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Posts Tagged ‘monopsony’

Got milk?

You’ll be familiar with these types of posts from me, which typically start with a comment like: ‘On my commute to work on …’. That’s one of the good things about a long drive – the interesting and informative discussions that you hear on the radio. This one is another interesting piece from BBC Radio 4, looking at a very topical issue, especially to those living in the South West and other rural areas in the UK.

We have recently seen pictures of farmers protesting about the price of milk and in places like Somerset, the protest took a rather odd method, where farmers from across the region entered supermarkets and simply bought all of the milk, before giving it away. The issue is that dairy farming is no longer profitable, as the price that dairy farmers receive for each pint of milk is now lower than the cost of providing it. Thus, for each pint they make a loss.

There are many reasons that have contributed to this situation, including pressures imposed by customers demanding cheaper prices; pressures from supermarkets using their monopsony power to force down the prices paid to farmers; and pressures from abroad. In the case of milk, we have a surplus and with a perishable product, i.e. one that cannot be stored, unlike wheat, this has contributed to falling prices. Data suggest that we are seeing approximately one farmer per day being forced to leave the indsutry.

This programme explores the current dairy farming crisis and draws some similarities with the wheat crisis that the UK experienced in the 1930s. The programme below is 30 minutes and provides some interesting insights on two important commodities and the economics behind the markets.

Today’s crisis in dairy farming and the wheat crisis of the 1930s BBC Radio 4; The Long View, Jonathan Freedland (29/9/15)

Questions

  1. Using demand and supply analysis, explain the situation in the milk market.
  2. Now consider the wheat industry and provide a similar analysis of how prices are set and what caused the problems seen in the 1930s.
  3. Although these two commodities have similarities they are also very different. Why can two different commodities experience such similar problems at such different times?
  4. What are the key demand and supply-side factors affecting the current low price of milk?
  5. Consider the market for (a) milk and (b) wheat. What are (if any) the market failures within each area?
  6. Agriculture is an area where we do see significant government intervention. Should the UK government be doing more to help the UK’s dairy farmers? If so, what should they do and would this intervention create further problems, e.g. unintended consequences?
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An above-inflation rise in the NMW

In the blog Effects of raising the minimum
wage
, the policy of an above-inflation rise in the minimum wage was discussed, as this had been advocated by political leaders. Over the past 5 years, the minimum wage has fallen in real terms, but from October 2014, the national minimum wage will increase 19p per hour and this rise will be the first time since 2008 when the increase will be higher than inflation.

The National Minimum Wage is a rate applied to most workers in the UK and is their minimum hourly entitlement. For adults over the age of 21, it will be increased by just over 3% to £6.50. Rises will also occur for 18-20 year olds, though their increase will be lower at 10p and will take the hourly wage to £5.13 an hour, representing a 2% rise. Those aged 16 and 17 will also see a 2% rise, taking their wage up by 7p to £3.79. With inflation currently at 1.9% (as measured by the CPI), these rises outstrip inflation, representing a real increase in the minimum wage. Undoubtedly this is good news for workers receiving the minimum wage, and it is thought that millions of workers will benefit.

Vince Cable said:

The recommendations I have accepted today mean that low-paid workers will enjoy the biggest cash increase in their take home pay since 2008…This will benefit over one million workers on national minimum wage and marks the start of a welcome new phase in minimum wage policy.

While this rise has been praised, there are still suggestions that this minimum wage is too low and does not represent a ‘living wage’. The General Secretary of Unison said:

Across the country people are struggling to make ends meet. The sooner we move to a Living Wage the better. The real winners today will again be payday loan sharks who prey on working people, unable to bridge the financial gap between what they earn and what their families need to survive.


(Click here for a PowerPoint of the above chart.)

The Chancellor eventually wants to increase the minimum wage to £7 per hour, but there will undoubtedly be an impact on businesses of such a rise. Is it also possible that with the national minimum wage being pushed up, unemployment may become a problem once more?

Market wages are determined by the interaction of the demand and supply of labour and when they are in equilibrium, the only unemployment in the economy will be equilibrium unemployment, namely frictional or structural. However, when the wage rate is forced above the equilibrium wage rate, disequilibrium unemployment may develop. At a wage above the equilibrium the supply of labour will exceed the demand for labour and the excess is unemployment.

By increasing the national minimum wage, firms will face higher labour costs and this may discourage them from taking on new workers, but may also force them into laying off existing workers. The impact of the minimum wage on unemployment doesn’t seem to be as pronounced as labour market models suggest, so perhaps the increase in the minimum wage will help the lowest paid families and we won’t observe any adverse effect on businesses and employment. The following articles consider this story.

National minimum wage to rise to £6.50 The Guardian, Rowena Mason (12/3/14)
Minimum wage up to £6.50 an hour BBC News (12/3/14)
Minium wage to increase by 3% to £6.50 an hour Independent, Maria Tadeo (12/3/14)
Minimum wage rise confirmed Fresh Business Thinking, Daniel Hunter (12/3/14)
Ministers approve minimum wage rise London Evening Standard (12/3/14)
Government to accept proposed 3% minimum wage rise The Guardian, Rowena Mason (4/3/14)
Londoners do not believe minimum wage is enough to live on in the capital The Guardian, Press Association (9/3/14)
Minimum wage: The Low Pay Commission backs a 3% increase BBC News (26/2/14)

Questions

  1. Using a diagram, illustrate the impact of raising the national minimum wage in an otherwise perfectly competitive labour market.
  2. How does your answer to question 1 change, if the market is now a monopsony?
  3. To what extent is elasticity relevant when analysing the effects of the national minimum wage on unemployment?
  4. How might an increase in the national minimum wage affect public finances?
  5. Why is an above-inflation increase in the national minimum wage so important?
  6. What is meant by a Living Wage?
  7. What do you think the impact on business and the macroeconomy would be if the minimum wage were raised to a ‘Living Wage’?
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Private versus public

Many people are attracted to work in the private sector, with expectations of greater opportunities for promotion, more variation in work and higher salaries. However, according to the Office for National Statistics, it may be that the oft-talked-of pay differential is actually in the opposite direction. Data from the ONS suggests that public sector workers are paid 14.5% more on average than those working in the private sector.

As is the case with the price of a good, the price of labour (that is, the wage rate) is determined by the forces of demand and supply. Many factors influence the wages that individuals are paid and traditional theory leads us to expect higher wages in sectors where there are many firms competing for labour. With the government acting as a monopsony employer, it has the power to force down wages below what we would expect to see in a perfectly competitive labour market. However, the ONS data suggests the opposite. What factors can explain this wage differential?

Jobs in the public sector, on average, require a higher degree of skills. There tend to be entry qualifications, such as possessing a university degree. While this is the case for many private-sector jobs as well, on average it is a greater requirement in the public sector. The skills required therefore help to push up the wages that public-sector workers can demand. Another explanation could be the size of public-sector employers, which allows them to offer higher wages. When the skills, location, job specifications etc. were taken into account, the 14.5% average hourly earnings differential declined to between just 2.2% and 3.1%, still in favour of public-sector workers. It then reversed to give private-sector workers the pay edge, once the size of the employer was taken out.

Further analysis of the data also showed that, while it may pay to be in the public sector when you’re starting out on your career, it pays to be in the private sector as you move up the career ladder. Workers in the bottom 5% of earners will do better in the public sector, while those in the top 5% of earners benefit from private-sector employment. The ONS said:

Looking at the top 5%, in the public sector earnings are greater than £31.49 per hour, while in the private sector, the top 5% earn more than £33.63 per hour… The top 1% of earners in the private sector, at more than £60.21 per hour, earns considerably more than the top 1% of earners in the public sector, at more than £49.65 per hour.

The data from the ONS thus suggest a reversal in the trend of average public-sector pay being higher than private sector pay, once all the relevant factors are taken into account.

This will naturally add to debates about living standards, which are likely to take on a stronger political slant as the next election approaches. It is obviously partly down to the public-sector pay freeze that we saw in 2010 and also to a reversal, at least in part, of the previous trend from 2008, where public-sector pay had been growing faster than private-sector pay. However, depending on the paper you read or the person you listen to, they will offer very different views as to who gets paid more. All you need to do in this case is look at the titles of the newspaper articles written by the Independent and The Telegraph! Whatever the explanation, these new data provide a wealth of information about relative prospects for pay for everyone.

Data
Public and Private Sector Earnings Office for National Statistics (March 2014)
Annual Survey of Hours and Earnings, 2013 Provisional Results Office for National Statistics (December 2013)

Articles
Austerity bites as private sector pay rises above the public sector for the first time since 2010 Independent, Ben Chu (10/3/14)
Public sector workers still better paid despite the cuts The Telegraph, John Bingham (10/3/14)
Public sector hourly pay outstrips private sector pay BBC News (10/3/14)
Public sector workers are biggest losers in UK’s post-recession earnings squeeze The Guardian, Larry Elliott (11/3/14)
New figures go against right-wing claims that public sector workers are grossly overpaid Independent, Ben Chu (10/3/14)
Public sector pay sees biggest shrink on 2010, figures suggest LocalGov, Thomas Bridge (11/3/14)
Public sector staff £2.12 an hour better off The Scotsman, David Maddox (11/3/14)

Questions

  1. Illustrate the way in which wages are determined in a perfectly competitive labour market.
  2. Why does monopsony power tend to push wages down?
  3. Why does working for a large company suggest that you will earn a higher wage on average?
  4. Using the concept of marginal revenue product of labour, explain the way in which higher skills help to push up wages.
  5. How significant are public-sector pay freezes in explaining the differential between public- and private-sector pay?
  6. Why is there a difference between the bottom and top 5% of earners? How does this impact on whether it is more profitable to work in the public or private sector?
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Effects of raising the minimum wage

Conservative Party leaders are considering the benefits of an above-inflation rise in the minimum wage. This policy has been advocated by both the Labour Party and the Liberal Democrats as a means of helping the lowest paid workers. From 2008 to 2013, minimum wage rates fell 5.2% in real terms: in other words, nominal increases were less than the increase in both the RPI and CPI (see UK minimum wage: a history in numbers).

Advocates of a real rise in the minimum wage argue that not only would it help low-paid workers, many of whom are in severe financial difficulties, but it would benefit the Treasury. According to Policy Exchange, a free-market think tank closely aligned to the Conservative Party, increasing the minimum wage by 50p would save the Government an estimated £750m a year through higher tax revenues and lower benefit payments.

But even such a rise to £6.81 would still leave the minimum wage substantially below the living wage of £8.80 in London and £7.65 in the rest of the UK, as estimated by the Living Wage Foundation (see The cost of a living wage). Although many businesses are now paying at least the living wage, many others, especially small businesses, argue that a rise in the minimum wage above the rate of inflation would force them to consider cutting the number of employees or reducing hours for part-time workers.

Meanwhile, in the USA 13 states have raised their minimum wage rates from the 1st January 2014 (see). Some of the rises, however, were tiny: as little as 15 cents. In a couple of cases, the rise is $1. Currently 21 states and DC have minimum wage rates above the Federal level of $7.25 (approx. £4.40); 20 states have rates the same as the Federal level; 4 states have rates below the Federal level. At $9.32 per hour, Washington State has the highest state minimum wage; the lowest rates ($5.15) are in Georgia and Wyoming. In 5 states there is no minimum wage at all. As the ABC article below states:

The piecemeal increases at the local level are occurring amidst a national debate over low wages and income inequality. Fast food and retail workers have been staging protests and walking off work for more than a year, calling for better pay and more hours. Currently, fast food workers nationally earn an average of about $9 per hour.

Workers from McDonald’s, Wendy’s, Burger King and other fast food joints are calling for $15 per hour. Wal-Mart workers organizing as part of the union-backed OUR Walmart aren’t asking for a specific dollar amount increase, but they say it’s impossible to live on the wages they currently receive.

President Obama has been throwing his weight behind the issue. Earlier this month, the President said in a speech that it’s “well past the time to raise the minimum wage that in real terms right now is below where it was when Harry Truman was in office.” But such legislation has a bleaker outlook if it reaches the Republican-led House of Representatives. House Speaker John Boehner has said that raising the minimum wage leads to a pullback in hiring.

So what are the costs and benefits of a significant real rise is the minimum wage on either side of the Atlantic? The articles explore the issues.

Articles: UK
Lib Dems accuse Tories of ‘stealing’ their policy as George Osborne prepares to approve above-inflation rise in minimum wage Independent, Andrew Grice (7/1/14)
Lib Dems accuse Tories of ‘nicking’ party’s policy on low wages The Guardian, Nicholas Watt (7/1/14)
Cut housing benefit? A higher minimum wage would help The Guardian, Patrick Collinson (6/1/14)
Miliband prepares to wage war The Scotsman, Andrew Whitaker (8/1/14)
Increasing the minimum wage is only a half answer to poverty New Statesman, Helen Barnard (8/1/14)
Raise the bar: Economically and socially, Britain needs higher wages Independent (7/1/14)
Another Tory says there’s a ‘strong case’ for raising the minimum wage The Spectator, Isabel Hardman (8/1/14)
Fairness and the minimum wage Financial Times (7/1/14)
Osborne wants above-inflation minimum wage rise BBC News (16/1/14)
George Osborne backs minimum wage rise to £7 an hour The Guardian, Nicholas Watt, (16/1/14)
Minimum wage: in his efforts to defeat Labour, Osborne risks mimicking them The Telegraph, Benedict Brogan (16/1/14)
Minimum wage announcement is not just good economics The Guardian, Larry Elliott (16/1/14)

Articles: USA
13 states raising pay for minimum-wage workers USA Today, Paul Davidson (30/12/13)
Minimum wage increase: Wage to rise in 13 states on Jan. 1 ABC15 (30/12/13)
NJ minimum wage sees $1 bump on Jan. 1 Bloomberg Businessweek, Angela Delli Santi (31/12/13)
Minimum wage hike a job killer ctpost, Rick Torres (7/1/14)
A Business Owners Case For Raising The Minimum Wage Grundy Country Herald, David Bolotsky (7/1/14)
Raising the Minimum Wage Isn’t Just Good Politics. It’s Good Economics, Too. New Republic, Noam Scheiber (31/12/13)
Minimum wage rises across 13 US states Financial Times, James Politi (1/1/14)

Information
National Minimum Wage rates GOV.UK
UK minimum wage: a history in numbers Guardian Datablog
List of minimum wages by country Wikipedia

Questions

  1. Draw two diagrams to demonstrate the direct microeconomic effect of a rise in the minimum wage for two employers, both currently paying the minimum wage, where the first is operating in an otherwise competitive labour market and the other is a monopsonist.
  2. What is meant by the term ‘efficiency wage rate’? How is the concept relevant to the debate about the effects of raising the minimum wage rate?
  3. What are the likely macroeconomic effects of raising the minimum wage rate?
  4. What is the likely impact of raising the minimum wage rate on public finances?
  5. Is raising the minimum wage rate the best means of tackling poverty? Explain your answer.
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The curse of the bumper harvest

A bumper harvest should be good news for farmers – but not if it drives down prices. This is the position facing many Australian farmers. After a relatively wet summer a year ago and a mild winter this year, crop yields have soared. But the prices farmers can get in wholesale markets have been so low that many have resorted to setting up their own farm shops or selling in farmers’ markets or from the backs of ‘utes’ (utility vehicles, i.e. pickup trucks) or at roadside stalls.

And the supply problem is not just one of increased domestic supply: cheap food imports, often of inferior quality, have been flooding into Australia. Increasing food exports, especially to Asia, would help Australian farmers, but here again there is competition in these markets from other countries.

The problem of increased Australian supply is even more serious for Australian farmers in areas where harvests have not been so good. Australia is a huge country and conditions, although generally favourable this year, have been poor in some areas. Here farmers face the double disaster of low output and low prices.

Australian dairy farmers too are facing problems of falling prices. Price deregulation and the monopsony power of supermarkets have driven down the price of milk and other dairy products. Since deregulation in 2000, the number of dairy farms has halved, as many smaller family farms go out of business and larger ‘industrial-scale’ farms grow.

So are there any solutions? The BBC article looks at things being done in Tasmania to help small farmers, but questions whether small farmers have much of a future more generally in Australia?

Articles
Australia’s small farmers struggling with low prices BBC News, Phil Mercer (31/10/13)
Commodity prices edge lower in October Sky News Australia (1/11/13)
Low prices spoil perfect season for Australian farmers ABC News, Eric Tlozek and Courtney Wilson (18/9/13)
Agri-businesses taking over the farm The Guardian (Australia) (6/11/13)

Data
Commodity prices Index Mundi
Agriculture in Australia Wikipedia
Farm inputs & costs Dairy Australia

Questions

  1. How does the fallacy of composition relate to the ‘problem’ of good harvests?
  2. How price elastic is the demand for specific crops likely to be? Why may individual farmers face an elasticity of demand close to infinity?
  3. Illustrate the problem for small farmers in Australia with a demand and supply diagram.
  4. Is there any way in which farmers, either individually or collectively, can make their demand less elastic?
  5. Comment on the following statement by a sugar cane farmer: “We’ve got that much money tied up (in the business) we just can’t walk away”. Under what circumstances would it make sense to ‘walk away’?
  6. How does the monopsony power of supermarkets influence the prices farmers receive?
  7. Discuss ways in which the federal government in Australia could support farmers.
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PCS vote to strike

The most common demands for trade unions are for higher wages and better working conditions. However, pensions have become an increasingly important issue that many public-sector workers in particular have raised concerns over. While actions by trade unions have been less frequent and public in recent months, the Public and Commercial Services Union (PCS) has voted to strike.

The labour market works like any other market – there is a demand for and supply of labour. The intersection of the demand and supply of labour give the equilibrium wage rate and equilibrium number of workers. Trade unions may aim to push up the wage rate above this equilibrium and the impact on the number of workers employed will depend on the type of labour market. If we have a competitive labour market, then the increase in wage will create an excess supply of labour: that is, unemployment. This is often a choice a trade union has to make. However, if the market is a monopsony, then it is possible for a trade union to force up wages and yet there may not be any fall in the number of workers employed.

Pay is just one of the issues being raised by the PCS. Public-sector pay was frozen for two years for those earning above £21,000. According to the Cabinet Office, this was necessary to ‘protect jobs in the public sector and support high quality public services.’ A 5% pay rise has been requested to counter an alleged 7% fall in earnings since 2008. 61% of those who voted in the ballot were in favour of strike action. Other concerns include job losses and pensions.

One concern of the PCS will be the low turn-out. Only 28% of the union’s members voted in this ballot and this is likely to weaken the union’s bargaining position. The government has monopsony power in employing civil servants and this is one of the reasons why a powerful trade union is likely to emerge: it acts to reduce the power of the monopsonist employer. Negotiations will typically take place between the employer and the trade union and with such a low turn-out, the power is certainly with the government. However, with the threat of strike action to occur around the time of the Budget, this does present something of a concern for the government, especially with growth remaining weak and the loss of the AAA rating.

Two separate pay offers have been made to 1.6 million public-sector workers, but Unison has suggested that members of PCS should reject them. If headway is not made in negotiations between PCS and the government, then strike action could be just around the corner. The following articles consider this looming industrial action.

UK public workers’ union may strike after vote Bloomberg, Gonzalo Vina (4/3/13)
PCS Union votes for strike action after national ballot BBC News (4/3/13)
Union ballots over Budget strike action Scotsman (4/3/13)
Civil servants vote in favour of strike The Guardian (4/3/13)
Budget day threatened by civil service strike The Telegraph, Victoria Ward (4/3/13)
PCS strike vote: Results of national ballot due BBC News, John Moylan (4/3/13)
Department of Education workers vote in favour of strike action over cuts and job losses Independent, Richard Garner (18/2/13)

Questions

  1. Use a diagram to illustrate a competitive market for labour and show how a trade union will aim to push up the wage rate. Show why a trade-off exists between the higher wage and the number of workers employed.
  2. Illustrate a diagram showing a monopsony and explain why the MC curve exceeds the AC curve. Why is it possible for a trade union to force up wages without creating a decline in the equilibrium number of workers employed?
  3. What other actions, besides striking, are available for trade union members? What are the costs and benefits of each relative to striking?
  4. Which factors, besides a low turn-out in the ballot, will reduce the trade union’s negotiating power?
  5. Public-sector pay was frozen for two years. If the government accepted the trade union’s pay demands, what would be the impact on the budget deficit? Could the higher pay help boost economic growth by creating a multiplier effect?
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Supply in chains

The news in many European countries has been dominated in February by the ‘horse meat scandal’. Small traces of horse meat may be the result of faulty quality control. But the significant amount of horse found in several processed meat products suggest fraud at one or more points in the supply chain from farm to supermarket or other outlet. Indeed several specific suppliers, from abattoirs to processors are facing criminal investigation.

The scandal has put the supply chain under intense scrutiny. Part of the problem is that the supply chain is often very long and complex. As the Guardian article states:

The food and retail industries have become highly concentrated and globalised in recent decades. A handful of key players dominate the beef processing and supermarket sectors across Europe. They have developed very long supply chains, particularly for their economy lines, which enable them to buy the ingredients for processed foods from wherever they are cheapest at any point, depending on exchange rates and prices on the global commodity markets. Networks of brokers, cold stores operators and subcontracted meat cutting plants have emerged to supply rapidly fluctuating orders “just in time”. Management consultants KPMG estimate there are around 450 points at which the integrity of the chain can break down.

Then there is the huge pressure on all parts of the supply chain to reduce costs.

Supermarkets use their market power to drive down the prices of the products they buy from their suppliers and this has a knock-on effect backwards down the supply chain. This pressure has intensified as real wages have fallen and consumers have found their budgets squeezed.

At the same time, beef and other meat prices have been rising as the costs of animal feed have soared. This all puts tremendous pressure on suppliers to add cheaper ingredients. Again to quote the Guardian article:

Manufacturers add other cheap ingredients including water and fat, and use concentrated proteins to bind the water and fat in. They may appear on labels as ‘seasoning’. One of the cheapest sources of these protein additives is pork rind. It is possible that horse hide is now also being used. The widespread adulteration of cheap chicken breast with pig and beef proteins and water has been uncovered in previous scandals. The beef proteins were derived from hydrolysed cattle hides. It is not illegal to use these protein concentrates so long as they are identified correctly to the manufacturer.

It is not surprising that if cheap horse meat becomes available to suppliers, such as from old horses towards the end of their working lives, some processing companies may be tempted to add it fraudulently, stating that it is beef.

The articles look at the issues of long and complex supply chains in the processed food industry and assess why they have evolved into their current form and the difficulties in regulating them.

Horsegate: heed economics of the cold chain The Grocer, Andrew Godley (16/2/13)
Horsemeat scandal: the essential guide The Guardian, Felicity Lawrence (15/2/13)
After the horse has been bolted The Economist (16/2/13)
Slavery, not horse meat, is the real scandal on our doorstep The Telegraph, Fraser Nelson (14/2/13)
Industry must take the reins on food safety Globe and Mail (Canada)Sylvain Charlebois (15/2/13)
Supply chains changed the growth model The Economist, Richard Baldwin (15/8/12)
Supply-chain management The Economist (6/4/09)
Tesco pledges to open up supply chain after horse meat scandal The Telegraph (16/2/13)
Horse meat scandal: Shoppers who buy ‘cheapest food’ at risk The Telegraph, James Quinn, Jason Lewis and Patrick Sawer (16/2/13)
Let Them Eat Horse Bloomberg, Marc Champion (15/2/13)
Scandal shows meat supply chain must be policed heraldscotland (14/2/13)
MPs push for new powers for FSA as officials seize yet more suspect meat Independent, Martin Hickman (13/2/13)

Questions

  1. Why do supermarkets and their suppliers use long supply chains?
  2. Explain the concepts of ‘countervailing power’ and ‘monopsony or oligopsony power’? How do they apply in the processed meat supply chain?
  3. Identify the types of transactions costs in the processed meat industry.
  4. In what ways do consumers (a) gain and (b) lose from such supply chains?
  5. Why is the problem of fraud in processed food supply chains likely to have intensified in recent years?
  6. How have supermarkets reacted to the horse meat scandal? Why has it taken the scandal to make them react in this way?
  7. To what extent is the problem simply one of inaccurate labelling?
  8. To what extent is there a principal–agent problem in the processed meat supply chain?
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The Winter of Discontent: the sequel?

You may ask how on earth bins are related to the post. The simple answer is that these are two things that may not be collected. They say that one wedding brings on another, but it looks like that this also applies to strikes. The Winter of Discontent in 1978-9 saw widespread industrial action, where the country almost came to a stop. Is this really where we are now?

The postal strike has been widely publicised, but it’s not just your post that may not arrive. Bus drivers have been striking against First Bus in Greater Manchester and various other places following pay freezes. British Airways is to face the possibility of strike action over new contracts, working practices and pay freezes after talks broke down. The Spanish company Iberia had to cancel over 400 flights over two days due to protests, and in Leeds, rubbish hadn’t been collected for eight weeks.

So, what’s causing all of this discontent? Are we going to see more and more workers protesting over contracts, hours of work and notably pay?

One key thing about strikes is that they affect everyone, whether it’s walking past piles of bin bags; not receiving birthday cards; getting to work late; cancelling holidays or receiving fines for late payment, and even for not submitting your tax returns. These are all problems that people have been facing, not to mention the loss of income some businesses have seen, especially resulting from the postal strike. With the government looking to reduce public-sector debt by increasing taxes or spending cuts, including public-sector pay freezes and controls on banking bonuses, we could be in for another winter of discontent with further disruptions to come.

Gordon Brown faces ‘winter of discontent’ with further strikes Telegraph, Alistair Jamieson (26/10/09)
Christmas travel threat as BA cabin crew vote on strike The Times (27/10/09)
British Airways boss enjoys jolly in Las Vegas as Christmas strike is threatened Mirror, Clinton Manning (27/10/09)
Iberia cancels over 400 flights scheduled for today and tomorrow Avio News (27/10/09)
India’s Jet Airways reports loss, shares plummet AFP (27/10/09)
Hundereds of flights cancelled as Iberia workers go on strike Gadling, Sean McLachlan (26/10/09)
British Airways strike could be in the works again Travel News (8/10/09)
Leeds binmen strike: Union view Yorkshire Evening Post (26/10/09)
Pay row bus drivers strike again BBC News (26/10/09)
Postal union and bosses in war of words Mirror, Clinton Manning (26/10/09)
Postal strike hangover could hit Christmas Guardian, Jamie Doward and Martin Wainwright (25/10/09)
How the postal strike might change Britain BBC News Magazine (27/10/09)
Postal strike costs London £500m Parcel2Go, Tom Sands (26/10/09)
Postal strike: union warns of more disruption over £7 billion pension deficit Telgegraph, James Kirkup (26/10/09)
Postal union plans legal action BBC News (27/10/09)
Postal strikes: union takes legal action over temporary Royal Mail staff Telegraph (27/10/09)
Origins of the Royal Mail strike BBC News (22/10/09)
Pass notes: 2,672: The winter of discontent The Guardian (27/10/09)

Questions

  1. What is the purpose of a strike and how effective are they likely to be? What are the costs?
  2. One of the reasons for strike action is pay freezes. What happens in an individual labour market when pay is frozen? What happens to the demand and supply of labour? Illustrate your answer with a diagram.
  3. Some news articles have referred to ‘picket lines’ forming. What are they?
  4. What is the difference between collective bargaining and individual bargaining? Which is more effective?
  5. Illustrate on a diagram the effect of a trade union entering an industry. How does it affect equilibrium wages and equilibrium employment? Is there any difference if the trade union faces a monopsonist employer of labour?
  6. Do you think the strike action is right? Why or why not? What are the things you have considered?
  7. Discuss whether we are heading towarads another ‘winter of discontent?’ Can it be stopped?
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Tea’s up

Tea prices have soared in recent months. Explanations can be found on both the demand and supply side. But while this might be bad news for tea drinkers, the news is more mixed for tea growers. So just what are the causes and consequences of the price rises? The following linked articles look at the issues.

Tea prices hit record high as supplies tighten Financial Times (19/8/09)
No break for Britons as tea price set to soar Scotsman (19/5/09)
Tea prices hit record high (video) BBC News (21/8/09)
Price of cup of tea goes up (video) BBC news (17/8/09)
Africa Tea Prices Climb to a Record on Dry Weather Bloomberg (20/8/09)
Kenya Tea Prices Hit Record High Before Ramadan FlexNews (19/8/09)
African tea prices ‘to extend gains’ China People’s Daily Online (18/8/09)
Sri Lanka to revive all closed tea factories ColomboPage (24/8/09)
Land usage should be flexible: Tea panel The Economic Times of India (24/8/09)

For tea price data see:
Tea Monthly Price Index Mundi

Questions

  1. Identify the factors on the demand and supply sides that have led to the rise in tea prices. Draw a diagram to illustrate your answer.
  2. Under what circumstances will farmers benefit from a rise in tea prices? What is the relevance of the market price elasticity of demand to your explanation?
  3. If the price of tea in the shops rises, will this necessarily mean a rise in the price to tea growers and in the wages of workers on tea plantations? Explain using concepts of competition and market power.
  4. What will be the effect of using more land for growing tea on (a) the price of tea and (b) the incomes of tea growers?
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