The UK Labour Market
• Trends in the UK labour market
– sectoral shift
• from agriculture to manufacturing
• from manufacturing to services
0
5
10
15
20
1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Mill
ions
Agriculture
Mining, energy and construction
Manufacturing
Services
Employment in different sectors of the UK economy
0
5
10
15
20
1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Mill
ions
Agriculture
Mining, energy and construction
Manufacturing
Services
Employment in different sectors of the UK economy
0
5
10
15
20
1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Mill
ions
Agriculture
Mining, energy and construction
Manufacturing
Services
Employment in different sectors of the UK economy
0
5
10
15
20
1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Mill
ions
Agriculture
Mining, energy and construction
Manufacturing
Services
Employment in different sectors of the UK economy
0
5
10
15
20
1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
Mill
ions
Agriculture
Mining, energy and construction
Manufacturing
Services
Employment in different sectors of the UK economy
0
5
10
15
20
25
30
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Em
plo
yme
nt
(mill
ion
s)Full-time and part-time employment in the UK
0
5
10
15
20
25
30
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Em
plo
yme
nt
(mill
ion
s)
Total employment
Full-time and part-time employment in the UK
0
5
10
15
20
25
30
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Em
plo
yme
nt
(mill
ion
s)
Total employment
Full-time employment
Full-time and part-time employment in the UK
0
5
10
15
20
25
30
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Em
plo
yme
nt
(mill
ion
s)
Total employment
Full-time employment
Part-time employment
Full-time and part-time employment in the UK
The UK Labour Market
• Trends in the UK labour market (cont.)
– rise in part-time employment
– rise in female participation rates
The UK Labour Market
• Trends in the UK labour market (cont.)
– rise in part-time employment
– rise in female participation rates
– rise in temporary employment
The UK Labour Market
• Trends in the UK labour market (cont.)
– rise in part-time employment
– rise in female participation rates
– rise in temporary employment
– effects of downsizing
Market-determined Wage rates and Employment
• Perfect labour markets
– assumptions of a perfect labour markets
• everyone is a wage taker
• freedom of entry
• perfect knowledge
• homogeneous labour
– determination of the market wage
• horizontal supply curve to individual employers
• horizontal demand curve for individual workers
Sall workers
in the market
Dall firms
in the market
O
Labour hours
Ho
urly
wa
ge
Wm
A labour market: whole market
Dindividual employer
O
Labour hours
Ho
urly
wa
ge
Q1
Wm
Slabour
A labour market: individual employer
• The supply of labour
– the supply of hours by an individual worker
• marginal disutility of work
• income and substitution effects of wage changes
• the shape of the individual’s supply curve of labour
Market-determined Wage rates and Employment
• The supply of labour
– the supply of hours by an individual worker
• marginal disutility of work
• income and substitution effects of wage changes
• the shape of the individual’s supply curve of labour
– the supply of labour to an individual employer
Market-determined Wage rates and Employment
• The supply of labour (cont.)
– the market supply of a given type of labour
• position of the curve
– number of qualified people
– non-wage benefits
– desirability of alternative jobs
• elasticity of the market supply of labour
– the mobility of labour
Market-determined Wage rates and Employment
• The demand for labour: marginal productivity theory
– the profit-maximising approach
– measuring the marginal cost and revenue of labour
• marginal cost of labour (MCL)
• the marginal revenue product of labour (MRPL)
– the profit-maximising level of employment
Market-determined Wage rates and Employment
OQ of labour
Out
put
MPPL
x
Marginal physical product of labour curve
Diminishing returnsset in here
• The demand for labour: marginal productivity theory
– the profit-maximising approach
– measuring the marginal cost and revenue of labour
• marginal cost of labour (MCL)
• the marginal revenue product of labour (MRPL)
– the profit-maximising level of employment
– derivation of the firm's demand curve for labour
Market-determined Wage rates and Employment
O
Q of labour
£
MRPL
W1 MCL1
Q1
MCL2W2
MCL3W3
Q2 Q3
a
b
c
Deriving the firm’s demand curve for labour
Profits maximisedwhere MRPL = MCL
D
O
Q of labour
£
W1 MCL1
Q1
MCL2W2
MCL3W3
Q2 Q3
a
c
The MRPL curve tracesout the demand curve
b
Deriving the firm’s demand curve for labour
• Elasticity of demand for labour
– determinants• price elasticity of demand for the good
• ease of factor substitution
• elasticity of supply of complementary factors
• elasticity of supply of substitute factors
• ratio of wage costs to total costs
• time period
• Wages and profits under perfect competition
Market-determined Wage rates and Employment
Firms with Power in the Labour Market
• Types of labour market power
– monopsony power of employers
– monopoly power of trade unions
• Firms with monopsony power in employing labour
– MCL > W
Firms with Power in the Labour Market
• Types of labour market power
– monopsony power of employers
– monopoly power of trade unions
• Firms with monopsony power in employing labour
– MCL > W
– effects on wages and employment
The Role of Trade Unions
• Unions with monopoly power
• Unions facing competitive employers
– effects of wage increases on employment
O Q of labourQ1
W1
S
D
£
W2
Q2 Q3
Monopoly union facing producersunder perfect competition
Unemployment
The Role of Trade Unions
• Unions with monopoly power
• Unions facing competitive employers
– effects of wage increases on employment
– productivity deals
The Role of Trade Unions
• Unions with monopoly power
• Unions facing competitive employers
– effects of wage increases on employment
– productivity deals
• Bilateral monopoly
The Role of Trade Unions
• Unions with monopoly power
• Unions facing competitive employers
– effects of wage increases on employment
– productivity deals
• Bilateral monopoly
– no unique equilibrium
The Role of Trade Unions
• Unions with monopoly power
• Unions facing competitive employers
– effects of wage increases on employment
– productivity deals
• Bilateral monopoly
– no unique equilibrium
– relationship between wages and employment
O Q of labour
£
W1
Q1
MRPL
MCL1
No
un
ion
S1 (=ACL1)
No unio
n
Bilateral monopoly
Monopsony:no union
W2
xMCL2
= ACL2
O Q of labour
£
W1
Q1
MRPL
MCL1
No
un
ion
S1 (=ACL1)
No unio
n
Bilateral monopoly
Bilateralmonopoly
Q3
W2
xMCL2
= ACL2
O Q of labour
£
W1
Q1
MRPL
MCL1
Bilateral monopoly
Wage can riseto W2 with no fall
in employment
The Role of Trade Unions
• Unions with monopoly power
• Unions facing competitive employers– effects of wage increases on employment
– productivity deals
• Bilateral monopoly– no unique equilibrium
– relationship between wages and employment
– how a rise in wage rates could lead to an increase in employment
W2
x
MCL3 = ACL3
O Q of labour
£
W1
Q1
MRPL
MCL1
Bilateral monopoly
Wage can risefrom W1 to W3
and employmentrises to Q2
W3
Q2
The Role of Trade Unions
• Collective bargaining– union threats and promises– employers’ threats and promises
• The outcome of negotiations– power– attitudes– union's membership– scope for movement– bargaining skills– information
• Role of government
The Efficiency Wage Hypothesis
• Meaning of efficiency wage rates
• Why might higher wage rates lead to higher productivity?
– less ‘shirking’
– reduced labour turnover
– self-selection
– morale
• In which parts of the labour market are efficiency wage rates likely to be paid?
Low Pay and Discrimination
• Low pay– identifying workers who are low paid– evidence on low pay– the growth in low pay
• unemployment due to recession• unemployment due to technological change• the growth in part-time employment• changes in labour laws
• Minimum wages– effects in competitive markets– effects in monopsonistic markets– evidence on the effects of a minimum wage
Low Pay and Discrimination
• Discrimination
– types of discrimination
– differences in pay not related to productivity
– differences in productivity arising from discrimination in social opportunity
Low Pay and Discrimination
• Gender and the labour market (cont.)
– causes of inequality between the sexes• types of employment (including part time)
• career breaks
• differences in mobility
• union membership
• custom and practice
• training
• prejudice
– effects of equal pay legislation
The Flexible Firm and the Market for Labour
• Flexible labour markets
– the flexible firm
• functional flexibility
• numerical flexibility
– core workers and peripheral workers
– Implications for wages
First peripheral groupSecondary labour market
Numerical flexibility
Core groupPrimary labour
marketFunctionalflexibility
The flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
Self-employmentSelf-employment
Core groupPrimary labour
marketFunctionalflexibility
The flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
Self-employmentSelf-employment
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
ge
ncy
tem
por
ari
es
The flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
Self-employmentSelf-employment
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
ge
ncy
tem
por
ari
esS
ub
-con
trac ting
Sub
-co
ntrac ting
The flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
Self-employmentSelf-employment
IncreasedoutsourcingIncreased
outsourcing
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
ge
ncy
tem
por
ari
esS
ub
-con
trac ting
Sub
-co
ntrac ting
The flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
Second
peripheral
grou
p
Self-employmentSelf-employment
IncreasedoutsourcingIncreased
outsourcing
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
ge
ncy
tem
por
ari
esS
ub
-con
trac ting
Sub
-co
ntrac ting
The flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
Short-
term
contracts
Second
peripheral
grou
p
Self-employmentSelf-employment
IncreasedoutsourcingIncreased
outsourcing
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
ge
ncy
tem
por
ari
esS
ub
-con
trac ting
Sub
-co
ntrac ting
The flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
Short-
term
contracts
PublicSubsidyTrainees
Second
peripheral
grou
p
Self-employmentSelf-employment
IncreasedoutsourcingIncreased
outsourcing
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
ge
ncy
tem
por
ari
esS
ub
-con
trac ting
Sub
-co
ntrac ting
The flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
Short-
term
contracts
PublicSubsidyTrainees
Delayedrecruitment
Second
peripheral
grou
p
Self-employmentSelf-employment
IncreasedoutsourcingIncreased
outsourcing
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
ge
ncy
tem
por
ari
esS
ub
-con
trac ting
Sub
-co
ntrac ting
The flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
Short-
term
contracts
PublicSubsidyTrainees
Delayedrecruitment
Job
sharin
g
Second
peripheral
grou
p
Self-employmentSelf-employment
IncreasedoutsourcingIncreased
outsourcing
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
ge
ncy
tem
por
ari
esS
ub
-con
trac ting
Sub
-co
ntrac ting
The flexible firm
First peripheral groupSecondary labour market
Numerical flexibility
Short-
term
contracts
PublicSubsidyTrainees
Delayedrecruitment
Job
sharin
g
Part
time
Second
peripheral
grou
p
Self-employmentSelf-employment
IncreasedoutsourcingIncreased
outsourcing
Core groupPrimary labour
marketFunctionalflexibility
Ag
ency
tem
por
ari
esA
ge
ncy
tem
por
ari
esS
ub
-con
trac ting
Sub
-co
ntrac ting
The flexible firm