How does the minimum wage affect aggregate demand/aggregate supply and macroeconomic factors such as inflation, unemployment and economic growth? A minimum wage is the statutory minimum wage that employers can pay per hour. In 2019, the UK minimum wage was set at £8.21 an hour for workers over 25. In the US, the federal min …
The gig economy refers to the segment of the labour market which concentrates on short-term / temporary jobs and contracts. Often these workers can have more than one job, e.g taxi driver who works both for a traditional taxi company and Uber. Like a musician who goes from one gig to the next, the gig …
A look at the economic impact of an increase in the supply of female workers in labour markets. In summary: Increased female labour market participation will lead to increase in supply of labour, and in theory, could lead to lower wages. However, a gradual increase in female labour market participation is often in response to …
Poverty implies low income and struggling to meet basic needs. There are two main types of poverty Absolute poverty – income below a certain threshold necessary to meet basic necessities of life (food, shelter, clothing, rent) Relative poverty – Individuals receiving income a certain level (e.g. 50%) below the median income of the general population. …
A look at factors that explain wage inequality – including classical economic theory and labour market imperfections. Readers Question: Idealized free market theory argues that it is automatic for each worker to receive just what he or she is worth; otherwise, an “underpaid” worker could just look elsewhere to bid a higher salary. Could established …
In a recent post, we looked at the advantages of free movement of labour. But, what about the problems which might arise from free movement of labour? Firstly, free movement of labour depends on the area in question. To make an easy contrast, initially, the EU was free movement of workers between 12 / 15 …
Monopsony occurs when there is one buyer and many sellers.
In the labour market, a monopsony occurs with one employer and many workers wanting to gain employment.
Arguably, monopsony power enables firms to ‘exploit’ workers by setting lower wages and employing fewer workers than in a competitive market.
To visualise monopsony power, we could think of a coal mining town in the nineteenth century. In these towns, the principal source of employment was a coal mine owner (or cotton mill owner). If workers couldn’t get employment in the coal mine, or cotton mill there were few other alternatives. Hence we can understand why workers in the Victorian era were often facing low wages and dreadful conditions.
In this case of monopsony power, the coal mine owner has the ability to be a wage setter. A monopsony can pay wages lower than in a competitive market.
Diagram of Monopsony Exploitation
The marginal cost of employing extra workers increases at a faster rate than the average cost. Because if you increase the wage rate to attract more workers, you have to pay everyone a higher wage.
A monopsony maximises profits by employing a quantity of workers where MR = MC (Q2). This means they only have to pay a wage of W2. This is lower than wage in a competitive market (W1), there are also fewer workers employed.
Many Western economies face a demographic time bomb – an ageing population, which places strain on government spending and the welfare state. To deal with this situation, governments face several difficult choices –
Raise taxes to pay for pensions,
Shift the emphasis on to the private sector provision of pensions,
Raise the retirement age
Cut other forms of spending to be able to maintain pension commitments.
Recently, the UK chancellor George Osborne, has suggested that he favours a solution which involves automatically linking state pension to life expectancy; this could see the state retirement age, increasing to 70. It is estimated, this could save up to £500bn over 50 years; there would be a very significant opportunity cost to keeping the retirement age at 65.
However, others are more critical of increasing the retirement age. They argue that raising the retirement age will adversely affect low income workers who find it more difficult to save for a private pension. Also, some economists question whether we really have a demographic time bomb, and argue that the fears of an ageing population are exaggerated.
The extent of the problem
The dependency ratio is the ratio of people who are not of working age compared to those who are of working age. If there is a higher % of pensioners then the dependency ratio will rise. Basically a higher dependency ratio means a relatively greater number of benefit recipients to tax payers.
This graph shows that all Western economies face a rise in the dependency ratio (assuming a retirement age of 65). However, the UK’s demographic forecast is not as bad as other countries. This is partly because the UK has had significant levels of immigration and an increase in the population.
How UK spending on pensions has increased
The share of GDP spent on pensions in UK has increased from 2% in 1950 to 8% in 2016, it is forecast to rise towards 10% of GDP by 2062. See: UK pension spending
Arguments for raising the pension age to 70
1. Increasing life expectancy . Increasing life expectancy means that it makes sense to raise the retirement age. When the first state pensions were introduced in 1908, the pension age was set at 70. It was later reduced to 65. But, since the start of the Twentieth Century, we have seen a rapid increase in life expectancy. It means that people are living for longer. If we keep the retirement age the same, we are trying to support an ever increasing % of people’s life in retirement. Rather than seeing it as a bad thing the retirement age is increasing, we should see it as a good thing we are enjoying greater life expectancy. Since 1981, longevity has increased 5.3 years
2. Higher tax revenue. As well as saving the government pension spending, if people work longer it will increase income tax revenues. Increasing the labour supply will also increase the productive capacity of the economy.
3. Will enable the government to increase the value of the state pension. If the retirement age is increased, the government will be able to afford an increase in the real value of the state pension. A higher basic state pension will help reduce poverty without creating disincentives to save that means tested top up benefits do. People may prefer a decent pension spread over a smaller number of years than a limited pension stretched over a longer time period.
3. More flexible labour markets. At the moment, several professions have a fixed retirement age; this means people have to retire at a certain age, even if they would prefer to keep working. Increasing the state pension age, will enable people to work longer. It may be that people work part time towards the end of their working life, but it will help increase the supply of labour. With jobs increasingly non-manual, there isn’t any physical barrier for people to keep working. It means the economy can benefit from highly experienced and highly skilled workers.
4. Better than the alternatives. The alternatives to increasing the retirement age are also unattractive. It would entail placing a higher tax burden on the working population; these higher tax rates could reduce incentives to work.
