Lesson 10
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Lesson 10. Labour market failure. Lesson Aims. Define ‘Labour Market Failure’ Illustrate ‘labour market failure’ Analyse the nature of the various causes of labour market failure. Further Reading. Text book Pages 65-71. Other. Hale, G, Labour Markets , Heinemann, Ch1.

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Lesson 10

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Lesson 10

Lesson 10

Labour market failure

Lesson aims

Lesson Aims

  • Define ‘Labour Market Failure’

  • Illustrate ‘labour market failure’

  • Analyse the nature of the various causes of labour market failure.

Further reading

Further Reading

Text book Pages 65-71


  • Hale, G, Labour Markets, Heinemann, Ch1.

  • Wilson, I. The Economics of Leisure, Heinemann, Ch1.

  • OCR/Heinemann text book.

  • Cramp, P, Labour Markets,Anforme.

  • ONS, Labour Market Trends.

  • ONS, Social Trends.

Labour market failure

Labour market failure

  • Labour market failure occurs when the market forces of demand and supply do not result in an efficient allocation of labour resources.

Labour market failure1

Labour market failure

Real wage rate







Quantity of Labour



Labour market failure2

Labour market failure

  • Examples of labour market failure include:

    • Imperfect information

    • Economic inactivity

    • Discrimination

    • Skills shortages

    • Geographical and occupational immobility of labour

    • Abuse of market power

    • Segmented labour markets

    • Trade Unions

Imperfect information

Imperfect information

  • Information not available to employers or employees.

  •  Improvements

    • Websites

    • Job centres

Economic inactivity

Economic Inactivity

  • Lack of Economic activity

  •  Improvements

    • Increase supply side policies

    • Expansionary fiscal and monetary policy



  • Some workers may be discriminated against by employers for a number of reasons.

  •  Improvements

    • Legislation

Skills shortages

Skills shortages

  • Skills shortages occur when firms have difficulties recruiting people with the required skills.

  •  Improvements

    • Key skills, vocational training, apprenticeships, financial aid.



  • Geographical immobility: barriers to movement of workers between different areas.

  • Occupational immobility of labour: barriers to workers changing occupations.

  •  Improvements

    • Investment spending, regional multipliers, subsidies, enterprise zones.

Monopoly power

Monopoly power

  • A monopolist is a firm that is the only buyer (only employer)

  • Examples include:

    • Space industry

    • Military

    • As there is only one buyer they can influence the wage rate.

Monopoly power1

Monopoly power

  • Methods of correcting market failure:

    • Lack of competition – monopolies and mergers commission, investigation, fines, legislation, break up of the business

    • Power over suppliers – investigation, fines, legislation

    • Barriers to Entry and Exit – encourage competition, remove administrative barriers, provide licences.

Segmented labour markets

Segmented labour markets

  • There are a number of barriers that exist to the free movement of workers between different sections of the labour market. i.e qualifications.

  •  Improvements

    • Education and Training

    • Apprenticeships

Trade unions

Trade Unions

  • Trade unions are labour organisations that seek to promote the interests of their members.

  • They could ask for an increase in wages, this will cause a firms costs to increase and cause a fall in employment.

Government intervention

Government Intervention

  • To evaluate the extent to which government intervention is effective

    • Time – short run versus long run gains

    • Alternative policies – would spending on training be better than a subsidy?

    • Stakeholders - who benefits and why?

    • Nature of problem – could the problem be better solved locally or by a firm?

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