Labour Markets,

Wages and
Industrial Relations
 The UK Labour Market

• Trends in the UK labour market

– sectoral shift
• from agriculture to manufacturing
• from manufacturing to services
 Employment in different sectors of the UK economy

20 Agriculture

Mining, energy and construction

Manufacturing
15
Services
Millions

10

0
1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
 Employment in different sectors of the UK economy

20 Agriculture

Mining, energy and construction

Manufacturing
15
Services
Millions

10

0
1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
 Employment in different sectors of the UK economy

20 Agriculture

Mining, energy and construction

Manufacturing
15
Services
Millions

10

0
1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
 Employment in different sectors of the UK economy

20 Agriculture

Mining, energy and construction

Manufacturing
15
Services
Millions

10

0
1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
 Employment in different sectors of the UK economy

20 Agriculture

Mining, energy and construction

Manufacturing
15
Services
Millions

10

0
1890 1900 1910 1920 1930 1939 1950 1960 1970 1980 1990 2003
 The UK Labour Market

• Trends in the UK labour market (cont.)

– rise in part-time employment

 Full-time and part-time employment in the UK
30

25
Employment (millions)

20

15

10

0
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
 Full-time and part-time employment in the UK
30
Total employment

25
Employment (millions)

20

15

10

0
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
 Full-time and part-time employment in the UK
30
Total employment

25

Full-time employment
Employment (millions)

20

15

10

0
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
 Full-time and part-time employment in the UK
30
Total employment

25

Full-time employment
Employment (millions)

20

15

10

Part-time employment

0
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
 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
 A labour market: whole market

Sall workers
in the market
Hourly wage

Wm

Dall firms
in the market

O
Labour hours
Hourly wage A labour market: individual employer

Slabour
Wm

Dindividual employer

O Q1
Labour hours
 A labour market: individual worker

Sindividual worker
Hourly wage

Dlabour
Wm

O Q2
Labour hours
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 marginal disutility of hours worked

MDU
Disutility

O
Hours worked
 The supply of hours worked

S
Hourly wage

O
Hours worked
 Backward-bending supply curve of labour

S
Hourly wage

WI

O
Hours
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

 Marginal physical product of labour curve
x

Diminishing returns
set in here
Output

MPPL

O
Q of labour
 The profit-maximising level of employment
£

MCL= W
Wm

MRPL = MPPL × Pgood

MRPL

O Qe
Q 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

– derivation of the firm's demand curve for
labour
 Deriving the firm’s demand curve for labour
£

a
W1 MCL1
b
W2 MCL2
c
W3 MCL3

Profits maximised
where MRPL = MCL
MRPL

O Q1 Q2 Q3
Q of labour
 Deriving the firm’s demand curve for labour
£

a
W1 MCL1
b
W2 MCL2
c
W3 MCL3

The MRPL curve traces

out the demand curve
D

O Q1 Q2 Q3
Q of labour
Market-determined Wage rates
and Employment
• 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
 Wages and a firm's surplus over wages
£

Surplus for firm

MCL = W
W

Wages

MRPL

O Qe
Q of labour
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
 Monopsony
£
MCL

ACL ≡ W
(supply curve)

MRPL

O
Q of labour
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

 Monopsony
£
MCL

ACL ≡ W
(supply curve)

W2

W1

MRPL

O Q1 Q2
Q of labour
 The Role of Trade Unions

• Unions with monopoly power

• Unions facing competitive employers

– effects of wage increases on employment
 Monopoly union facing producers
under perfect competition
£
S

W1

O Q1 Q of labour
 Monopoly union facing producers
under perfect competition
£
S

Unemployment
W2

W1

O Q2 Q1 Q3 Q of labour
 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
 Bilateral monopoly
£ MCL1 S1 (=ACL1)

Monopsony:
no union
n
ion

o
uni
No un

o
N
W1

MRPL

O Q1 Q of labour
 Bilateral monopoly
£ MCL1 S1 (=ACL1)
x
W2 MCL2 = ACL2

Bilateral
monopoly
n
ion

o
uni
No un

o
N
W1

MRPL

O Q1 Q3 Q of labour
 Bilateral monopoly
£ MCL1
x
W2 MCL2 = ACL2

Wage can rise

to W2 with no fall
in employment

W1

MRPL

O Q1 Q of labour
 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
 Bilateral monopoly
£ MCL1
x
W2

W3 MCL3 = ACL3

Wage can rise

from W1 to W3
and employment
W1 rises to Q2

MRPL

O Q1 Q2 Q of labour
 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

– evidence on wage inequality
Average gross hourly earnings for full-time adult
UK employees (pence per hour): 1970-2002
Average gross hourly earnings for full-time adult
UK employees (pence per hour): 1970-2002
Average gross hourly earnings for full-time adult
UK employees (pence per hour): 1970-2002
Average gross hourly earnings for full-time UK
employees on adult rates (2002)
Average gross hourly earnings for full-time UK
employees on adult rates (2002)
Average gross hourly earnings for full-time UK
employees on adult rates (2002)
 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

The flexible firm
 The flexible firm

Core group
Primary labour
market
Functional
flexibility
 The flexible firm

First peripheral group

Secondary labour market
Numerical flexibility

Core group
Primary labour
market
Functional
flexibility
 Self-employment
The flexible firm

First peripheral group

Secondary labour market
Numerical flexibility

Core group
Primary labour
market
Functional
flexibility
 Self-employment
The flexible firm

First peripheral group

Secondary labour market
Numerical flexibility

Core group
temporaries

Primary labour
Agency

market
Functional
flexibility
 Self-employment
The flexible firm

First peripheral group

Secondary labour market
Numerical flexibility

Core group
temporaries

contracting
Primary labour
Agency

Sub-
market
Functional
flexibility
 Self-employment
The flexible firm

First peripheral group

Secondary labour market
Numerical flexibility

Core group
temporaries

contracting
Primary labour
Agency

Sub-
market
Functional
flexibility

Increased
outsourcing
 Self-employment
The flexible firm

First peripheral group

Secondary labour market
Numerical flexibility

Core group
temporaries

contracting
Primary labour
Agency

Sub-
market
Functional
flexibility
Se

p
ou
co
nd

gr
peripheral

Increased
outsourcing
 Self-employment
The flexible firm

First peripheral group

Secondary labour market
Numerical flexibility

Core group
temporaries

contracting
Primary labour
Agency

Sub-
market
Functional
flexibility
Se -
Sh m

p
ou
co
co
ter acts
ort

nd

gr
ntr

peripheral

Increased
outsourcing
 Self-employment
The flexible firm

First peripheral group

Secondary labour market
Numerical flexibility

Core group
temporaries

contracting
Primary labour
Agency

Sub-
market
Functional
flexibility
Se -
Sh m

p
ou
co
co
ter acts
ort

nd

gr
ntr

Pu peripheral
Su blic
Tra bsid
ine y
es

Increased
outsourcing
 Self-employment
The flexible firm

First peripheral group

Secondary labour market
Numerical flexibility

Core group
temporaries

contracting
Primary labour
Agency

Sub-
market
Functional
flexibility
Se -
Sh m

p
ou
co
co
ter acts
ort

nd

gr
ntr

Pu peripheral
Su blic
Tra bsid
ine y Delayed
es
recruitment

Increased
outsourcing
 Self-employment
The flexible firm

First peripheral group

Secondary labour market
Numerical flexibility

Core group
temporaries

contracting
Primary labour
Agency

Sub-
market
Functional
flexibility
Se -
Sh m

p
ou
co
co
ter acts
ort

nd

gr
ntr

Pu peripheral
Su blic b
Tra bsid Jo ing
ine y Delayed h ar
es s
recruitment

Increased
outsourcing
 Self-employment
The flexible firm

First peripheral group

Secondary labour market
Numerical flexibility

Core group
temporaries

contracting
Primary labour
Agency

Sub-
market
Functional
flexibility
Se -
Sh m

p
ou
co
co
ter acts
ort

tim rt
nd

gr
ntr

Pa
e
Pu peripheral
Su blic b
Tra bsid Jo ing
ine y Delayed h ar
es s
recruitment

Increased
outsourcing
The Flexible Firm and the Market for Labour

• The Japanese model

– total quality management

– elimination of waste, 'just-in-time' methods

– team work

– functional and numerical flexibility