the firms cannot afford to
employ as many workers – and therefore make some workers redundant). Consider the
diagram below :
If a minimum wage of £6 per hour is set (above the equilibrium in this market of £5 per
hour) then this will cause an extension in the supply of labour (more workers are willing and
able to work at a higher wage rate), but it will cause a contraction in the demand for labour
(fewer firms are willing and able to employ as many workers). This leads to an excess supply
of
workers and, therefore, employment falls from
workers to
workers.
However, some Keynesians believe that the introduction of a national minimum wage may not
result in higher unemployment. They believe that the extra disposable income being spent by
the lower-paid workers will increase consumption (ie increase A.D) and lead to higher output
levels (and shift the MRP of labour curve to the right). This will probably maintain (or even
increase) the level of employment in the economy, as firms seek to increase their
production.
A national minimum wage was introduced in the UK in April 1999. It benefited approx 1.8
million workers at the time. It was set at £3.60 per hour for workers in full-time
employment and aged 21 years or over. It is reviewed annually (it currently stands at £5.80
per hour). There is a slightly reduced rate for 18-21 year olds (currently £4.83 per hour)
and a further reduced rate for 16-17 year olds (currently £3.57 per hour).
7)
The Equal Pay Act (1970)
The Sex Discrimination Act (1975)
The Race Relations Act (1976)
The Disability Discrimination Act (1995)
Employment Equality (Age Discrimination) Act (2006)
The aim of these laws is to reduce discrimination against a particular (minority) group and
also make employers’ attitudes change over time. Employers may find that a group which
they had previously discriminated against is more productive than they first thought.
However, employers may seek to get round such legislation by claiming that workers from a
certain group are less well suited than others for the jobs on offer. Furthermore, employers
can redefine jobs undertaken by workers from different groups (eg give a different job
title) and, therefore, justify a different rate of pay for the job. In practice, it can be very
difficult to prove that discrimination has occurred.
8)
If it is thought that the power of trade unions has been weakened too much by the various
legislation passed by successive Conservative governments in the 1980s and 1990s and their
bargaining power has been reduced too much in relation to employers, then a government
may repeal some of the laws. The Labour government that came to power in 1997 changed a
number of laws that the Conservative government had introduced. For example, it removed
the ban on public sector workers at GCHQ at Cheltenham from joining a union. This trade
union reform reduces the power of employers and increases the power of trade unions.
Hopefully this leads to better negotiations and compromise between the two similarly
powerful parties (employers and trade unions). In other words, neither party should be
exploited by the other (ie it should be a more efficient process and outcome).
9)
In 1997, the newly elected Labour government reversed the UK’s opt out from the Social
Chapter of the Maastricht Treaty. It adopted various EU directives on employment
legislation, for example, on the right to paternity leave, paid holidays, the maximum length
of the working week and minimum standards of health and safety at work.
Workers in the UK work longer hours than those in virtually all the other EU countries. In
1998, the Working Time Directive came into force – this requires employers to “take all
reasonable steps” to ensure that employees do not work, against their will, for more than an
average of 48 hours a week. Despite this, in 2003 it was estimated that approximately one
fifth of UK workers worked for more than 48 hours per week. At the time, employers
expressed concern that this directive might raise their labour costs and reduce the
flexibility of their labour force. There is evidence, however, that actually reducing long
working hours can raise labour productivity rates.