Download widening of EU labour markets

To what extent has the labour
market in the UK become
more flexible?
Russel Dudley-Smith
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Definition: The speed of responsiveness of the labour market to changes in demand or supply.
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There might be a substantial increase in unemployment in the near future due firstly to the recession
causing a fall in aggregate demand due to the wealth effects of the substantial fall in house prices.
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But, secondly, due to government fiscal restraint resulting in the loss of several hundred thousand
public sector jobs.
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If there is a substantial fall in labour demand, how might the market reabsorb those workers?
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The greater the flexibility of the market, the quicker the fall in unemployment, but just how flexible is the
current UK labour market?
• This model envisages an ideal case where the price mechanism, in this case real wages, quickly achieves
equilibrium following a shift in demand or supply.
• There would then be a natural tendency for the market to balance the scarce resources of workers with
different skills with the unlimited demand for their work by competing firms.
• The term flexibility then expresses the conditions necessary to establish equilibrium for a particular kind
of homogenous labour.
• These conditions would include no monopoly over either supply or demand; freedom of entry and exit
from the labour market; and perfect information about the quality of applicants and their usefulness
combined with other factors of production.
• A fully specified model would have to incorporate a number of different labour markets depending on
know-how and experience.
• The term flexibility needs to cover the ease of between these markets as well as adjustment within
them.
• Because most people are potentially available in more than one market having a variety of human
capital available including skills, know-how and experience.
• High real wages will be needed to stimulate supply.
• The supply of dentists, for example, can rise as higher wages persuade existing dentists to take less
leisure, but also by attracting people from other segments of the market that are less in demand, after a
period of retraining.
• Higher wages today mean reduced wages in the future, as new workers enter the dentistry market and
cause the equilibrium price to fall.
• The concept of flexibility is important because entrepreneurs need the efficient clearing of the labour
market to perform their task of rationing scarce resources in a dynamic and quickly changing world.
• The more responsive labour markets are to changes in demand and supply, the faster the economy can
adjust and prosper as technology changes.
• Evidence of recent labour market flexibility is the willingness of UK workers to accept very low increases
in nominal wages at a time of rising inflation.
• Workers seemed to accept that uncertainty was so great that cuts in real wages were acceptable, thus
greatly alleviating the effect on unemployment.
• Potential inflexibility comes from those factors that prevent falling real wages. One considerable
obstacle was the introduction of the minimum wage in 1999, although the Low Pay Commission in
2009 found little evidence of an adverse effect on unemployment.
• This may be because minimum wages have positive effects on demand for labour by raising worker
productivity.
• Macro data shows that constraints to flexibility have been outweighed by other changes that allowed
real wages to fall after 2008.
• These included structural changes in the 1980s which restricted the ability of trade unions to strike and
the long-term decline in union membership.
• Also, the reduction in industry-specific unions has led to local pay bargaining and a dramatic reduction in
overall strike action in the UK in recent decades.
• A second kind of labour market flexibility is the responsiveness of supply to changes in the real wage.
• As the UK recovered from the credit crunch in 2010 real wage growth only became positive towards the
end of 2010, suggesting that the supply of labour is still relative elastic with firms able to hire new
workers quite easily.
• Occupational flexibility has become significantly greater in recent decades in the UK as a result of
pressure from globalisation and the IT revolution.
• The idea of a job for life has given way to work patterns that often include frequent change.
• There has also been a continuing rise in part-time work, providing a new flexibility, with workers able
to change the number of hours they offer.
• Further flexibility has come as a result of improvements in human capital.
• Facilitated by policy initiatives including the promotion of Lifelong Learning and grants to subsidise
retraining, with more people than ever going to university.
• Supply flexibility has been improved by the widening of EU labour markets allowing increased
immigration.
• But, regional differences in house prices have made labour less geographically mobile.
• In June 2010, the UK government announced a cut of 5% in the number of skilled workers allowed to enter
the UK from outside the EU.
• Another potential inflexibility for labour markets has been the regulative burden faced by employers.
• This is particularly due to the legislative and taxation requirements that raise the effective cost of
employing workers well beyond their real wage.
• For example, the national insurance paid by employers on the wages of each employee, has risen from
10% in 1978-79 to 12.8% in 2010-11.
• Also, changes to employment legislation have raised the regulative burden on employers, including the
tightening of regulations on dismissing workers.
• Plus there have been changes to entitlement to statutory redundancy payments and the need to consult
staff before changes in working conditions can be made.
• Employees now have the right to have their request for flexible working formally considered by their
employer.
• From April 2011 all employees have a right to request training.
• The government is to abolish the default retirement age of 65 in October 2011.
• Other sources of inflexibility include EU legislation, including the working time directive limiting the
hours a worker may work in a seven day period to 48.
• The EU has also begun to reinforce the rights of part-time workers.
• One problem with the competitive model is that the demand and supply of labour may not be
independent.
• Research has shown that those in part-time, weakly unionised and temporary contracts are significantly
less likely to receive training to improve their skills.
• Thus unskilled labour is likely to experience a relative fall in its share of the economy’s output.
• People in secure jobs with good wages will be able to extend their human capital through training and
will see the demand for their labour rise relative to those in less skilled work.
• Also, some firms may negotiate with workers outside of the market framework, preferring to pay
existing workers above the equilibrium wage, rather than face the transaction costs of having to hire
new employees.
• Two forces have been at work in terms of determining labour market flexibility.
• On the one hand, a general move to allow the price mechanism to ration labour according to competing
demands whilst ensuring an adequate supply of well qualified workers.
• This has been backed up by a reduction in union power, increase in immigration and the expansion of
higher education.
• On the other hand, an increasing concern with human rights has tried to ensure equality of opportunity
by improving workers’ rights.
• Also the minimum wage has attempted to guarantee lower-paid workers a least a minimal share in
the growing collective affluence, albeit at the cost of less flexibility.
• There could be greater labour market flexibility, but only perhaps at the risk of threatening social solidarity.
• Flexibility refers to the speed of responsiveness of the labour market to changes in demand or supply.
• Inflexibilities may prevent wages failing to clear the market, or prevent supply responding to increased
demand.
• A number of changes have increased flexibility in the UK including outsourcing, the growth of shortterm and part-time contracts and reduced trade union powers.
• However, much of the relationship between workers and their employers is established outside the market.
• Legislation in this area has included the working time directive, the minimum wage, redundancy rights for
part-time workers and employment tribunals.
• Use AD/AS analysis to illustrate the significance of date in Table 1 for an economy faced with a sudden
fall in AD.
• Why are the labour market diagrams in this article specified in terms of real rather than nominal wages?
• To what extent should one look at the CPI or at the RPI when calculating changes in real wages?
• Calculate the change in real minimum wage since 1999 using inflation data from
www.statistics.gov.uk
• The labour market diagrams are drawn with linear functions for clarity of exposition. Why
might these be non-linear in practice?
• Whose interests should come first? Those of the workers or those of the employers?