website title

Students Zone - Answers to End of Chapter Questions

CHAPTER 9: LABOUR MARKETS

Currently more women and more part-time workers are employed in European labour markets but the level of unionization has fallen. Alongside these facts, the European Union has introduced policies on maternity and paternity leave. Do all these features suggest that labour markets are becoming more flexible in Europe?

Answer

Flexibility in labour markets means many different things:

Wage or earning flexibility;
Increased labour mobility;
Functional flexibility, and;
Flexibility in the pattern and organisation of work.

The growth in female and part-time employment in Europe may be an indication of greater functional flexibility whilst the growth in maternity and paternity leave may an indication of greater flexibility in the pattern and organisation of work. Part of the changes in the labour market have been brought about through social pressures, particularly in the case of maternity and paternity leave. They will have an impact on labour market flexibility encouraging women to have longer periods of time off after the birth of a child. Nonetheless, such schemes are often not linked with full pay and their overall impact on flexibility may be small. The growth of women and part-time workers in the labour market may be strongly correlated in that for some women to return to work the availability of part-time work is important. Part-time work is also important for older workers who wish to stay in the labour market. These two groups can be used by employers to fulfil changing demands for their products and services. However, in terms of wage or earnings flexibility the impact is less clear, though having an increased pool of labour on which to draw may keep a lid on wage levels. Both changes have little impact on increased labour mobility unless part -time work and increased women's participation are seen as ways for people to improve their labour skills and therefore increase their ability to find other work.

2. The managing directors of the Rover Group earned high rewards whilst the company incurred high levels of debt before going into receivership in 2005. Do you consider that Rover executives’ pay should have been more of a reflection of the company performance?

Answer

This is a perennial debate that occurs within the press and at shareholder meetings. That is, executives are being rewarded for what appears to be mismanagement of the business. It raises issues of corporate governance. Some organisations argue that high salaries are required to gain the best people otherwise they will go elsewhere; others argue that the business may have performed even worse without these people at the helm. There is also the question that no matter who might have been appointed the business or sector was in decline and the executives could do little about this. External circumstances or unforeseen circumstances may also have affected the business.

The answer to this question should also explore the packages that an executive is offered. How much is actual salary, how much is in shares, when can these be "cashed in", and what are the payments to pension funds? Individual investors have begun to pressurise insurance companies and the like which hold the bulk of an organisations shares to be more questioning about executive pay.

3. Ignomenti, a dynamic Italian clothing firm, has always employed young designers and a young workforce while selling its products throughout Europe mainly to the 18-25 age group. What might be the implications for Ignomenti as the European population ages?

Answer

There may be two problems for Ignomenti - its workforce has been drawn from the younger age group and its customers are also from the same group. If Ignomenti has been selling its products in Europe, then the projections are that there will be a decline in numbers in younger age groups over the next 20 years at least and a rise in the numbers aged over 55. Ignomenti could look to sell its products in other areas of the world where the demographic profile of the population is still very young. It could look to migrant labour to keep its fairly young employee profile. Alternatively it could consider employing older people and change its designs for an older customer base.

4. In the United Kingdom the introduction of a minimum wage in 1997 and its subsequent upward revisions have been associated with a period of growing male and female employment. Reconcile this with the theoretical view that the introduction of minimum wages should lead to a fall in employment.

Answer

The diagram on page 269 of the text shows the theoretical impact on the labour market after the introduction of a minimum wage in a competitive market, where the minimum wage is set above the current equilibrium wage. In this case of the imposition of a minimum wage leads to a fall in the demand for labour and an increase in the supply of labour. The overall impact is for an increase in unemployment. However, in the case of the UK, the introduction of minimum wage legislation in 1997 did not appear to increase the level of unemployment but in fact the opposite occurred. There have been a number of reasons put forward to explain this phenomenon. Firstly, for those who know more about labour economics, it is possible for a minimum wage to lead to higher levels of employment when labour markets are not competitive. Secondly, the minimum wage was introduced when the UK economy was going through an upward part of its growth cycle so there was increased demand for jobs. Thirdly, the level of minimum wage was set at a level which was only just above the current equilibrium wage so that the impact on the labour market was negligible. Fourthly the sectors and hence the people affected by minimum wage legislation were relatively small since most people earned wages above the minimum wage. Fifthly, the percentage of the minimum wage paid to those under 21 meant that some employers could substitute younger workers for older workers (unemployment for older workers might rise but this is compensated by a fall in unemployment for younger workers). Finally, the decline in the power of trade unions has meant that any labour market unrest by those people who wanted to keep their wage differentials the same compared with those whose wages were raised through the introduction of a minimum wage was relatively small.

5. In Europe there are skill shortages in many of its craft industries of workers such as electricians, plumbers and builders. What could be the impact on the European Union if it does not deal with the skill deficiencies in these areas?

Answer

Where there are skill shortages in craft areas in the EU, then the wages for these groups of people will be above the EU average. This raises the costs to the building industry in particular. These higher building costs may result in higher prices for both commercial and industrial buildings and for domestic homes and this could dampen demand. Where there are skill shortages in craft areas, free market economists might argue that individuals perceiving the higher salaries in these areas would be attracted from other areas of the job market. Employers too may respond by setting up more apprenticeships or seeking these types of employees from outside of the EU, thereby creating a shortage worldwide (see the case of nurses in the UK and the impact on Africa). The EU and national governments could attempt to address some of these issues of skill shortages by setting up more training schools for craft workers. If nothing is done there will be less commercial and industrial building taking place and this will impact on prices. The knock-on effect might now be on foreign direct investment (FDI) where foreign companies see rental and build costs as too high in the EU and decide to develop their organizations in other countries outside of the EU where building costs are lower.

6. What is the importance of labour productivity to an economy? Using Table 9.5, explain why the United Kingdom has begun to catch up other European countries.

Answer

Labour productivity measures the output per person or output per hour worked. Therefore, economies that have higher levels of productivity can have higher levels of economic growth with the same level of resources. Since the same products can be produced with fewer man-hours in some countries they will also be price competitive. Labour productivity is also seen as an indication of the effectiveness to which resources are being used and is related to management expertise, trade union power, the level of skills and education of the workforce and the level of capital investment and R&D within an economy.

Table 9.5 indicates that the UK’s productivity, measured in terms of GDP per worker has been catching up that of France and Germany since 1998. Firstly, it is important to note that this is only a 5-year trend and that a longer period of data is called for if we wish to consider the UK’s longer-term productivity trend. There are many factors that could explain the productivity catch-up by the UK. Firstly, the catch-up is due to a range of supply-side policies introduced in the 1990s that are now feeding through the system. Could the UK have closed down some of its least efficient sectors? The figures are not sector specific so in some sectors the UK could still be falling behind. A further explanation could be that productivity catch-up occurred due to the range of skills and education policies introduced by the UK government during the 1990s. The growth of foreign direct investment (FDI) will also have enhanced UK productivity, since foreign owned firms tend to higher levels of productivity than UK owned firms. Levels of FDI relative to France and Germany may have increased in the UK during the 1990s. It is also possible that France and Germany were quicker to introduce new technology than the UK therefore in the period before 1998 their productivity levels rose dramatically and what we are seeing is the catch-up that results from the UK slowness of introducing this technology. Finally, perhaps there were circumstances in France and Germany that caused their productivity levels to slow down rather than for the UK to catch up. One of these may be the problem Germany has experienced through re-unification.

Other End of Chapter Questions >>

website title

Site Links

Lecturers Zone

Students Zone

Other