Recently, the German government have introduced a variety of reforms to try and tackle the high rates of unemployment in Germany. These policies have included:

• It’s easier to hire and fire.
• It’s more tax-efficient to set up a small firm.
• Unemployment and welfare benefits have been cut and rolled into one, to force people to leave what the Germans call the “soziale Haengematte”, the welfare hammock.
• People who have been without a job for a long time are offered poorly-paid “one-euro jobs” in the public sector, to help them get used to regular work again.
• The employment offices have been restructured to provide more localised services.

German Unemployment at BBC

If we take cutting unemployment benefits. The idea is that this provides an incentive to look for work and accept lower paying jobs. In theory lower benefits increase the motivation to get a job rather than stay on the welfare system.

However, as the above article highlights, this becomes a problem when jobs are not available. In other words people have a strong incentive to get a better paid job, but there aren’t enough jobs going – particularly a problem in current recession. Cutting welfare benefits will also create an increase in relative poverty.

Making it easier to hire and fire workers reduces the cost of taking new workers on, but it may lead to more temporary employment. So some workers may get taken on but it creates more job insecurity in the workforce.

• European unemployment
• Increasing labour market flexibility

Immigration tends to encourage a range of emotive responses, but, its impact on the flexibility of labour markets is worth considering.

In the boom years, Ireland was growing by upto 5% a year or more. Growth was particularly strong in the construction sector. This led to a shortage of workers in certain low skilled jobs. Usually, this rate of growth and shortage of labour would push up wage costs and create inflationary pressure. However, the growth and membership of the EU, encouraged many workers from eastern Europe to travel and work in Ireland. Thus, the supply of labour was relatively elastic, enabling Ireland to pursue fast growth with minimal inflation.

Now, the Irish economy has come to a sharp slowdown as the global credit crunch bites. Usually, this would lead to sharp rises in unemployment. But, as economic fortunes in Ireland deteriorate, many of the temporary workers are returning to Poland / Russia / Eastern Europe.

Therefore, the rise in unemployment will be mitigated by a decrease in the supply of labour.

A similar situation has been occuring in the UK. The exodus of immigrants has been accelerated by the fall in the value of Pound which means it is much less attractive to work and save in the UK. The benefit for the UK, is that as workers leave, the rise in unemployment is mitigated.

A key issues is the geographical mobility of eastern european workers. Immigrants from the Commonwealth (West Indies, India) would find it much more difficult to return home, just because work was drying up. But, for many young Poles, it’s just a question of driving home.

Of course, the net migration isn’t going to stop unemployment rising. Also as workers leave it will have an effect on reducing demand in the economy. But, it does give at least one benefit – more flexible labour markets.

The other question is when UK and Ireland recover, would Poles want to return?

Flexible labour markets

Benefits and costs of flexible labour markets

If you said trades unions could explain wage differentials between south east and north, it probably would be accepted. I would say:

Higher wages in the south east could be explained by a higher trade unions presence in the south east – There is greater membership, higher density and more power. Therefore, the unions could help to bargain for higher wages.

However for evaluation I would say:

• The unions might be more successful in the south east because unemployment is lower. In the north unemployment rates are higher therefore, the bargaining power of unions is diminished because firms could more easily replace striking workers with unemployed workers.
• Trades unions in the UK have declined as a political and economic force. These days in an era of service sector based economy they struggle to have much impact on increasing wages. In the south east, many of the industries have very low union density. Therefore it is unlikely that higher wages in the south east are due to trade union power.

So it is fine to say trades unions could explain differences in pay. I don’t think it is a particularly good point, but, that doesn’t matter. It actually makes the evaluation easier.

What Explains wage differentials

Why Women are paid less than men

The Black Market refers to economic activity that is not regulated by the government. It involves economic activity where people don’t declare tax returns or pay VAT e.t.c. It sometimes may be referred to as the ‘underground economy’ or ‘black economy’. The black market may involve illegal activity such as drug dealing or it may involve typical jobs such as paying a builder in cash – this becomes black market activity. Note it is a legal requirement to declare income to the inland revenue. But, it can be hard to trace and track down.

Immigrants may find themselves working in the black market. These will be jobs that are paid in cash, ignore labour laws, ignore minimum wages and do not declare income for tax purposes. Illegal immigrants, especially, may find that they have no alternative but to work in the black market. This is because they are not legally able to work. The problem is that employers are in a position to exploit the illegal labour and frequently wages and conditions may be very poor and in some cases akin to slavery where the workers are tied to the boss who brought them into the country.

Even legal immigrants may find themselves working in the black market. First generation immigrants often find it relatively more difficult to get work because of discrimination, language problems, lack of skills. Therefore, they may end up working in the black market.

Black markets may be more likely when closed communities have demand for particular goods and services.

Inactivity rates implies that people have left the labour market and are not able or are unwilling to seek employment. Inactivity rates can be caused by:

• Demotivation
• Sickness

Two Policies To Reduce Inactivity Rates

1. Make It more difficult to gain sickness / long term disability benefits. It is argued that it has become too easy for the long term unemployed to be given sickness benefits. The government could introduce a scheme where those on benefits are revaluated every 12 months and given the option to take on light work. This could help reintegrate them into the labour market.

However, it can be difficult for the government to intervene. If checks are too strict people unable to work are forced into working even though it is detrimental to health; this leads to a less productive labour force.

Another solution could be to provide education and training to older people who have become demotivated and left the labour market. Better skill training could encourage people to go out and look for work again. However, this is quite expensive, takes time and may not be very satisfactory. – old people may not want to learn new skills

National Minimum Wage Rates from 1 October 2009

• Workers Aged 16-17  – £3.57
• Workers Aged 18-21 – £4.83
• Workers Aged 22 and over – £5.80
  

In theory extending the minimum wage to 16-18 year old workers would increase the incentive to join the labour market because work will become more attractive compared to studying at school and not earning.

However, the minimum wage for 16 and 17 year olds is still relatively low. It is £3.57 for people under 18. Therefore, the benefit of working on the minimum wage may still seem insignificant compared to the benefits from studying and getting qualifications which will enable higher life time earnings.

Also many 16 and 17  year olds probably live rent free therefore there is not an economic necessity to go out and get a job.

Personally, I think the effect of a minimum wage for 16-18 year olds is relatively insignificant, I can’t think of many students who would give up A levels just so that they could go and work in McDonalds for £3.57 an hour.

What is most likely is that there will be an increase in the participation of young workers doing part time jobs in addition to studying full time.

In this period 1999 – 2008, ILO  unemployment has fallen from 1,822,000  to 1.61 million or 5.25%. Claimant count method is even lower at less than 800,000
Readers Question and Essay:

• Why does a Minimum Wage not cause Unemployment? - Several reasons including monoposony, economic growth and increased productivity
• Case for Regional Minimum Wage

It is difficult for the government to effectively increase labour market flexibility. However, this essay offers a few policies and evaluation of how successful they have been 

Policies Include:

1. Subsidised childcare provision – increase incentive for women to work.
2. Increased spending on education and training
3. Reducing power of trades unions and minimum wages
4. Making it easier to hire and fire workers.
5. New Deal

It is argued that the UK labour market has become more flexible than European counterparts such as France, Germany and Spain. Economists argue that this increased labour market flexibility is a reason why UK unemployment is lower and that the government can make a difference

If you are doing unit 5A Labour Markets the most important topics are:

• Determination of wages
• Impact of Trades Unions / minimum wages on labour markets
• Monopsony
• Flexible Labour Markets
• Government Intervention in Labour markets
• Unemployment in labour markets
• The impact of Ageing population on labour markets
• Causes of Inequality
• Policies to deal with inequality
• Measuring inequality
• See: essays on Labour Markets

Unit 5B Economic development

See List of Essays on Economic Development

• Causes of growth
• Meaning of development
• Costs of growth
• Development strategies. agriculture vs Industry
• External Finance e.g. MNCs and World Bank
• The merits of Aid
• Structural adjustment policies

• Labour Markets notes

Trades Unions had suggested that the Minimum wage should rise to £6.75 a rate, a rate which would lift workers out of needing government benefits. Employers, predictably, were happy that minimum wages have only increased in line with inflation.

The government announced stiffer penalties for companies who avoid paying the National Minimum wage. There has been concern about a growing number of firms employing immigrant labour and paying them less than the national minimum wage.

• 66% of workers who receive the minimum wage are women.
• For 18 to 21-year-olds the NMW will increase from £4.60 to £4.77,
• For 16 and 17-year-olds the NMW will go up from £3.40 to £3.53.

Benefits of Increasing the Minimum wage

• Reduce Relative Poverty
• The minimum wage help to reduce the dependency on benefits and increase the gap between unemployment benefits and wages
• Since its introduction in 1997, the Minimum wage has not caused any significant unemployment that might have been expected.

Problems of National Minimum Wage

Doesn’t take into account regional variations. e.g. £5.73 will affect few workers in London, but, could be too high in the north and Scotland .

Essay – does a minimum wage solve poverty?