3.3.3 The Labour Market: Setting the Level of Wages Paid

The balance between the supply of suitable workers and the employer’s need for them is what determines the level of wages paid

As with materials and supplies, described in the previous section (3.3.2), a market is in equilibrium when the price level is such that supply is balanced by demand.  In the labour market, the ‘price’ is a combination of a wage level and working conditions.  People won’t take jobs if they can’t find better pay and conditions elsewhere.  Employers only hire people if they can afford to employ them and if they cannot find anyone suitable who will work for less.

Levels of unemployment have a considerable effect on employees’ bargaining power.  Employers have the upper hand if people have difficulty finding a job – and people are naturally afraid of unemployment.  Governments use macroeconomic tools to manage unemployment, as described later (3.3.8).  They try to keep it fairly low, but not so low that employers have to pay a lot more to attract workers.  They aim for the Non-Accelerating Inflation Rate of Unemployment (NAIRU): a level of unemployment that is compatible with avoiding inflationary wage pressures.  Paul Krugman described this issue in his essay, Ricardo’s Difficult Idea:

“countries have central banks, which try to stabilize employment around the NAIRU; so that it makes sense to think of the Federal Reserve and its counterparts acting in the background to hold employment constant.”

If government policies are successful, the labour market will be stable.  People will be able to find jobs (but not necessarily in their preferred field).  Three factors which determine the level of wages paid are described in the following sub-sections:

●  The productivity of the labour force determines how much employers can afford to pay ( If a smaller team of people can produce the same output, perhaps as a result of automation, the business can afford to pay more to each individual.  Wage levels are higher for every type of job if a country has high overall productivity.

●  Wage negotiations are unbalanced ( Workers cannot put much pressure on employers unless they bargain collectively, in trade unions for example.  And an employee might find it difficult to move location, whereas some employers can easily move work elsewhere.

●  A government can intervene in the labour market by setting minimum wage levels ( These protect employees against exploitation.  An increased minimum wage might be thought to reduce the number of jobs available, but this can be avoided in practice.



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This page is intended to form part of Edition 4 of the Patterns of Power series of books.  An archived copy of it is held at https://www.patternsofpower.org/edition04/333a.htm.