A Level Economics 22: Labour Markets and Supply Side Economics

Supply-side performance refers to the overall productivity and efficiency of the production factors, including labor, in an economy. It represents the ability of an economy to produce goods and services efficiently, meet demand, and achieve sustainable economic growth. Issues in the labor market can significantly impact the supply side performance of an economy. Here are a few examples of how labor market issues can affect the supply side of an economy:

1. Labor Shortages: When there is a shortage of available labor in the market, it can constrain the supply side performance of the economy. For example, if a country experiences a decline in the working-age population due to demographic factors or emigration, there may be insufficient labor to meet the demand for goods and services. This can lead to production bottlenecks, reduced output, and slower economic growth. A shortage of skilled labor, particularly in critical sectors, can also limit productivity and hinder the economy's ability to capitalize on growth opportunities.

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3. Skills Mismatch: A skills mismatch occurs when there is a gap between the skills demanded by employers and the skills possessed by the available workforce. If the labor market lacks workers with the necessary skills and qualifications to meet the demands of emerging industries or technological advancements, it can hinder the supply side performance of the economy. The inability to match labor skills with evolving market needs can limit productivity, innovation, and the competitiveness of industries. Conversely, a well-matched and skilled workforce enhances productivity, stimulates technological progress, and drives economic growth.

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5. Low Labor Force Participation: Low labor force participation refers to a situation where a significant portion of the population is not actively engaged in the workforce. Factors such as high unemployment rates, discouraged workers, or a lack of job opportunities can contribute to low labor force participation. This can limit the supply side performance of the economy by underutilizing human resources and reducing the overall output potential. It also results in missed opportunities for economic growth and development. Encouraging labor force participation through targeted policies, training programs, and inclusive growth initiatives can enhance the supply side performance.

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7. Informal Economy: A large informal economy, characterized by unregulated and unregistered employment, can hinder the supply side performance of an economy. Informal workers often lack access to social protections, formal training, and productive resources. This can lead to lower productivity levels, lower-quality output, and reduced innovation. Additionally, the informal sector may evade taxes, leading to revenue losses for the government, which can further impact the economy's supply side performance. Formalizing the informal economy and providing support for workers in the transition can improve productivity and contribute to overall economic performance.

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9. Labor Market Rigidities: Labor market rigidities, such as excessive regulations, high levels of unionization, or inflexible labor laws, can impede the supply side performance of an economy. These rigidities make it difficult for employers to adjust their workforce according to changing market conditions, hindering their ability to optimize production levels. Excessive labor regulations can also increase labor costs, reduce labor market flexibility, and discourage investment, thereby limiting economic growth. Creating a more flexible and adaptive labor market environment can foster productivity, innovation, and competitiveness.

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11. Wage Growth and Income Inequality: Excessive wage growth or widening income inequality can affect the supply side performance of an economy. Rapid wage growth that outpaces productivity gains can lead to cost-push inflation, reducing the competitiveness of industries. On the other hand, significant income inequality can limit access to resources, education, and opportunities, hindering human capital development and innovation. Striking a balance between fair wages, productivity growth, and equitable income distribution promotes a healthy supply side performance and sustainable economic development.

Addressing these labor market issues is crucial to enhance the supply side performance of an economy. Policies aimed at improving labor force participation, promoting skills development, reducing skills mismatches, fostering labor market flexibility, and ensuring inclusive growth can help overcome these challenges and promote sustainable economic performance. By creating a conducive environment for labor market dynamics and efficiently utilizing the available workforce, economies can enhance their supply side performance and achieve long-term prosperity. 

A Level Economics 21: Labour Market Flexibility

Labor market flexibility involves the ease with which both workers and employers can adapt to changes in economic conditions and make adjustments in employment, job roles, and work arrangements. It encompasses the flexibility of employers to hire, fire, and manage their workforce efficiently.

Factors Affecting Flexibility in Labour Markets:

1. Trade Union Power: The influence and power of trade unions can affect labor market flexibility. Strong unions with significant bargaining power may negotiate for higher wages, increased job security, and stricter employment regulations, which can reduce employers' flexibility in making hiring and firing decisions, as well as adjusting work arrangements. Conversely, weaker unions or more cooperative labor relations can enhance flexibility for employers by enabling more adaptable work arrangements and facilitating workforce management.

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3. Regulation: Labor market regulations, such as employment protection laws, minimum wage legislation, and working time regulations, can impact flexibility for employers. Stricter regulations may limit employers' ability to adjust their workforce, make hiring and firing decisions, or modify work schedules, leading to reduced flexibility. More flexible labor market regulations can allow employers to respond more quickly to changes in labor demand, hire and dismiss employees more easily, and adjust work arrangements as needed.

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5. Welfare Payments: The design of welfare payments, such as unemployment benefits and social assistance programs, can influence labor market flexibility for employers. Generous welfare benefits that provide extensive financial support to unemployed individuals may reduce employers' flexibility by creating disincentives for individuals to actively seek employment. However, well-designed welfare systems that provide support while encouraging labor market participation can promote flexibility for employers by facilitating workforce mobility and easing the transition between jobs.

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7. Income Tax Rates: Income tax rates can impact labor market flexibility for employers by influencing labor supply and individuals' decisions to work, earn additional income, or accept different job opportunities. High tax rates may discourage labor force participation, reduce incentives for individuals to work longer hours or take on additional responsibilities, and hinder mobility between jobs. Lower tax rates, particularly on lower-income brackets or certain types of income, can incentivize labor market participation and support flexibility for employers by fostering a more dynamic and adaptable workforce.

Examples:

• In countries where trade unions have significant power, employers may face more challenges in making adjustments to their workforce based on changing market conditions. Stricter labor regulations imposed through union negotiations may limit employers' flexibility in terms of hiring, firing, and adjusting work arrangements.

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• Labor market regulations that provide strong employment protections can limit employers' flexibility to make workforce adjustments. For instance, strict regulations related to severance pay or notice periods may increase the cost and complexity of dismissing employees, reducing employers' flexibility to manage their workforce effectively.

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• Generous unemployment benefits that provide a high level of income replacement for extended periods may reduce labor market flexibility for employers. These benefits can discourage individuals from actively seeking employment, making it more challenging for employers to find suitable candidates when job vacancies arise.

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• High income tax rates, particularly on businesses and higher income brackets, can limit employers' flexibility by increasing labor costs and reducing their ability to offer competitive wages or expand their workforce. Lower tax rates can provide employers with more financial resources to invest in human capital, hire additional employees, or offer higher salaries, enhancing flexibility in workforce management.

Labor market flexibility is a complex concept that involves the interaction between workers and employers. Ensuring a balance between worker protections and employer flexibility is essential to promote a dynamic and efficient labor market.

Make London independent to mend the north-south divide

The south may be recovering, but the north shows Ed Miliband's aspiration for One Nation Britain is far off from reality

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• • Larry Elliott
  • The Guardian, Sunday 22 September 2013 17.01 BST

London, Europe's unrivalled financial capital. Making it an independent city state would give the rest of Britain a competitive boost. Photograph: High Level Photography/Rex

Go to Preston and tell them that Britain is booming and the notion will be greeted with a hollow laugh. Tell the folks in Hull that the housing market has caught fire and they will assume you have taken leave of your senses. Mention in Rochdale that a corner has been turned and you are likely to be run out of town.

Ed Miliband's big idea at last year's Labour conference was One Nation Britain. This is a nice as an aspiration but bears no relation to the country we actually inhabit.

The latest growth figures are a classic example of Disraeli's dictum that there are three sorts of falsehoods: lies, damned lies and statistics. Sure, if you take the UK as a whole it is true that growth has returned. National output is expanding by 3% a year, slightly above its long-term trend.

But the country-wide average disguises considerable regional disparities, which are reflected in Britain's political make-up. Areas where the Conservatives are strong tend to have above-average prosperity; areas where Labour is strong tend to be poorer than the average. Marginal seats are clustered in those areas where the two nations collide.

House prices are one example of how regional economic performance varies. The Office for National Statistics said last week that property was 3.3% dearer in July 2013 than it had been a year earlier. But strip out London, where the cost of a home increased by almost 10%, and the south-east, and in the rest of the country prices were up by just 0.8%. That's below inflation, meaning that property prices are falling in real terms. In Scotland and Northern Ireland they are falling in absolute terms.

Now look at the regional breakdown for workless households, where the five areas with the worst record are all former industrial powerhouses lying north of a line drawn from the Severn estuary to the Wash: Glasgow, Liverpool, Hull, Birmingham and Wolverhampton. For the UK as a whole, 18% of households do not have anyone in work; in the unemployment blackspots it ranges from 27% to 30%.

At the other end of the scale, the areas with the fewest workless households are all in the south of England. Hampshire has the lowest percentage, at 10.6%, followed by North Northamptonshire (11.2%), Buckinghamshire (11.3%), West Sussex (11.3%) and Surrey (11.4%).

The north-south divide is not new. Far from it. There has been a prosperity gap for at least a century, ever since the industries that were at the forefront of the first industrial revolution went into decline. But the disparity between a thriving London and the rest has never been greater.

On past form, there will be a ripple effect from the south-east and there are tentative signs that this may be happening. But it is early days and, understandably, there is concern in the rest of the UK when it is mooted that economic policy needs to be tightened to tackle a problem that is chronic and heavily localised.

This is well illustrated in an article by Paul Ormerod published in Applied Economics Letters. Ormerod drills down into the UK labour market to see what has been happening to unemployment at the local authority level.

He notes that most labour market economists have seen the cure for unemployment as a good dose of "flexibility".

According to this approach, joblessness will only persist over time due to "rigidities" in the labour market. Remove the rigidities – such as over-generous welfare systems, employment security provisions, working time regulations, national pay bargaining – and the price of employing workers will adjust (ie reduce) to a level that will ensure that everybody who wants to work can find a job.

Unemployment blackspots

That's the theory. Ormerod tests it by looking at what has happened to unemployment over time. If greater labour market flexibility is the answer, then local authority areas with high levels of unemployment 20 years ago should have witnessed an improvement. But Ormerod finds no such correlations.

Those parts of the country that had relatively high levels of unemployment in 1990 still had them in 2010, even though the rates of joblessness went up or down according to whether the national economy was booming or struggling. "The striking feature of the results is the strength of persistence over time in patterns of relative unemployment at local level," Ormerod said.

Those who say flexibility is the answer may counter that the problem with Britain is that the labour market is still not flexible enough, and that only by making the UK more like the US can the problem of persistent unemployment be tackled. The only difficulty with this argument is that high levels of unemployment persist in America as well, although the correlation is not quite so strong as it is in Britain. This, though, may have more to do with the willingness and the ability of Americans to move than it does with the flexibility of the labour market.

Ormerod concludes: "The labour market flexibility of the theorists, beloved by policymakers, appears to be at odds with reality. This is especially the case in the UK, where relative unemployment levels persist very strongly over long periods of time. The findings certainly call into question the efficacy of policies that were designed to increase flexibility and to improve the relative performance of regions."

The cross-party support for a new high-speed rail link to the Midlands and the north is one attempt to find new ways to tackle the two nations problem. Supporters of HS2 say the cost will be worth it because the new line will lead to higher investment, increased rates of business creation and enhanced spending power in the northern regions.

Another solution to the north-south divide would be for London, rather than Scotland, to get its independence. Although Britain is not part of the single currency, London is Europe's unrivalled financial capital. From the dealing floors of Canary Wharf in the east to the hedge-fund cluster in Mayfair to the west, London is where the action is. Upmarket estate agents can tell where the world's latest troublespot is by the source of the foreign cash buying up properties in Belgravia and south Kensington: currently, it is Syria.

Were the government to publish regional trade figures, they would show that London runs a current account surplus with the rest of the UK, offset by capital transfers from the rich south to the poorer north. As an independent city state, London would have a higher exchange rate and higher borrowing costs. The rest of the country would, by contrast, get a competitive boost.

The reality is that London is a separate country. Perhaps we should make it official.

Debunking the myths of your employment contract

Employment lawyer Philip Landau looks at some of the more common misconceptions about workers' contractual rights

Staff who familiarise themselves with their contract early on can avoid any nasty surprises further down the line. Photograph: Getty Images

Many workers are not aware of their contractual rights. Their written contract of employment (assuming they have one) is often only read in passing and they are consequently surprised – whether positively or negatively – when they have to rely on it. Here are several things that workers commonly believe, but are not actually true:

All the terms of my employment are set out in writing in my contract

A contract of employment is not necessarily one document; it can incorporate terms from a number of different sources, and can be written or verbal.

Express terms are those that are explicitly agreed between the parties (written or verbal), such as your hours of work, job description, notice, wages and sick pay. These terms could be found in a number of different documents such as a written statement of employment particulars, staff handbook, the job advertisement, payslips or, of course, the written employment contract itself.

Certain terms and conditions can also be implied into a contract of employment by common law or custom and practice. For example, both employer and employee have duty, trust and confidence implied into every relationship. If that fundamental trust is breached, a right of action could follow (in an employee's case, this would be a constructive dismissal claim). Other examples of an implied term can include an employer's decision to pay a bonus every year, or an enhanced redundancy pay, which could give rise to a custom and practice to receive such benefits.

My employer can't force me to relocate against my wishes

Yes, it can if you have a "mobility clause" written into your contract of employment. This would entitle it to move you to another location within the limits set out in the contract (unless your employer is acting unreasonably).

If you refuse to move, your employer may be able to avoid paying you redundancy.

If you do not have a mobility clause in your contract, you can generally refuse to move and still be entitled to receive redundancy payment. However, if the relocation is just a short distance (say a few miles) you could still lose this if you are seen to have unreasonably refused this suitable alternative employment.

My employer cannot vary the terms of my contract without my consent

Your consent may, in fact, have already been given when you entered into your contract of employment as there may be an express right reserved for your employer to make the required changes (a flexibility clause). This could apply, for example, to a change in job role or hours of work.

Such clauses are construed narrowly by the courts and your employer must act reasonably, but an employer will be in a far stronger position if the contract allows them to make this change. You may also have "impliedly" given your consent, especially if the imposed change is of immediate practical effect (such as a pay cut or change in commission structure) and you have continued to work without objection after the change. In these circumstances, there is unlikely to be a breach of contract by your employer.

My employer has to pay my outstanding bonus when I leave

If there is a clause in your contract of employment (which there often is) stating that you must be employed and not under notice "as at the bonus payment date", you may lose your bonus entitlement when you leave. Many are caught out when they resign and not aware of this clause.

Some employers purposefully choose to fast-track you out of the business to avoid you being employed at the bonus payment date – even if you have worked the full preceding year. They can do this by placing you on notice or making a payment under "pay in lieu of notice clause" in your contract. This is especially the case with bankers' bonuses, even where the announcement to make the bonus payments had been made many months beforehand.

I can work my notice when I leave my job

Once you resign or are given notice, you may think you would usually work that notice period. But assuming your employer has reserved the right in your contract, you could also be paid in lieu of your notice or put on garden leave.

Many individuals want to work for as long as possible as they consider prospective employers have more of a preference for candidates that are still employed. But employers will often want to cut ties early once a termination is on the cards – and pay in lieu of notice. You can't object.

If your employer elects to put you on garden leave, you are not required to attend work for the period of your notice, but are still contractually bound to your employer so cannot start a new job either. This is likely to have a greater impact, of course, if you have a longer period of notice.

It is always good to familiarise yourself with your employment contract so you can make the dealings with your employer work to your advantage when you need to. Or even better, try and negotiate more favourable terms before you sign it, as it will invariably be too late otherwise.

Are you familiar with the terms of your contract of employment? Have you ever regretted agreeing to certain terms or been surprised about what it contained?