1. Government Intervention in the Labour Market

2. Causes of labour market failure
Monopsony
Trade union
Unemployment (particularly structural  inflexibility)
Discrimination
Inflexibility (occupational & geographical immobility)
Inequality
Also issue of demographic time bomb – ageing population

3. Key aims of government intervention in labour market are to reduce inequality & market failure
Minimum wage / national living wage
Maximum wages (rarely used)
Tax & benefits system
Legislation
To prevent discrimination
To support or regulate trade unions
To protect workers – health & safety / maximum working week
Government provision of education & training schemes
Regional policy
Others
Immigration points system
Housing policy
Participation rate – e.g. increase school leaving age
Pension system

4. Minimum Wages Sets a legal floor below which employers cannot pay
Aim is to increase the income of the low paid – reduce inequality
Required due to:
The decline of trade unions
A rise in part-time / temporary work
A rise in monopsony power of employers
All these factors put downward pressure on wages

5. Minimum Wages Impact depends on : - initial equilibrium wage
- wage elasticity of labour demand
- Wage elasticity of labour supply

6. Minimum Wage – Evaluation points
Increases the costs for employers and can therefore lead to unemployment
However, despite increases in minimum wage, UK unemployment is at near-record low levels, suggesting minimum wage causes minimal unemployment
This suggests that:
Demand for labour is wage inelastic (firms willing to pay higher wages)
Higher wages can increase labour productivity ( MRP)
Some firms have monopsony power

8. Maximum Wages In theory the government could set a maximum wage
Jeremy Corbyn has suggested this for executive pay
Example - at 20 x lowest pay
Could reduce inequality
BUT
May make it more difficult to attract the best staff
Could lead to a brain drain

9. Legislation against Discrimination
Equal Pay Act (1970)
Outlawed paying different wages for the same job
Sex Discrimination Act (1975)
Sought to promote greater gender equality of opportunity in training, employment & promotion
Created the Equal Opportunities Commission (EOC) which enabled people to bring cases of discrimination
Equality Act (2010)
Brought together different acts outlawing different types of discrimination – age, gender, disability, religion, sexual orientation

10. Discrimination Diagram – perceived lower MRP

11. Legislation against Discrimination
Firms can engage in discrimination through hiring, firing & pay
The Equal Pay Act was targeted at women who were paid lower wages for doing very similar jobs to men
This targeted obvious sex discrimination, but hard to target is the ‘glass ceiling’
Fewer women get promoted to high paid jobs in certain sectors

12. Tackling the Gender Pay Gap
From 2017, by law, companies with more than 250 employees must publish data on their gender pay gap
This is the difference between the average female and male salary
In 2017, the UK gender pay gap was 18.1% for all workers, 9.4% for full-time staff
The aim was to NUDGE firms into promoting women
Latest figures for 2019 show the gap has WIDENED

13. Trade Union Legislation
The Conservative government, under Margaret Thatcher (1979 – 91) ought to reduce the power of Tus through a series of acts of parliament
The belief was that TUs caused inefficiency through
Strikes
above equilibrium wages
closed shops (make it hard for non-members to get jobs)
Others argue that Tus can help increase labour productivity & provide a counter-balance to monopsonist employers
Impact depends on:
Market structure
Impact on productivity
Sector involved

14. EU Legislation – Working Time Directive
Limits work to a maximum of 48 hours a week
Could reduce unemployment
Firms will have to employ more workers
Protect employees from over-work
HOWEVER
Some employers ask employees to waive their rights
France experimented with a max working week of 35 hours
Effect on unemployment was ‘disappointing’

15. Behavioural Nudges
Policy to encourage employees to take up private pensions
Default is “opt –in”
So employees would have to take action if they wanted to opt out

16. Government provision of education & training schemes
Most important form of government intervention
MERIT GOOD
Left to market forces – under consumed
Provides a more skilled workforce
Increases labour productivity
Increases occupational mobility
Government under pressure to provide more VOCATIONAL TRAINING
Includes support for apprenticeships
Helps bridge skills gap
Helps reduce market failure in under-provision of training schemes for workers

17. Other ways to Increase Labour Market Flexibility
Housing policies – e.g.reduce the cost of rented accommodation (see articles on housing market)
Regional Policies – e.g. Northern Powerhouse (see article)
Reduce employment protection through promoting zero hours contracts
Implement a points based immigration system
Raise the school leaving age
Provide more apprenticeships
Reduce marginal tax rates

18. Reduce employment protection through promoting zero hours contracts
Gives firms numerical and temporal flexibility, which is likely to improve productive efficiency
Reduces likelihood of over-staffing
Could reduce costs of production improving competitiveness of UK firms, contributing to economic growth
Employment may increase as firms more willing to hire workers on flexible basis
Evaluation
Could increase uncertainty, which would increase the average propensity to save & reduce economic growth.
Productivity may fall of workers are demotivated by working on these contracts

19. Implement a points based immigration system
Immigration decision based on the skills held by workers, favouring those who have skills in areas of skills shortages
This is a cheap method to address skills shortages as means workers do not have to be trained and has no time lags
Can boost productive capacity of the economy and reduce costs of firms
Evaluation
Means government will have to support domestic citizens struggling from structural unemployment who lack the right skills
Could put a strain on public services
UK has a limited ability to impose this policy given there is free movement of labour within the EU – this therefore could only apply to non-EU migration

20. Raise the school leaving age
Individuals suffer from myopia – they do not fully realise the benefits of education & therefore under-consume in a free market
Therefore they do not acquire sufficient transferable skills
Raising school leaving age will force individuals to acquire more qualifications and skills, increasing functional flexibility & making labour supply more wage elastic
EVALUATION
This only works if the education actually increases labour market flexibility - Further generic academic education may not do this
Expensive with time lags

21. Provide more Apprenticeships
Individuals don’t want to train because they are myopic and would rather earn an income.
Firms will under-provide training because they fear workiers will be poached
Providing tax breaks to firms who provide apprenticeships will increase the number of apprenticeships available leading to a better trained workforce
EVALUATION
Despite many apprenticeships being available in the UK many individuals do not take advantage of them because they would rather be in full-time employment

22. Reduce Marginal Tax Rates
Individuals are not incentivised to work more hours when the wage rate increases because of high marginal tax rates
This means firms find it difficult to get workers to work more hours
Cutting marginal tax rates will mean individuals keep more of their income, strengthening incentives to respond to wage changes and improving labour market flexibility
EVALUATION
This policy will have to be funded from somewhere which will incur an opportunity cost