Tag: supply of labour

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The Royal Mail

With Christmas approaching, sales will once again begin to rise and cards will be written. Mail services will be at their busiest as we post millions of cards and parcels every day. But, the question is: will they arrive? Workers in the supply chain at Royal Mail have voted to strike over pay.

Since the part privatisation of Royal Mail, many criticisms have emerged, ranging from the price at which shares were sold, the efficiency of the Royal Mail, suggestions of varying prices for delivery depending on location, and now over pay. As with any labour market, there is a demand and a supply of workers and the intersection of these curves creates our equilibrium wage. If the wage is forced up above the equilibrium wage by the actions of trade unions, then there is the potential for unemployment to be created.

The Communications Workers Union (CWU) feels that their pay is insufficient. Dave Ward, Deputy General Secretary of CWU said:

“Thanks entirely to the unreasonable attitude of Post Office management, a pre-Christmas national strike is looking inevitable…The workforce has made a major contribution to the company’s success and have every right to their fair share.”

However, the head of the supply chain at Royal Mail has responded to the threats of strike, referring to the 5% pay rise promised to its workers over the next three years, saying:

“We are undertaking the biggest modernisation programme in UK retail history to ensure we become commercially viable and reduce our reliance on public money…We urge the CWU to reconsider their unrealistic demands and discuss an affordable pay deal rather than call strike action which can only cost our people money.”

The row over pay is not the only way that job losses could emerge. A major criticism levelled at the Royal Mail is its lack of efficiency, especially in terms of cost reductions and work flexibility. The Royal Mail has become increasingly concerned by competition, especially as its low-cost competitors can choose to whom they deliver. Those living in built up areas receive mail, but for those living in more rural areas, some of Royal Mail’s competitors will not deliver there, because of the higher costs. Royal Mail does not have this luxury and hence must deliver to loss-making places. Royal Mail says that this is creating unfair pressure to its business and is calling for these competitors to be forced to deliver to rural areas and small businesses. However, one such company, Whistl, has said that the figures from Royal Mail suggest that ‘productivity is not a sufficiently high enough management priority.

If the strike does go ahead in the build up to Christmas, then the management priorities of Royal Mail will certainly be under scrutiny. The following articles consider the current situation.

Articles

Questions

  1. If there is strike action in a labour market, what can we conclude about the market in question in terms of how competitive it is?
  2. Is strike action completely pointless?
  3. What actions could workers take, other than strike action, to achieve a resolution of their grievances? Discuss what employers could offer in an attempt to resolve the situation?
  4. What are the arguments for making Royal Mail’s competitors deliver to all places, just as the Royal Mail must do?
  5. The efficiency of the Royal Mail has been called into question. If efficiency improved, would this mean that pay rises were more or less feasible?
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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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Fighting cyber crime

When you look at the linked articles below, I’m sure many of you will be thinking that this is an odd choice for an economics blog! However, part of the economic relevance of ‘cyber-crime fighters’ relates to the relative skills of workers and the gap that exists between the most and least skilled workers in the UK.

Crime has always existed, but as technology has developed the types of crime committed have grown along with the complexity of them. For certain crimes, a very skilled individual is needed. With this emergence of technologically advanced crimes, those fighting crimes have also had to improve their skills and techniques. Thus crime-fighters have become more technologically advanced as well.

The problem is that the number of skilled workers able to deal with things like cyber crime has not kept pace with the demand for them and thus we have a skills gap. Usage of the Internet has continued to grow, creating more and more opportunities for cyber crime. However, the UK supply of IT and cyber-security professionals has not been able to keep pace. Therefore, we have a shortage of skilled labour in this area.

More investment into research and education is occurring, with the aim of addressing this shortage, but it is expected to take many years before supply catches up to demand. In particular, more investment is needed in the sciences and technology subjects at school to create the supply at university level. The NAO said that:

‘The current pipeline of graduates and practitioners are unable to meet demand.’

A second area of relevance to economics is the cost of cyber crime. The NAO estimated that the cost is somewhere between £18bn and £27bn per annum. However, on the other side, is there a case that crime actually benefits the macroeconomy by requiring government investment. As cyber crime has grown, so has the demand for cyber-crime fighters and this has created more jobs. With more jobs comes increased spending and the benefits of the multiplier. The following articles consider cyber crime and the impact it is having.

National Audit Office warns UK needs more skilled cyber crime fighters BBC News (12/2/13)
IT staff shortages raise cyber crime risk Sky News (12/2/13)
UK planning ‘Cyber Reserve’ defence force BBC News (3/12/12)
Britain vulnerable from cyber attacks for at least 20 years The Telegraph, Tom Whitehead (12/2/13)
Britain targeted by 120,000 every DAY with cost to country thought to total £27billion Mail Online, Jack Doyle (12/2/13)

Questions

  1. Illustrate the demand for and supply of labour curves in the market for cyber crime fighters. How is the equilibrium wage determined?
  2. If there is increased investment in education, how would this affect the shape and position of the MRP curve and what impact would this have on your diagram?
  3. If there is a shortage of cyber crime fighters, what does that suggest about the position of the two curves? Illustrate this situation and explain why it is a problem.
  4. Which factors would be considered by NAO in estimating the costs of cyber crime?
  5. Explain why crime can pay.
  6. How does the macroeconomy benefit from increased crime? Illustrate this on a diagram.
  7. Does your answer to question 5 above suggest anything about the effectiveness of using GDP as a measure of welfare?
  8. How is the multiplier effect relevant?
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Not much left in the tank

Reforms and budget cuts seem to be the norm across the world. In the UK, we’ve seen announcements about substantial cuts in government spending and reforms to our welfare state, including child benefit and pension reforms. But how will people react? Perhaps, we should look to France to see what could be to come. People across the country are protesting against the plan to raise the pension age from 60 to 62.

Workers at French oil refineries have ceased work and, as as a result, shortages of petrol across France look set to continue. There has been mass disruption to various transport markets, including cancelled flights and lorry drivers using ‘go-slow tactics’.

Furthermore, it’s not just workers at oil refineries who are on strike. Rubbish remains uncollected; oil tankers are floating off the coast; rail strikes and postal strikes have disrupted daily life; and even the school system has been affected. But, what are the costs of these strikes? Will the French economy suffer? Will economic growth be affected? It’s certainly an inefficient use of resources and will undoubtedly cost money.

Yet, despite these strikes, the President has said that the reforms will still go ahead, as he looks forward to a Senate vote on the pension bill. But what are the problems necessitating pension reform, not just in France, but across the world? And will it be France’s turn to experience a ‘winter of discontent’?

French strikes force petrol stations to shut BBC News (18/10/10)
Defiant Marseille, heart of France’s social unrest Reuters (18/10/10)
French Fuel Crisis: Protests turn violent Sky News, Huw Borland (18/10/10)
JPMorgan says French strike will cut demand for oil next year Bloomberg, Grant Smith (18/10/10)
French strikes hit airlines, trucking, gas pipes Philippine Star (19/10/10)
French riot police clash with students as petrol stations run dry Telegraph, Henry Samuel (18/10/10)
French based for another day of strike action Guardian, Angelique Chrisafis (18/10/10)
France strike: flights cancelled, airlines told to carry enough fuel for return journey Telegraph (18/10/10)

Questions

  1. What action other than striking is open to workers? What are the costs and benefits of each?
  2. Why are strikes by groups of workers likely to be more effective than protests by individual workers?
  3. 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?
  4. What are the efficiency arguments against strike action?
  5. How are oil prices determined? What will be the impact on oil prices of these strikes in France? Will there be an impact on the rest of the world?
  6. What are the key issues necessitating pension reform? Are these issues worth the price of the strikes?
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Turbulence in the air

Throughout October we saw widespread strikes, from bins to the post and airline flights to buses – and it’s not yet over. (See article The Winter of Discontent: the sequel?) Last November, BA cut the number of cabin crew members, despite strike action, which delayed hundreds of flights. This issue has yet to be resolved and over the weekend, there were further talks to try to reach some agreement. However, no truce was reached and so further strikes are now expected. Indeed, the Unite union announced the results of another ballot of cabin crew, showing even larger support for strike action.

However, BA is not the only airline facing strike action. Some 4000 pilots at Lufthansa, a German airline, called a four-day strike, following disputes over job security. This has led to thousands of flights being cancelled and thousands of passengers left stranded. Although the strike was suspended after one day, the dispute is not settled.

The stimulus for this action appears to date back to the huge turnover that Lufthansa made in 2007, with pilots feeling they should have a share in this success, along with its recent purchase of Austrian Airlines and the need to turn this into a profitable enterprise. The Lufthansa pilots are concerned that foreign pilots will be brought in to replace them in order to reduce costs. The airline fears that this strike could cost them about £21.9 million per day. With both sides unwilling to yield, it looks as though many passengers may find themselves stranded for a bit longer.

Articles

Questions

  1. How effective is the strike action by Lufthansa and BA likely to be? Which factors affect this?
  2. With a huge turnover in 2007, why were pay cuts at Lufthansa felt to be necessary by the company?
  3. How would wages be determined in the airline industry without trade unions? Illustrate this on a diagram and use that to explain why some workers get paid more than others.
  4. On your diagram of wage determination, now illustrate the effects of a trade union entering the market. How are wages and the equilibrium level of employment affected?
  5. Other than striking, what other options do workers and unions have?
  6. If strike action is costly to BA and Lufthansa, why don’t they simply agree to the unions’ demands?