Increasing Labour Market Failure

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FLEXIBLE LABOUR MARKET a market which the supply of labour is broadly responsive to a change in the demand for labour

INCREASED LABOUR MARKET FLEXIBILITY CAN BE ACHIEVED IN A NUMBER OF DIFFERENT WAYS:-

OCCUPATIONAL MOBILITY can be increased through education and training which would also relieve skills shortages. However this comes at the opportunity cost of the government using this money on other policies. Potential market failure may occur if the training received isn't demanded by employers meaning skills shortages persist over time

GEOGRAPHICAL IMMOBILITY could be improved via the key worker scheme however this means labour may have to be moved away. Subsidised housing comes at the opportunity cost of not being able to spend the money elsewhere. Reducing stamp duty will reduce the costs of moving but will reduce government revenue which could have been used to finance other forms of government finance

FLEXIBILITY IN TERMS OF HOW PEOPLE ARE EXPECTED TO WORK eg increasing opportunities for part time workers may increase the amount of parents with small children to enter the labour market increasing the amount of income tax paid. Shift work, temporary contracts and variable hour contracts are other ways which flexibility may be improved. This may benefit employers and ULC would decrease but employees may suffer

FLEXIBILITY IN TERMS OF PAY the formal sector nee pay to be determined by prevailing demand and supply conditions. To eliminate the ratchet effect (where wages tend to rise and not fall) the power of TU's which keep wages high need to be reduced as does the NMW which may impact income inequality and poverty (low paid worse off). Care needs to be taken that TU's are still around to protect employees rights on an individual basis

CONSEQUENCES OF A MORE FLEXIBLE LABOUR MARKET:-

Flexible labour markets benefit employers rather than employees

Firms operating in a flexible labour market usually have lower ULC increasing their international competitiveness

This may decrease consumer prices, increasing exports and improving the Balance of Payments position

Unemployment would also tend to be lower given both occupational and geographical mobility have been improved, skills shortages should also be reduced

Employees are more likely to suffer in terms of reduced job security, a deterioration in working conditions and lower pay

The social chapter addresses this situation as it protects workers rights and says they can be required to work 48 hours a week

Any form of legislation including the social chapter will impose costs on employers which might erode some one the benefits of operating in a flexible labour market

In response to the increase in demand for labour from DL to DL1

Where labour is in-flexible there is a large increase in wages from WI to WI1 and a small extension along the supply curve from QI to QI1

Where labour is flexible in response to the same increase in AD there is a smaller increase in wages from WF to WF1, but a much larger extension along the supply curve from QF to QF1