Competition in the Labor Market - Term Paper Example

 Competition in the Labor Market Introduction This project aims to discuss the macroeconomic factors that determine the equilibrium wages in the labor market. In this context, it analyses the causes behind the increase or decrease in the labor demand and supply in the global labor market. Some of the main causes which have been discussed at length in the project include immigration, globalization and labor regulations as introduced by governments of various nations. It also cites examples of the labor market conditions prevailing in the OECD nations, Britain and Australia. Competition in the Labor Market The concept of comparative advantage and trade policies changed with the introduction of imperfections in the product market. Macroeconomists have used models of monopolistic competition to show how adjusting prices leads to business fluctuations. This trend is seen to influence the labor market economics as well. It is seen that employers have been increasingly gaining market power in terms of setting wages (Bhaskar & Manning, p.1). An informal survey on the fast food restaurants located in Virginia proved that significant wage disparity existed among workers performing the same job. The hourly wages of employees in six restaurants located very close to each other ranged from $5.15 to $6.00. This fact goes against the competitive theory in labor markets which says that low skilled and non-unionized workers are paid equal wages by all employers (Bhaskar & Manning, p.2). Competition existing in the product market has a direct impact on the level of unemployment and wages prevailing in the nation. Different regulations prevailing in different countries have been used to analyze their impact on competition. It is seen that increase in competition reduces risks of unemployment. This is more prominent in countries having labor market institutions. The labor market institutions are said to improve the bargaining power of workers. (Griffith, Harrison & Macartney, p.2). Activities of firms having market power and unions having enormous bargaining power gets restricted to a considerable extent because of the demand elasticity prevailing in product markets. It is also found that greater competition or real wages benefits the workers but the benefit also gets reduced with the increase in bargaining power. “Intuitively, real wages increase through a drop in the general price level, but workers with bargaining power lose out somewhat from a reduction in the rents that they had previously captured” (Griffith, Harrison & Macartney, p.2). Competition creates a constraint on the behavior in which firms set their prices and the way unions set wages. Firms set their prices as mark ups over the wages. On the other hand, demand elasticity of the product determines the mark up price. Competition decreases the mark up prices of firms. Unions of firms bargain to set a high wage assuming that firms will set the mark up price over and above this wage. It is known that high wages will take the shape of high prices of products for the consumers, consequently lowering the output of firms. As unions are concerned with both wages and employments, increase in competition limits their bargaining power even further. Hence, product market competition increases employment substantially. The result is aggravated even further if the union’s bargaining power remains high (Griffith, Harrison & Macartney, p.9). Female participation in the labor force has increased substantially over the past few years. Their achievements in terms of education are also on the rise. In US, women have surpassed men in becoming the most educated sex. Despite making great advances in the labor force and adopting practices like ‘equal pay’, women are still not getting paid as much as the men. Since the entry of women in the labor force, the gender gap has been reducing. But surprisingly, “today’s division of labor between spouses within the household appears surprisingly traditional” (Chichilnisky & Frederiksen, p.2). Studies have revealed that the time spent by women at home is much greater than that of their husbands. The wage gap between the two genders has also remained quite high even today (Chichilnisky & Frederiksen, p.2). The national minimum wage was introduced in Britain in the year 1999. It was meant to raise the real wages and relative wages for the low income workers of Britain. It has also reduced the pay gap existing between genders. But its effects on employment were very trivial. This is because the impact on workers and the labor market are offset by the tax credit system, improved productivity, incomplete compliances etc. (Metcalf, “Abstract”). Non compliances of the minimum wages has certain has adverse economic effects. The employer tends to employ less labor than he would in the presence of the law. Non compliance also involves risk for the employer, consequently raising the marginal cost of labor (Yaniv, “Abstract”). A program was conducted for changing the labor laws in Australia. It was meant to expand the dimensions of the existing laws to include all aspects present in the labor market, rather than just improving relationship between employees. By expanding the traditional coverage, it was assumed that operations and effects of the labor laws would be revealed more readily. This would allow the laws to contribute towards the society (Frazer, p.4). In most nations, employers cannot shed their redundant labors according to their will during the times of adverse economic conditions. Employments remain regulated by laws and contractual arrangements. Partial equilibrium models which take the business conditions and wages as given are useful in understanding effects of such employment protection provisions. Recently a research was conducted on the numerically flexible nations belonging to the OECD. These nations are said to demonstrate positive results in their labor markets. Employment rates were higher for the old, young and females in comparison to nations which were not numerically flexible. The labor market policies and institutions happen to be the discriminating factors in the above case. The conclusion is that equity and efficiencies can be achieved in the labor market given the provision that there is the existence of institutions and policies for achieving protected mobility (Auer-a, “Abstract”). However, there are exceptions where nations with good labor market performance and flexibilities demonstrate great insecurity and vice versa. This is the case for countries like Denmark and Netherlands (Auer-b, “Different Employment Systems”). A trend towards income inequality has recently been noticed in the OECD countries. This is because technological changes have increased the demand for skilled labor and globalization has exposed more and more numbers of unskilled labors in the global market (Atkinson, “Abstract”). There has been an increase in supply of informal labor due to the increase in the number of laid-off workers from the formal sector. The process has been catalyzed by migration. This has further reduced wages and increased the level of poverty (Siggel, “Abstract”). There is a certain link between immigration and wages of a nation. The Heckscher-Ohlin model however suggests that immigration have no direct impact on the native wages. The factor proportion analysis have been used by many economists to show that immigrants are responsible for creating pressure on wages of the similarly skilled citizens (Scheve & Slaughter, p.3). Research results show that less skilled workers prefer reduction in the number of immigrants in the United States. There is an apprehension among the people of United States that the US economy attracts immigrants by partially changing the wages. Additionally they are said to participate in framing policies according to their own interests (Scheve & Slaughter, p.4). Additionally, it is seen that immigrants themselves gain significantly from migration. They are able to gain higher wages from the host nation which is much greater than that of their own country. They also enjoy large per capita income than their own nation. The World Bank has found that migrants are able to gain three times of their own income. This implies a gain worth $162 million even after discounting the remittances sent back to the people left in the home country (Chang, P.10). Certain European countries converted themselves from migrant sending countries to migrant receiving countries. This created greater pressure on the labor market and the native workers (Venturini & Villosio, “Labour Market effects of immigration into Italy: An empirical analysis”). It is seen that workers mobility reduces significantly along with the increase in specific education. This point has been illustrated by using data from two nations, Poland and Estonia, both victims of macroeconomic turbulence. It was seen that greater unemployment was associated with increase in the number of vocational degrees. Over specialization in the labor market in Poland led to a greater increase in unemployment in the nation in comparison to that in Estonia. This was consequently related to the increase in competition in the labor market (Science Direct, “Abstract”). There is a direct relationship between outsourcing and wage formation and equilibrium level of unemployment in the labor market. Here the wages are determined by the labor unions. In such cases outsourcing is said to increase the disparity between high and low skilled workers. The labor unions attempt to implement equal wage policies to reduce the wage disparity. Further, outsourcing increases the level of unemployment among the high skilled workers, while it reduces the same among the low skilled workers. To sum it all, outsourcing is said to reduce unemployment in the economy under the assumption that the proportion of high skilled workers remains low in comparison to the low skilled workers (Koskela & Stenbacka, “Abstract”). Conclusion During the course of the project it was revealed that labor unions played a critical role in determining the wages of an organization. But recently the trend is found to be changing. Employers have been gaining greater market power in determining wages. This is apparent from the fact that employees performing the same job are getting paid differently in different places in Virginia. It is also seen that there exists a direct relationship between competition in the product market and employment. This is aggravated even further by the intervention of labor unions. Wages are determined by the market forces of demand and supply. However, governments have been taking special initiatives in formulating labor regulations to determine wages. This is because wages keep fluctuating along with the levels of migration and increased globalization. This has been affecting the local and native workers. Additionally governments have been formulating policies that contribute to the growth of the society. References Atkinson, A. B. Abstract. July 27, 2007. The distribution of earnings in OECD countries. November 10, 2010. < http://onlinelibrary.wiley.com/doi/10.1111/j.1564-913X.2007.00004.x/abstract>. Auer-a, P. Abstract. 2010. Protected Mobility for Employment and Decent Work: Labour Market Security in a Globalized World. November 10, 2010. < http://jir.sagepub.com/content/48/1/21.abstract>. Auer-b. Different Employment Systems. 2005. Protected mobility for employment and decent work: Labour market security in a globalised world. November 10, 2010. < http://ilo-mirror.library.cornell.edu/public/english/employment/strat/download/esp2005-1.pdf>. Bhaskar, V. & Manning, A. Oligopsony and Monopsonistic Competition in Labor Markets. 2002. November 10, 2010. . Chang, H. F. May 2, 2007. The economic impact of international labor migration: recent estimates and policy implications. November 10, 2010. < http://law.bepress.com/cgi/viewcontent.cgi?article=2210&context=alea>. Chichilnisky, G. & Frederiksen, E. H. An equilibrium analysis of the gender wage gap. 2008. November 10, 2010. < http://www.ilo.org/public/english/revue/download/pdf/s1_chichilnisky.pdf>. Griffith, R., Harrison, R. & Macartney, G. Product Market Reforms, Labour Market Institutions and Unemployment. February, 2006. November 10, 2010. < http://www.ifs.org.uk/wps/wp0606.pdf>. Frazer, A. D. Introduction. 2008. Reconceiving Labour Law: The Labour Market Regulation Project. November 10, 2010. < http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1057&context=lawpapers>. Koskela, E. & Stenbacka, R. Abstract. September 2009. Equilibrium unemployment with outsourcing and wage solidarity under labour market imperfections. November 10, 2010. < http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V64-4X908VT-1&_user=10&_coverDate=04%2F30%2F2010&_rdoc=1&_fmt=high&_orig=search&_origin=search&_sort=d&_docanchor=&view=c&_searchStrId=1535178753&_rerunOrigin=scholar.google&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=6c76858347587adc06fd7b2928a52265&searchtype=a>. Metcalf, D. Abstract. 2010. Why has the British National Minimum Wage had Little or No Impact on Employment?. November 11, 2010. . Science Direct. Abstract. 2010. Are specific skills an obstacle to labor market adjustment?. November 10, 2010. . Scheve, K. F. & Salughter, M. J. Introduction. February 1999. Labor Market competition and individual preferences over immigration policy. November 10, 2010. < http://www.nber.org/papers/w6946.pdf?new_window=1>. Siggel, E. Abstract. May 19, 2010. The Indian informal sector: The impact of globalization and reform. November 10, 2010. < http://onlinelibrary.wiley.com/doi/10.1111/j.1564-913X.2010.00077.x/abstract>. Venturini, A. & Villosio, C. Labour Market effects of immigration into Italy: An empirical analysis. June 28, 2008. November 10, 2010. < http://onlinelibrary.wiley.com/doi/10.1111/j.1564-913X.2006.tb00011.x/abstract>. Yaniv, G. Abstract. February 2007. On the employment effect of noncompliance with the minimum wage law. November 10, 2010. < http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V7M-4MYMFW0-7&_user=10&_coverDate=12%2F31%2F2006&_rdoc=1&_fmt=high&_orig=search&_origin=search&_sort=d&_docanchor=&view=c&_searchStrId=1536378620&_rerunOrigin=scholar.google&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=e75f540ba5418cd78851ddb55bde288a&searchtype=a Read More