ECONOMICS

Demand and Supply in the Labour Market
Market theory is expected to apply to factor markets in a similar way to its application to
product markets. However, there is extensive evidence in the UK economy to suggest that
the operation of this theory in the labour market is ineffective.
In market theory the price of labour should adjust to market conditions. However, even
during a recession some wages can continue to rise and labour shortages remain despite
high levels of unemployment. Since the demand for labour is a
derived demand
this
would appear to contradict market theory. Many economists blame
inflexibility in
the labour market
for this apparent contradiction. The Organisation for Economic
Co-operation and Development (OECD) has suggested that, whilst money wages may
react strongly to price rises, there is little response in money wages to rising levels of
unemployment. In addition, the introduction of a minimum wage in the UK did not lead
to the rapid rise in unemployment anticipated by some people, but it may have distorted
labour market efficiency.
During this recession, unemployment has risen less than anticipated due to improved
labour market flexibility such as reduced working hours. The continued existence of a
large pool of long-term unemployed workers, at the same time as shortages persist in some
labour markets, indicates that progress has been limited. The longer individuals are out
of the labour market the harder it becomes to find employment. In recent years inward
migration from newer member states of the European Union (EU) has also had a significant
impact on the UK labour market.
It has been suggested that the mismatch between workers and jobs occurs because the
labour force lacks mobility and because there may be a lack of incentive to enter or re-enter
the labour market. The housing market is also a major impediment to labour mobility and
contributes to the large variations in unemployment throughout the UK.

1.
Explain what is meant by the following as used in the passage.
(
a
)
Derived demand (line 6).
(
b
)
Inflexibility in the labour market (lines 7–8).
2.
For what reasons might money wages react strongly to price rises, but weakly to
rising unemployment?
3.
Explain reasons, other than reduced working hours, why unemployment did not rise
as much as anticipated during the recent recession.
4.
Suggest reasons why those in long-term unemployment might find it hard to
re-enter the labour market.
5.
Discuss the positive and negative consequences of migration from the rest of the
European Union (EU) to the UK on the UK economy.
6.
(
a
)
Use a diagram to show how the introduction of a national minimum wage may
cause unemployment.
(
b
)
Explain why, in practice, the introduction of the national minimum wage did
not lead to a sharp rise in UK unemployment.
7.
Explain why the housing market is an impediment to labour mobility.
8.
Changes to the benefits system have been proposed by the UK Government to
increase the rate of participation in the labour market. Discuss how these changes
could improve the efficiency of the UK economy.
Page three

1.
“Oligopolistic markets have become more common and dominant in many UK
industries.”
(
a
)
Explain, using diagrams if appropriate, why oligopoly is often characterised by
“price stability”.
(
b
)
Occasionally a “price war” will break out between competing businesses in such
markets. Discuss the consequences of a price war for firms and for consumers
in such markets.
(
c
)
Outline the current framework of Competition Policy in the UK and evaluate
how effective it has been in recent years.
2.
The UK Government’s Comprehensive Spending Review announced the biggest
cuts in public sector expenditure since the Second World War.
(
a
)
Describe the main proposals contained in the Comprehensive Spending Review.
(
b
)
Explain the Government’s reasons for announcing such large-scale cuts in its
spending.
(
c
)
Explore the possible negative consequences for households and for the
UK Economy of the Government spending cuts.
(
d
)
Discuss why the Government has chosen to put most of its policy emphasis on
cutting public sector expenditure rather than increasing taxation.
3.
Even with inflation expected to remain well above target, the Monetary Policy
Committee (MPC) has been persistently split as to whether monetary policy should
be tightened or loosened.
(
a
)
(i)
Explain the arguments which have been made to justify raising interest rates.
(ii)
Explain the arguments which have been made to justify keeping interest
rates low.
(
b
)
Explain how Quantitative Easing is expected to influence the UK economy.
(
c
)
Discuss why some economists believe that monetary policy was relatively
ineffective in helping the UK economy recover from recession.
Page four