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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

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?