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ECONOMICS
Johnson Hsu
Economics of work and
leisure
1. Nature of work and leisure and trends in
employment and earnings
2. Market Structures and competitive behavior
in leisure markets
3. Labour demand, supply and wage
determination
4. Market failure and the role of the
government and union in the labour
market
Why labour market
failure will occurs?
Ans: because the market forces of
demand and supply do not result
in an efficient allocation of labour
resources.
The main causes for
labour market failure
1)
2)
3)
4)
5)
6)
7)
8)
Abuse of labour market power
Imperfect information
Skill shortages
Economic inactivity
Unemployment
Discrimination
Segmented labour market
Geographical and occupational immobility of
labour
Other causes for labour
market failure


Attachment between workers and
employers
inertia
Monosponist

A single buyer
Oligopsonist

One of a few dominant buyers
Wage determination
In a competitive labour market, the
demand for and the supply of labour
play the key roles in determination
wage rate.
Diagram of Wage
Determination
Diagram of Wage
Determination



The equilibrium wage rate in the industry is
set by the meeting point of the industry
supply and industry demand curves.
In a competitive market firms are wage
takers because if they set lower wages
workers would not accept the wage.
Therefore they have to set the equilibrium
wage We.
Diagram of Wage
Determination
The firm will maximise profits by
employing at Q1 where MRP of Labour
= MC of Labour
The wage rate in the industry is
determined by the equilibrium position
of supply and demand. A change in a
given variable may shift the supply or
demand curve.
Average and marginal
cost of labour
No of
workers
1
Average
cost of lab
10
Total cost
of labor
10
Marginal
cost of lab
10
2
11
22
12
3
13
39
17
4
16
64
25
5
20
100
36
6
25
150
50
Bilateral monopoly

A market with a single buyer and seller
Factors influencing an
employer’s bargaining strength
1)
2)
3)
4)
Greater the financial reserves it has with
which it can last out any dispute
Lower the proportion of its workers who are
in a union or professional body
greater the degree of substitution between
capital and labour
Higher the rate of unemployment, since this
will mean it can substitute existing workers
with unemployed workers
Factors influencing an
employer’s bargaining strength
5) Lower the support worker have from the
public
6) Lower the disruption any industrial action
would cause to the productive process
7) More branches the firm has which employ
non-union labour or labour in different
unions – so that production can be moved in
the case of a dispute
8) More legislation favours employer
Factors influencing a trade
union’s bargaining power
1)
2)
3)
4)
Greater the financial reserves of the
organisation
Higher the proportion of workers in
the organisation
More inelastic the demand for the
firm’s product
Lower the degree of substitution
between capital and labour
Factors influencing a trade
union’s bargaining power
5) Lower the proportion of labour costs in total
costs
6) Greater the support the workers have from
the general public
7) Lower the rate of unemployment
8) More legislation favours the rights of workers
9) More disruption any industrial action would
cause.
Production possibility
frontier
Disequilibrium
unemployment

Unemployment caused by the
aggregate supply of labour exceeding
the aggregate demand for labour
Equilibrium
unemployment

Unemployment that exists when the
labour market is in equilibrium
Non-accelerating inflation
rate of unemployment

The level of unemployment that exists
when the labour market is in
equilibrium; also called equilibrium
unemployment
Discrimination

Discrimination results in an inefficient
allocation of resources and inequitable
wage differentials.
Factors on discrimination
1)
2)
3)
4)
5)
The group discrimination against clearly suffers.
Producers who discriminate have a smaller pool of
labour to select from.
Consumers will experience higher prices if
producers discriminate.
The government may have to pay out more welfare
benefits to groups that are discriminated against
and may have to spend time and money
introducing and monitoring anti-discrimination
legislation.
The economy will lose out as a result of the
misallocation of resources.
Theories of
discrimination


Becker’s theory
Statistical discrimination
Discrimination
Employment Tribunals and EAT Statistics,
2011-12
Geographical immobility
of labour

Barriers to the movement of workers
between different areas
Geographical Immobility:
Occupational immobility
of labour

Barriers to workers changing
occupations
Occupational Immobility:

A major study by the Organisation for Economic Co-operation and
Development (OECD) shows how England's 16 to 24-year-olds are falling
behind their Asian and European counterparts.
England is 22nd for literacy and 21st for numeracy out of 24 countries.
The OECD's Andreas Schleicher warned of a shrinking pool of skilled
workers. Unlike other developed countries, the study also showed that
young people in England are no better at these tests than older people, in
the 55 to 65 age range.
When this is weighted with other factors, such as the socio-economic
background of people taking the test, it shows that England is the only
country in the survey where results are going backwards - with the older
cohort better than the younger.
The study shows that there are 8.5 million adults in England and Northern
Ireland with the numeracy levels of a 10-year-old.
"This shocking report shows England has some of the least literate and
numerate young adults in the developed world," said Skills Minister
Matthew Hancock.
Types of labour market
flexibility





Numerical flexibility
Temporal flexibility
Locational flexibility
Functional flexibility
Wage flexibility
Flexible Labour Markets:
Flexible Work Patterns

A perfectly flexible economy would be one
in which prices and then quantities
adjusted instantly in response to any shock,
and in such a way so as to ensure full
resource utilisation. For the labour market,
perfect flexibility would imply that following
any change in the economic environment,
the labour force would be immediately
redeployed to its most efficient use, with
unemployment remaining at its structural
level.

Where flexibility is particularly limited, the labour
market may fail to adjust completely. In this case,
the change in unemployment may become a
permanent rather than a transitory phenomenon. As
the economy is constantly adjusting to a changing
economic environment, it is analytically helpful to
think of actual unemployment as consisting of
structural and cyclical components, where the
cyclical component corresponds to the transitional
aspect of unemployment, while the structural
component corresponds to the permanent element.
European labour market
model
features
Continental
model
Nordic model
Anglo-saxon
model
Level of
government
intervention
high
high
low
Power of trade
unions
High
High
Low
Regulations on
dismissals
High
Average
Low
Minimum wage
High
High
High
Unemployment
benefits
Generous
Generous but
short term
Not very
generous
Employment
rate
Relatively low
high
high
European labour market
model
features
Continental
model
Nordic model
Anglo-saxon
model
Duration of
unemployment
Tends to be long Short term
term
Short term
Average no. of
hours worked
Low and flexible Relatively high
Low
Sense of job
security
High
Relatively high
Low
Labour market
efficiency
Low
High
High
Income equality
High
High
Low
priority
Social cohesion
Social cohesion,
efficiency
Efficiency, social
cohesion
Skill Shortages
UK firms facing 'critical' skills
shortage

UK businesses are suffering from a 'critical' lack of skilled workers,
according to a new report. A survey of almost 300 companies by the
CBI found a "stubborn shortage" in the skills industry needs to
remain competitive and fuel long-term growth. The study showed
that three out of five firms were struggling to recruit workers with
the advanced technical skills they need, and feared shortages will
persist for the next three years.
Almost half lacked confidence in being able to take on high-skilled
workers, especially in manufacturing, construction and
engineering. One in two of those polled revealed they had to put on
basic remedial training for employees, and 55% said school-leavers
lacked the right work experience. A third were dissatisfied with some
school and college-leavers' basic literacy and numeracy.
Director general John Cridland said: "We're facing a critical lack of
skills in some key industries, just as the economy starts to pick up.
Long-term sustainable growth will come in part from rebalancing
towards high-value products and services, which demand much
better technical skills.
"We need to boost our skills base urgently before the UK loses more
ground. It's time to stop looking on enviously at Germany and build a
system that works."
Government Solutions?

BIS
The Department for Business, Innovation & Skills (BIS) is
the department for economic growth. The department
invests in skills and education to promote trade, boost
innovation and help people to start and grow a business.
BIS also protects consumers and reduces the impact of
regulation.
We have around 2,500 staff working for BIS plus around
500 people working for UK Trade & Investment in the
UK. Our partner organisations include 9 executive
agencies employing around 14,500 staff. We
have BIS offices in London, Sheffield, Billingham, Cardiff,
Darlington, Glasgow, Manchester, Nottingham, Runcorn
and Watford.
Segmented Labour
Markets:
Wage differences are due to the nature of the job as opposed to
the nature of the worker.
Segmented labour markets are dual labour markets, which
consist of various sub-groups with little or no crossover
capability. The labour markets are divided in 2 sectors:
primary sector and secondary sector. The primary
sector generally contains the higher-grade, higher-status, and
better-paid jobs, with employers who offer the best terms and
conditions. It is a male dominated sector. The secondary
sector is characterised jobs which are mostly low-skilled and
require relatively little training. There are few barriers to job
mobility within the secondary sector. Because the jobs are
unattractive there is little incentive to stay, and there are high
levels of labour turnover, with workers moving on to other
jobs or employers. Wages are low, and terms and conditions of
the job are poor. It is a female dominated sector.
Top Five Male Dominated and
Female Dominated Jobs (Oct - Sept
2009)
Government intervention
in labor markets
1)
2)
3)
4)
5)
6)
7)
8)
The government as an employer
Labour market information
Regional policy
Training
Education
Minimum wage legislation
Discrimination legislation
Trade union legislation
Income

Is flow of money over a period of time.
Functional income
Labour  wages
Capital  interest
Land  rent
Entrepreneurs  profits
Causes of differences in the
geographical distribution of
income






Unemployment rates
The proportion of the population claiming
benefits
The qualifications and skills of the labour
force
Industrial structure
Occupational structure
Living costs that give rise to differences in
pay
Causes of income inequality
between households






Unequal holdings of wealth
Differences in the composition of
households
Differences in skills and qualifications
Differences in educational opportunities
Discrimination
Differences in hours worked
Causes of wealth
inequalty




Inequality of income
Differences in entrepreneurial skills
The pattern of inheritance
Marriage patterns of the wealthy
Gini coefficient

Used to make international comparisons
of income inequality. It is found by
using a Lorenz curve.
Lorenz curve

A diagram commonly used to illustrate
income or wealth distribution, named
after the American statistician, Max Otto
Lorezn
Ways in which governments
affect the distribution of income
and wealth
1)
2)
3)
4)
5)
Taxation
Provision of state benefits
Provision of benefits in kind
Labour market policy
Macroeconomic poliey
Fiscal Policy:
Absolute poverty

The inability to purchase the basic
necessities of life
Relative poverty

A situation of being poor relative to
others
Causes of poverty
1)
2)
3)
4)
5)
6)
7)
Unemployment
Low wages
Sickness and disability
Old age
The poverty trap
Being a lone parent
Reluctance to claim benefits
The effects of poverty




Suffer worse physical and mental health
A lower life expectancy
Damaging effects on the wider
economy
A burden on government spending and
reduces productivity
Government policy
measures to reduce poverty
1)
2)
3)
4)
5)
6)
7)
Operating a NMW.
Cutting the bottom rate of income tax
Increasing employment opportunities
Improving the quantity and quality and
training and education
Making use of the trickle-down effect
Increasing benefits
Increasing the provision of affordable
childcare
Dependency ratio


Proportion of the population who are too
young, too old or too sick to work and so who
are reliant on the output of those who are
working
Dependency Ratio =
Number of Children (0-15) + Number of
Pensioners ( > 65 )
------------------------------------------------------Number of Working age 16-65
What is the basis of UK State
pension?
Ans: ‘pay as you go’ basis. The
pension payments received by
current pensioners are paid for by
the taxes paid by current workers.
How to maintain pensioners’ living
standards while reducing the fiscal
pressure of an aging population?
1)
2)
3)
4)
5)
Raising the retirement age
Discouraging early retirement
Increasing the labour force by other
means
Promoting occupational and personal
pension schemes
Encouraging a change in salary
structure
Which employees does the
scheme cover?

Staff of all NHS organisations in England and Wales,
along with GP practices and direction bodies.
Direction bodies are normally voluntary and nonprofit organisations, such as hospices, care in the
community and housing associations.
There are similar schemes in Scotland and Northern
Ireland.
How many sections are
there?

There are two sections of the NHS
Pension Scheme called the 1995 section
and the newer 2008 section.
How many active, deferred
and retired members do they
have?

As at 31 March 2010 there were, in
England and Wales, 1,368,215 active,
524,726 deferred and 638,610
members in retirement.
In Scotland the scheme has over
153,000 members paying into the
scheme, with about 70,000 pensioners.
What are the principal
benefits?

Both schemes are final-salary schemes.
In the 1995 section, which closed to new joiners on 1 April 2008, the
normal retirement age (NRA) is 60. There is a half final-salary pension
after 40 years, based on an annual accrual rate of 1/80th per year, plus
an automatic lump sum of 3/80ths.
GPs in the 1995 scheme are in a separate "career average" sub-section
with an annual accrual rate of 1.4% of earnings.
In the 2008 section, opened from 1 April 2008, the NRA is 65, but
accrual is at a faster rate of 1/60th per year, though there is no
automatic lump sum.
GPs are in a separate "career average" sub-section with an annual
accrual rate of 1.87% of earnings.
What percentage of salary do
employees and employers pay?

The average NHS pension in payment is
currently £7,000 a year
Employers pay in 14% of pay while
employees pay an amount which is
dependant of their whole-time
equivalent pay, varying from 5% to
8.5% depending on their earnings.
What are the funding costs
of the scheme?

Approximately 20% of salaries.
Is the scheme funded or
unfunded?

Unfunded. It is paid for out of general
taxation, not an underlying investment
fund.
What is the value of the scheme's
assets (if any) and its liabilities?

There are no assets.
The scheme liability, which is estimated by the
Government Actuary's Department (GAD), is£287.6bn
as of 31 March 2010.
"The £287.6bn figure represents all future payments
due over the next eight decades or so to cover the
accrued rights of around two and a quarter million
individuals who work, have worked, or are
dependents of individuals who worked in the NHS,"
said NHS Pensions.
What is the average
pension in payment?

The average pension for all members is
around £7,000, with average scheme
membership of 18 years.
Have there been any changes or
reforms to the scheme in recent
years?

The most recent change was the
introduction of the New NHS Pension
Scheme on 1 April 2008, with
amendments to the scheme already in
place.
For new staff since 2008 the normal
pension age is 65, not 60.
Are there any further
changes in the pipeline?

There are no planned changes to the scheme.
John Hutton is currently reviewing public
sector pensions and this may have future
implications for the NHS pension scheme.
The government intends to revalue pensions
in payment in line with inflation as measured
by the consumer prices index (CPI) rather
than the retail prices index (RPI).