Labour market forces and government intervention · A Level Economics

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Governments and trade unions should be excluded from taking part in wage negotiations as their intervention always causes higher levels of unemployment. With the help of a diagram(s), evaluate this statement. Use TableA: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to thisquestion.

AO1 and AO2 out of 14marks. AO3 out of 6 marks.

Indicative content Responses may include:

AO1 Knowledge and understanding and AO2 Analysis

• Explanation and analysis of wage determination in perfect competition.

• Determination of marginal physical productivity of labour (MPP).

• Calculation of marginal revenue product (MRP) = MPP  Price. (Demand for labour)

• Determination of supply of labour

• Wage determination by MRP and Supply of labour. Diagram to show industry/firm wages from supply and demand for labour

• Intervention of government/trade union to set minimum wage. Diagram to show demand falls and supply rises to create unemployment.

AO3 Evaluation

• Is the perfectly competitive market view of wage determination based on realistic assumptions of perfect knowledge, movement etc.

• Trade unions can negotiate productivity agreements which raise MPP and hence the demand for labour increases.

• Governments often act as monopsonistic employers and may exploit their employees, and higher wages may reflect MRP.

Accept all valid responses.

AO1 Knowledge and understanding and AO2Analysis

AO3 Evaluation

Training workers improves their human capital and increases productivity. This benefits the workers, their employers and government. Consider the extent to which training fees should be paid for only by workers. Use TableA: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses this question.

AO1 and AO2 out of 14marks. AO3 out of 6 marks.

Indicative Content: Responses may include:

AO1 Knowledge and Understanding and AO2 Analysis

• Differences between education and training might be explained.

• Trained workers are likely to have higher productivity and this will increase the demand for this labour

• For workers, higher demand for skilled labour is likely to lead to higher wages.

• MRP theory might be used in conjunction with a supply of and demand for labour diagram, to illustrate the impact on wages of an increase in productivity

• For workers, highly skilled labour is more likely to produce an inelastic supply and therefore increase wages.

• Employers might pay fees because they are likely to benefit through an increase in profits.

• Government’s might contribute towards fees because they are likely to benefit in the long run due to an increase in real GDP

AO3 Evaluation

• Wealthier families can afford to pay.

• Fear of significant debt for lower paid individuals.

• Government funding might lead to less well-off workers subsiding those benefiting from government financial support

• low paid workers may not be able to cover self-financing their fees.

• Workers may be subsequently employed by other firms who do not bear the initial costs.

• Government funding of fees for some groups at the expense of others may be politically unpopular.

Accept all valid responses.

AO1 Knowledge and understanding and AO2 Analysis

AO3 Evaluation

The fashion industry employs around 75 million workers, many of whom earn very low wages and work up to 16 hours a day. The industry contributes to 20% of global wastewater and 8% of all carbon emissions. 60% of clothes are made from plastics, 83 million tonnes of the 100 billion garments produced are sent to landfill, and only 20% are collected for recycling. Consider to what extent an equitable solution can be found for market failures in the fashion industry.

Use Table A: AO1 Knowledge and Understanding, AO2 Analysis, and Table B: AO3 Evaluation, to mark candidate responses to this question

AO1 and AO2 are out of 14 marks. AO3 is out of 6 marks.

Indicative Content Responses may include:

AO1 Knowledge and Understanding and AO2 Analysis

• definition of market failure/allocative inefficiency

• explanation and example of a negative externality of production

• might draw a diagram to illustrate the link between negative externality of production and market failure

• the use of indirect taxation could be used to reduce the output of fashion clothes/the subsequent cost of the tax would be shared between consumers and producers

• use of advertising and education to raise public awareness of the negative impact of the production of fashion clothes upon society

• the provision of subsidies to those producers who use less plastic

• increase the cost of using landfill sites

AO3 Evaluation

• the use of indirect taxation might lead to unemployment in the fashion industry

• the use of indirect taxation might have a negative effect upon the export of fashion goods

• subsidies are costly and will lead to a re-distribution of income within the economy

• the rising cost of using landfill sites might lead to illegal dumping of waste products

Accept all valid responses

AO1 Knowledge and understanding and AO2 Analysis

AO3 Evaluation

Explain, with theaid of a diagram, how the migration of workers from a low-income country is likelyto affect wages in the low-income country. Labels and axes Wages/labour (1) Initial S and D for labour (1) and equilibrium point (1) Reduction in the supply of labour (supply curve shift) (1) New equilibrium wage and quantity (1)

Maximum 3 marks if no diagram

The average wageof chiefexecutivesin large companies in a country is over 100 times greater than the average wage of their employees. Assess how economictheorycan account for this variation in average wages. Use TableA:AO1 Knowledge and understanding andAO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question.

AO1 and AO2 out of 14 marks. AO3 out of 6 marks.

Indicative content Responses may include:

AO1 Knowledge and understanding and AO2 Analysis

• Explanation of wages determined by demand and supply of labour.

• Demand for labour determined by marginal physical product (MPP) and the price (P) of the good made to give marginal revenue product (MRP) = MPP  P.

• Determinants of the supply of labour; skills education, training or ability, reference to elasticity of supply.

• Analysis of why wages differ depending on MRP and supply.

• Use of the concepts of economic rent.

• The application of the theory to the statement concerning chief executives’ pay relative to that of other workers.

• Difference based on labour market for chief executives and workers.

• A comparison of the labour markets for CE and workers.

AO3 Evaluation

• How to measure the MPP of a factor of production is difficult.

• Wages of chief executives (CE) are sometimes determinedby people in a similar position and so may inflate the wage level.

• Monopsony employer may underpay workers.

• Prejudice and discrimination leads to low wages for workers.

Accept all valid responses.

With the help of a diagram, assess the importance of the supply of labourin relation tothe wage andemployment levels forfirms operating in perfectly competitive and monopsony labour markets.

Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question.

AO1 and AO2 out of 14 marks. AO3 out of 6 marks.

Indicative content Responses may include:

AO1 Knowledge and understanding and AO2 Analysis

• Characteristics of a perfectly competitive labour market should be described.

• The assumptions which determine the shape of the supply of labour to a firm in a perfectly competitive labour market.

• A diagram should be provided which shows how wages are determined and employment will be determined within a firm operating in a perfectly competitive labour market.

• An explanation of how wages and employment might be determined in a monopsony labour market

• Analysis should refer to the perfectly competitive labour market and why firms operating in this market have a perfectly elastic supply of labour and how this relates to demand for labour and employment

• Analysis can be used to determined how an equilibrium wage would be determined in a monopsony labour market. The importance of an upward sloping supply of labour should be discussed.

• Analysis should then be used to show why workers are likely to receive lower wages and less employment opportunities primarily due to the supply of labour being influence by a monopsony buyer of labour.

AO3 Evaluation

• Although the supply of labour to a firm in a perfect labour market is perfectly elastic, this does not mean the wage rate is fixed. For example, an increase in labour productivity across the market will lead to an increase in the wage paid by each firmplus an increase in employment in each firm.

• It should also be recognized that ashortage of labour supply in a perfect labour market will also lead to higher wages paid by individual firms as well as an increase in unemployment.

• An increase in the marginal productivity in a perfect labour market within a firmwill not lead to an increase in wages paid by the firm, nevertheless it should still lead to an increase of employment of labour.

• A firm in a monopsony market will employ labour up to the point where the marginal cost of employing labour is equal to the marginal revenue product of labour. This will mean that employees will receive a wage lower than that determined by the interaction of the supply of and demand for labour.

• Sometimes, a government will intervene in a monopsony labour by establishing a minimum wage, this will produce a perfectly elastic supply of labour at that wage, while increasing wages and employing. Trade union intervention may achieve a similar outcome.

• A conclusion should attempt to evaluate the state in the using the preceding discussion. No diagram L2 Max Must refer to both markets for L3

Accept all valid responses.

AO1 Knowledge and understanding and AO2 Analysis

AO3 Evaluation

With the help of a diagram, assess whether the impact of an increase in labour productivity on the wages and employment of a firm is likely to be greater in a perfectly competitive labour market than in an imperfectly competitive labour market.

Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question.

AO1 and AO2 out of 14marks. AO3 out of 6 marks.

Indicative content Responses may include:

AO1 Knowledge and understanding and AO2Analysis

• Characteristics of a perfectly competitive labour market should be described.

• An explanation should be provided of what is meant by an increase in labour productivity.

• A diagram and analysis should be provided which shows how wages are determined in a perfectly competitive labour market and how this impacts upon the wage and level of employment within each firm.

• Analysis should examine the potential impact of an increase in labour productivity on wages and employment in a perfectly competitive labour market.

• Comparative analysis to examine the effect of an increase in productivity on wages and employment in an imperfect market.

• An analysis of a monopsonistic labour market to show equilibrium for the imperfect labour market. No analysis of Increase in Productivity max L2 Max 10 marks.

Analysis of perfect or imperfect labour market only Max L2 8 marks. No diagram Max L2 8 marks.

AO3 Evaluation

• The model of perfect competition is based upon many assumptions such as; perfect mobility of labour, homogenous labour and perfect knowledge. It is unlikely that we can apply this to the real world.

• Labour productivity is sometimes very difficult to measure accurately, for example, the productivity of workers in service sectors such as health and education

• An increase in the productivity of the workforce through the provision of better training might increase wages and output in a perfect labour market but the cost of providing this training and the subsequent skill differentiation would challenge the basic assumptions of a perfect competitive market.

• An increase in productivity might also be produced by substituting capital for labour which might lead to an increase in unemployment.

• The impact of higher wages on employment will also depend upon how easy it is to substitute capital for labour and the existing proportion of capital to labour in the particular industry.

• In an imperfect market, although it is likely that some benefits of an increase in labour productivity might be passed on through higher wages, it is also likely that the costs incurred in increasing productivity in this type of market will be deducted from any benefits. Therefore, any increase in wage/job opportunities, is likely to be limited.

• A conclusion, based on the preceding analysis should discuss the relative impact of an increase in labour productivity in both types of market and consider which is likely to be the greatest, with reference to both wages and the level of employment.

Accept all valid responses

AO1 Knowledge and understanding and AO2Analysis

AO3 Evaluation

Evaluate whether the marginal revenue product theory (MRP) always explains the differences in wages.

Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to thisquestion.

AO1 and AO2 out of 14marks.

AO3 out of 6 marks.

Indicative content Responses may include:

AO1 Knowledge and understanding and AO2Analysis

• Definition and explanation of the MRP theory in terms of marginal physical product (MPP) and price equaling MRP which is the demand element in the demand and supply of labour.

• Explanations of what may affect the MPP.

• The effect of market structure on MRP.

• Explanations of factors affecting the supply of labour, for example population size, age structure, fertility, working conditions, education/experience migration etc.

• The combination of demand and supply factors to produce a wage rate.

AO3 Evaluation

• The theory is usually applied in a world of perfect competition which does not hold in real life.

• How do employers know MRP when labour is often collaborative.

• How to measure productivity e.g. health services/education?

• Trade union intervention in labour markets.

• Lack of market price for product e.g. health care outcomes

• Government intervention in labour markets e.g. minimum wage, staffing ratios (in childcare).

• Discussion of factors which account for differences which could include discrimination, market segmentation, capital equipment, monopsony.

Accept all valid responses

AO1 Knowledge and understanding and AO2Analysis

AO3 Evaluation

With the help of a diagram, evaluate the consequences of imposing an effective minimumwage on the employment level and the wage level in a monopsony labour market. Use TableA:AO1 Knowledge and understanding andAO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question.

AO1 and AO2 out of 14 marks. AO3 out of 6 marks.

Indicative content Responses may include:

AO1 Knowledge and understanding and AO2Analysis

• The key characteristics of a monopsony labour market should be provided

• An explanation of what is meant by a minimum wage should be provided.

• An accurate, clearly labelled diagram showing the effect of the introduction of aminimum wage in a monopsony labour market should be provided.

• The impact of the increase of the minimum wage on both the supply of and demand for labour in a monopsony labour market should be analysed.

• Analysis should be used to determine the potential impact on the level of employment and the new equilibrium wage rate

L2 Max if no relevant diagram provided.

AO3 Evaluation

• It should be recognized that the impact on wages and employment will be different depending upon the relative elasticities of demand for and supply of labour in a monopsony market.

• The extent of the increase will determine the significance of the impact upon the wage level and the level of employment.

• A minimum wage that increases the current wage might increase productivity, which would increase the MRP curve, increase the demand for labour and lead to even higher wage levels.

• A minimum wage may lead to the closure of smaller businesses that might already be struggling trying to make a profit thus decreasing employment.

• A minimum wage may raise costs which might make some businesses less competitive in global markets.

• The impact of a higher minimum wage on employment will also depend upon how easy it is to substitute capital for labour and the existing proportion of capital to labour in the particular industry.

• A conclusion should attempt to formulate ajudgement regarding the likely net effect on wages and employment in a monopsony labour market.

Accept all valid responses.

AO1 Knowledge and understanding and AO2Analysis

AO3 Evaluation