Pearson Edexcel International Advanced Level Economics: Labour market failure (YEC11) – Revision Notes

Short-form notes on 3.3.4 item 4 and 3.3.5 item 2 of the Pearson Edexcel International Advanced Level Economics specification (YEC11, Issue 2), Unit 3 Business behaviour. Use the study guide for the full explanations, then the practice set and the free diagnostics. Course links: hub and checklist. Every figure here is invented and illustrative.

Key definitions

Term	Meaning
Geographical immobility	Workers unable or unwilling to move to where jobs are
Occupational immobility	Workers unable to switch easily between jobs or industries
Structural unemployment	Unemployment from a mismatch of skills or location with vacancies
Monopsony	A single (or dominant) buyer of labour, able to pay below MRP
Minimum wage	Legal floor on hourly pay
Maximum wage	Legal ceiling on pay
Direct tax	Tax on income or profit, paid by the person or firm it is aimed at
NICs	National insurance contributions: payroll taxes on earnings, paid by employees and employers
Corporation tax	Tax on company profits
Pay gap	(Pay of group A - pay of group B) / pay of group A x 100

Causes and consequences at a glance

	Geographical	Occupational
Causes	Housing cost, family ties, removal costs, poor information, weak transport	Skills mismatch, licences, retraining cost, age, little information
Consequences	Regional unemployment and shortages, persistent wage gaps	Structural unemployment, skill shortages, lost output and tax
Policy	Housing, relocation grants, transport, vacancy information	Training, apprenticeships, careers advice, retraining schemes

Keep them apart: geographical is about place, occupational is about skill.

The case for intervention

Say which failure you mean and name it.

1. Immobility: resources idle or mismatched.
2. Monopsony: wages below MRP.
3. Discrimination: pay or hiring unrelated to productivity.
4. Under-provision of training (positive externality, poaching fear).
5. Information gaps.
6. Equity and poverty.

Against: government failure, cost, lower employment, avoidance.

Wage controls: method

Minimum wage, competitive market

1. Find equilibrium (demand = supply).
2. Check the floor is above it; if not, nothing happens.
3. Read employment from the demand curve and supply from the supply curve.
4. Unemployment = supply minus demand at the floor.
5. Use elasticity of demand for labour to judge the wage bill.

Monopsony

1. Equate MRP = marginal cost of labour (MC).
2. Read the wage from the supply curve at that quantity.
3. A floor between that wage and the competitive wage raises employment.

Maximum wage: a cap below equilibrium creates a shortage of labour (supply below demand).

Worked reminder. A floor raises pay from 8.00 to 8.80 (+10.0%) and employment falls from 500 to 470 (-6.0%).

Elasticity of demand for labour = -6.0 / 10.0 = -0.6  (inelastic)
Wage bill: 8.00 x 500 = 4,000 rises to 8.80 x 470 = 4,136 (+3.4%)

Inelastic demand means the wage bill rises; elastic demand means it falls.

Monopsony reminder

A small fictional town has one large employer. Marginal revenue product is w = 14 - L and supply is w = 2 + L (L in hundreds of workers, w per hour).

MC of labour = 2 + 2L
MRP = MC: 14 - L = 2 + 2L -> L = 4, wage = 2 + 4 = 6
Competitive outcome: 14 - L = 2 + L -> L = 6, wage = 8
A floor of 7: supply L = 5, demand L = 7 -> employment 5 (up from 4)

The firm pays 6 against an MRP of 10 at L = 4, so the gap is 4 per hour. A floor of 9 would sit above the competitive wage: demand L = 5, supply L = 7, so 2 hundred are unemployed.

Building an evaluation paragraph

Use this chain for any policy question.

1. Point: the policy and the failure it targets.
2. Mechanism: which curve moves, and why.
3. Size: elasticity, cost or the scale of the gap.
4. Counter-argument: who loses, or what else changes.
5. Time: short run against long run.
6. Judgement: which factor decides the outcome, stated plainly.

For example: a floor raises pay for those in work (mechanism), but if demand for labour is elastic, jobs fall by a larger percentage than pay rises (size). Young and low-skilled workers may be hit hardest (counter-argument). Firms may adapt over time through productivity gains (time). So the verdict depends on the size of the floor relative to the market wage.

Direct taxes

Tax	Curve affected	Likely effect
Employer NICs	Labour demand shifts left	Fewer jobs or lower wages
Employee NICs and income tax	Labour supply shifts left	Weaker incentive to work
Corporation tax cut	More retained profit	May raise investment and labour demand

Worked reminder. Employer NIC of 13% on pay of 10.00 gives labour cost 10.00 x 1.13 = 11.30. Corporation tax of 19% on 250,000 profit is 47,500, leaving 202,500.

Evaluate through elasticities, the share of the tax passed to workers, the time lag, and what the government does with the revenue.

Measures to reduce immobility: method

1. Name the measure (housing, grants, transport, training, apprenticeships, information).
2. Link it to the cause it targets.
3. Quantify cost and benefit if data are given.
4. Evaluate: cost, time lag, deadweight, whether training suits employers’ needs.

Worked reminder. Retrain 500 people at 4,000 each (2.0 million). 70% succeed (350), each gaining 5,000 a year in saved benefits and tax.

Annual fiscal gain = 350 x 5,000 = 1.75 million
Payback = 2.0 / 1.75 = 1.14 years

Geographical check: pay gap 22,500 - 18,000 = 4,500 (25.0%); less extra housing 1,500 = 3,000 net; moving cost 6,000 / 3,000 = 2.0 years.

Discrimination and exploitation

• Anti-discrimination and equal-pay law, with penalties.
• Pay-gap reporting.
• Minimum wages, limits on hours, enforcement bodies.
• Evaluation: hard to enforce, hidden discrimination, compliance cost; differences in hours or experience can explain part of a gap.

Worked reminder. Mean pay 22.00 against 19.80: gap = 2.20 / 22.00 = 10.0%.

Must-know distinctions

• Floor in competitive market: unemployment. Floor in monopsony: employment may rise.
• Employer NICs shift demand; employee NICs shift supply.
• Training that raises a firm’s own productivity differs from training that benefits the whole economy.
• A pay gap is a measure; discrimination is a cause.

Quick self-test

1. Name two causes of geographical immobility.
2. Name two causes of occupational immobility.
3. Employer NIC of 12% is charged on pay of 15.00. What is the labour cost?
4. 18,000 are unemployed in a labour force of 300,000. Find the unemployment rate.
5. A retraining scheme costs 8,000 per person and saves 5,000 in benefits and tax each year, with 1,000 in running costs. Find the payback.
6. Elasticity of demand for labour is -1.5. Pay rises 4%. What is the change in employment?
7. Why might a minimum wage raise employment?
8. Why might a maximum wage cause a shortage?
9. Firm profit is 250,000 and the tax rate is 40%. Find the tax.
10. Give one limit of anti-discrimination laws.
11. State the formula for the pay gap.
12. Why might firms under-provide training?

Answers

1. Any two of: housing cost, family ties, removal costs, poor information, weak transport.
2. Any two of: skills mismatch, licences, retraining cost, age, little information.
3. 15.00 x 1.12 = 16.80.
4. 18,000 / 300,000 x 100 = 6.0%.
5. Net saving 5,000 - 1,000 = 4,000; 8,000 / 4,000 = 2.0 years.
6. -1.5 x 4 = -6%.
7. In monopsony, the floor can lie between the monopsony wage and MRP, so firms hire more workers.
8. A cap below equilibrium lowers supply of labour below demand.
9. 250,000 x 0.40 = 100,000.
10. Enforcement is costly and discrimination can be hidden.
11. (Pay of one group - pay of the other) / pay of the first group x 100.
12. Trained workers can be poached by rivals, so the firm cannot capture all the benefit.

Where marks are usually lost

• Predicting unemployment from a minimum wage without checking the structure of the market.
• Drawing the floor below equilibrium and then describing an effect.
• Mixing up the curves a tax shifts.
• Using “immobility” without saying which type.
• Listing measures with no link to the cause they address.
• Quoting a pay gap as proof of discrimination.
• Giving a calculation with no working or units.
• A conclusion that repeats points without a judgement.
• Treating a training subsidy as free: it has an opportunity cost, and the benefit arrives later.
• Ignoring who bears an employer tax: part may fall on workers through lower pay, so say which group loses.
• Forgetting to separate short-run and long-run effects when judging a policy.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (YEC11), Issue 2, June 2018, first teaching September 2018: 3.3.4 item 4 and 3.3.5 item 2. Published by Pearson Education Limited.