sample - s3-eu-west-1.amazonaws.com · 1 economic rent diagram – blue shaded triangle should be...

Resources for Courses

New A LevelEconomics

LabourMarkets

SAM

PLE


Teacher InstructionsThis resource is designed to test students’ knowledge of labour market diagrams, and is a good revision exercise.

The activity is very simple – students simply need to work out which bit of the diagramis not shown, and add it in.

This task is very useful as a revision exercise, as it helps to highlight to students theimportance of accuracy in their diagram drawing.

Our suggested answers are given below – but obviously do credit students who spotanything else that they think should have been included!

Suggested Answers1 Economic rent diagram – blue shaded triangle should be labelled as economic

rent2 Lorenz Curve – x-axis label of “cumulative % of population”3 Maximum wage diagram – indication of excess demand for labour / labour

shortage4 Monopsony employer – label for MCL

5 Minimum wage – y-axis label of “wage rate”6 Substitution effect (individual labour supply) – x-axis label of “number of hours

worked”7 Trade Union – Union “mark up” wage (WTU)8 Transfer earnings – label for DL

Diagram Disaster

SAM

PLE

Diagram disaster

1 Economic RentWageRate

W

QL

DL

SL

Quantity of Labour

Missing element

3 Maximum WageWageRate

MaxWage

W

QSL QL QDL

DL

SL

Quantity of Labour

Missing element

2 Lorenz CurveCumulative

% of income

100

Line of equality

1000

Missing element

SAM

PLE

4 Monopsony EmployerWageRate

WC

WM

QM QC

MRP = DL

ACL

Quantity of Labour

Missing element

6 Substitution effect (individual labour supply) WageRate SL

Substitution effect

Missing element

5 Minimum wage Missing element

MinWage

Unemployment

W

QDL QL QSL

DL

SL

Quantity of LabourSAM

PLE

7 Trade Union Missing element

8 Transfer Earnings Missing element

WageRate

Unemployment

W

QDL QL QSL

DL

SL

Quantity of Labour

WageRate

W

QL

SL

Quantity of Labour

TransferEarnings

SAM

PLE


New A LevelEconomics

LabourMarkets

SAM

PLE


Teacher InstructionsThis resource contains a number of Labour Market Mini Briefs. Each Mini Brief includes a short case study on a different topic within the Labour Markets theme,along with a set of related key economic terms.

Accompanying each Mini Brief is a set of three “boxes”, in which students shouldwrite their own exam-style questions based on the mini brief. These questions arecategorised as Mild, Medium and Hot – in other words, 2 questions should bestraightforward (perhaps a definition or diagram), 2 questions should be more challenging (perhaps requiring detailed analysis in the answer) and 2 questionsshould be more challenging (perhaps incorporating an evaluative element, or a pieceof technical theory).

This activity can be run in a number of ways. Perhaps most obviously, each student(or pair of students) could be allocated a different Mini Brief, and asked to read theirBrief. They may feel that they want to do some additional research. Next, they shouldwrite definitions for the key terms included on the right hand side of each mini brief.Finally, students should develop their own questions to fit in the Mild, Medium andHot categories. As an additional task, students could also write suggested answers ormark-schemes for their questions.

Students should then swap Mini Briefs, and write answers to the questions, with theirwork then being assessed and marked by their peers. The process then continues, asstudents swap Mini Briefs again. All students should eventually answer all questions.

As an alternative, students could be given all of the Mini Briefs, and asked to writequestions. The teacher could then collate the various questions for each mini-briefand issue them as a revision activity.

Labour Markets Mini Briefs

SAM

PLE

Strikes by workers on the London Underground have a huge knock-on effect. Ancient buses are rolled back into service, queues for taxis weavetheir way around buildings, and A&E departments are full to the brim ofout-of-practice cyclists. On the plus side, lots of commuters walk to work,benefiting from a healthy dose of exercise.

Such a strike by members of the militant union the RMT (National Union ofRail, Maritime and Transport Workers) on July 9th 2015 cost the economyan immense £300m. This union has a strong monopoly power over theprovision of workers to London’s transport industry, and ensures that itsmembers have high pay and good perks compared with other, similarly-skilled professions.

So what prompted the strike in July? London’s underground infrastructureis fairly antiquated, and as London’s population continues to grow, improvements need to be made to the infrastructure to allow that populationto travel when needed. Transport for London (TfL), the body responsible for the city’s transport provision, is replacing space-sucking ticket officeswith space-saving ticket machines, moving workers from ticketing jobsonto platform management, and has introduced 24 hour service on 5 underground lines. The RMT complained that TfL’s offer of an additional£2000 in bonuses and above-inflation pay rises isn’t good enough.

Mini Brief Case Study

Mild Questions1

2

Medium Questions1

2

Hot Questions1

2

Trade Union

Strike

Industrial Action

Negative Externalities

Positive Externalities

Pecuniary / monetary rewards

Non-pecuniary / non-monetaryrewards

Monopoly power Wages

Essential Key Terms

SAM

PLE

Growth in the UK is on the up, and this is generally good news for businessrevenue. However, managers of many businesses, especially small firms,are concerned about the potential impact of the government’s “livingwage” which will come into effect in April 2016. Workers over the age of25 must be paid £7.20ph, and this is rising to £9ph by 2020. In effect, it isan increased National Minimum Wage (NMW).

One owner of a reasonably small, 60-room boutique hotel in London saidthat this will add £107,000 to her £500,000 annual wage bill – and that her profit margins simply can’t take it. Labour-intensive businesses, suchas hotels and other service industries, are likely to struggle. One estimatefrom the Office for Budget Responsibility (OBR) suggests that the new Living Wage will result in 60,000 more people being made unemployed.

Instead of making essential workers redundant, one alternative is to reduce the size of pay differentials, so that the pay gap between workersand managers is reduced. The policy could also boost demand for workersunder 25, since they will continue to be paid the old NMW. Employerscould also demand more from their lowest paid workers – in other words,to prevent redundancies, the productivity of workers, or their MarginalRevenue Product (MRP), will need to rise to keep pace with the higherwages.


Mild Questions1

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Medium Questions1

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Hot Questions1

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Economic growth

Living Wage

National Minimum Wage

Classical Unemployment

Labour-intensive industry

Unit labour costs

Pay / wage differentials

Productivity

Marginal Product

Marginal Revenue Product

Essential Key Terms

SAM

PLE

The International Brotherhood of Teamsters describe themselves as NorthAmerica’s most powerful union. Membership is just under 1.4m, which isdown from its peak of 2m around 25 years ago. For the last 25 years, theUS government has monitored the work of the Teamsters really closely, following years of violence and corruption by Teamsters (including violenceagainst their own members), although this monitoring is about to come toan end. The Teamsters are also the 11th largest political campaign donorsin the US. They have donated to both of (Democrat) Obama’s campaign, aswell as previously supporting the Republican candidates Ronald Reaganand George Bush (Sr). The largest employer of the union’s members is theparcel delivery company UPS, which employs 250,000 Teamsters.

Facing falling membership, the Teamsters continue to diversify the occupational groups that they represent in collective bargaining discussions.Most recently, mixed martial artists fighting for the Ultimate FightingChampionships (UFC), a promoter, complained that the majority of fightersdo not get paid enough for the risks that they take in the ring or cage. Themedian pay per fight is $24,500, compared with the earnings of the bestknown fighters, such as Conor “The Notorious” McGregor, who regularlybags $500,000 per fight. The UFC recently bragged to an Economist correspondent that the UFC is the world’s most valuable sporting franchise– millions of Americans are happy to pay $60 per fight on pay-per-view TV. Indeed, the UFC is by far the most dominant employer of mixed martialartists.

Other areas into which the Teamsters have expanded include flight attendants, bakers, cheesemakers, zookeepers, and public servants suchas police officers. On the Teamster website, it says that the Teamster union“stands ready to organise workers who want to bargain collectively...(theyare the) guarantors of decent wages, fair promotion, health coverage, jobsecurity, paid time-off and retirement income”.


Mild Questions1

2

Medium Questions1

2

Hot Questions1

2

Trade Union

Union Mark-Up

Monopoly supplier of labour

Monopsony Employer

Bilateral Monopoly

Pecuniary Benefits

Non-pecuniary benefits

Collective Bargaining

Essential Key Terms

SAM

PLE

Sexism is expensive. Around the world, the female participation rate lagsbehind that of men. For example, in India, women make up less than aquarter of the paid workforce and account for just 17% of GDP. The femaleparticipation rate in Europe is 52%, in China is 64%, and in highest in sub-Saharan Africa at 65%. In “rich” parts of the world, where womenform nearly half of the workforce, they tend to work fewer hours than men, and in jobs with lower productivity, and receive lower pay as a resultof discrimination.

A recent report by McKinsey Global Institute a think-tank, has tried to estimate the likely increase in GDP if there was gender equality. Overall,McKinsey estimates that if the gender gaps in productivity, participationand hours worked were closed, then the world economy would be 26%richer (equivalent to an increase in global GDP of $28.4tr). Furthermore, anumber of studies show that companies with no female members on theirboards have lower profits than female-friendly companies.

The issue of machismo is particularly pronounced in Latin America, wherestudies report that men have a “misconception” that the “pie is only sobig” – if women take a larger share then there will be less for men. A significant proportion of men there also said that “men make better political leaders” and that “a woman’s place is in the home”.

The solutions aren’t completely obvious. Targets could be set so that countries close their gender gaps at the rate achieved by the country in their region with the best performance. Girls could stay in school forlonger. Laws could be introduced to make discrimination illegal. But attitudes and social norms are hard to change.


Mild Questions1

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Medium Questions1

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Hot Questions1

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Participation rate

Workforce

Productivity

Discrimination

Gender equality

Discrimination legislation

Essential Key Terms

SAM

PLE

The number of workers who own shares in the business that employsthem is at its highest – this share ownership can be in the form of profit-sharing plans and share-ownership reward schemes. Some schemes allow individual workers to own their own shares, whilst other schemes“look after” the shares in an “employee trust” – the latter is how thescheme at John Lewis works. Politicians of all backgrounds like the ideaof employee ownership – but why?

Employee ownership can help to reduce inequality by giving workers easieraccess to owning capital. Employee ownership can also help to boost productivity by incentivising workers – this is backed up by a number ofreputable studies, which also show that firms with a high proportion ofemployee-ownership have lower staff turnover. Employee ownership alsomeans that by building up wealth, workers have an alternative source offuture finance, rather than simply relying on ever-diminishing pensions.Employee ownership schemes can help to reduce the impact of the principal-agent problem.

However, one danger is that poorly-performing employees or managersmay stay too long in a business, because they have less incentive to findalternative employment. Also, given that the average life expectancy of aFortune 500 company is now around 15 years today, compared with 75years in the 1930s, encouraging employees to put their savings into shareownership schemes may not help to fund the pensions gap.


Mild Questions1

2

Medium Questions1

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Hot Questions1

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Shares

Inequality

Income

Wealth

Consumption-smoothing

Pension

Frictional unemployment

Productivity

Ageing population

Demographic timebomb

Essential Key Terms

SAM

PLE

A number of schemes now exist in Britain to fast-track bright graduatesinto professions where there are shortages of skilled workers. Teach Firstis a scheme that sends bright graduates into tough schools. Police Now, a programme that aimed to copy the Teach First approach, was started insummer 2015, and provides 6 weeks of training before sending new officers out on the beat with the Metropolitan Police. There is also Frontline,which recruits graduates for children’s social work, and Think Ahead,which recruits graduates for mental health social work.

An unexpected bonus of these approaches – which are characterised byheavy marketing and short, intensive training periods – is that they areadding to the diversity of the profession. For example, 42% of this year’sTeach First cohort were actually first-generation university students (inother words, parents / grandparents had not attended university).

Whilst schemes such as Teach First can make a dent in the problem ofteacher shortages, it still isn’t enough. Last year, 1 in 100 teaching posts in England was vacant. The number of people starting teacher trainingcourses fell for the 6th successive year to 32,000 down from 39,000 in2009. In subjects such as English and Maths, the problem is even worsewith an 11% shortfall in the number of trainee teachers. Existing schoolteachers don’t necessarily make a good advert – one third of allteachers want to leave teaching within the next 5 years.

A former government education advisor, John Howson, blames thesqueeze on public sector pay and the reduction in funding for the cost ofthe £9000 teacher training courses. As the school-age population rises,demand for teachers is rising, as the supply of teachers is falling. In a freemarket, this should push up wages and attract more to the profession –but this cannot happen in the UK, partly because of the public sectormonopsony, partly because of the training period, and partly because ofthe difficulty in getting a visa for overseas teachers.


Mild Questions1

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Medium Questions1

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Hot Questions1

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Skills shortage

Human capital

Workforce diversity

Monopsony employer

Immigration

Wage elasticity of demand forlabour

Wage elasticity of supply oflabour

Essential Key Terms

SAM

PLE

Jeremy Corbyn’s election as Leader of the Labour Party has thrown upsome interesting questions relating to labour markets, including puttingthe issue of maximum wages for high-earners back on the political radar.Should we take this area of Corbynomics seriously? And if so, why?

In an interview with The Herald in the lead-up to his victory, Mr Corbynsaid “Why is it that bankers on massive salaries require bonuses to workwhile street-cleaners require threats to make them work?...There ought tobe a maximum wage. The levels of inequality in Britain are getting worse.”

Stephen Kinnock MP, the son of former Labour leader Neil Kinnockresponded by saying that it sounded like a good idea, but could be counterproductive. He would prefer to “nudge” business leaders towards a cut in executive pay rather than raise moral objections.

Mr Corbyn’s view stems from the fact that the pay of senior executives hasrisen 9 times more quickly than the median earner, and indeed, the chiefexecutive of large companies such as British Gas and Barclays earn 1000times the national median wage. Overall, the share of national incomeearned by the top 0.1% has risen from 1.3% in 1979 to around 6.5%. Furthermore, the bosses of large companies are actually 13 times lesslikely to lose their job than the lowest paid workers in the UK – their payclearly does not need to compensate them for risk.

Even the richest 0.1% concede that they are not purely motivated bymoney. Bernie Ecclestone, owner of the F1 brand, has said “I doubt if anysuccessful business person works for money…money is a by-product ofsuccess. It’s not the main aim”. In addition, Jeroen van der Veer, who wasformerly the chief exec of Shell said “If I had been paid 50% more I wouldnot have done [my job] better. If I had been paid 50% less then I would nothave done it worse.”


Mild Questions1

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Medium Questions1

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Hot Questions1

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Essential Key Terms

Maximum wage

Bonus

Performance Related Pay

Inequality

Median salary

Lorenz Curve

Gini Coefficient

Pecuniary rewards

Non-pecuniary rewards

Wage differentials

Essential Key Terms

SAM

PLE

The Euro Area’s unemployment statistics published in the middle of 2015 contained both good news and bad. The good news was that the unemployment rate across the Euro Area had fallen to 11.1%, down from its peak of 12.1% in April 2013. The bad news was that long-term unemployment (those out of work for over 12 months) was stubbornly rising.Out of 19m unemployed Europeans, over half had not worked for at least a year, and 15% had been without a job for over 4 years. The problem isworst in Southern Europe. Economists have been scratching their headsover the conundrum – in other parts of the world that were also hit hard by the financial crisis and the ensuing recession, both unemployment andlong-term unemployment rates have been falling.

So why is it so bad in Europe? One reason is a lack of labour mobility. Despite the Common Market, in reality it is difficult for Europeans to move between countries because of language barriers, cultural differences,tax/benefit differences, and failure by employers to recognise qualificationsfrom different countries. Another reason could be the lengthy period overwhich the unemployed can claim benefits; in the USA, unemployment benefit can only be claimed for 26 weeks. Furthermore, in the USA, thereis much higher labour turnover than there is in the Euro Area – this meansthat work tends to be spread out more across the population and thatskills are kept higher in the US.

Worryingly, long-term unemployment can effectively be self-sustaining.The longer that someone is out of work, the more skills they lose and theless likely they are to find work again. Fertility rates tend to fall, mentalhealth problems increase, and life expectancy falls. Not all of the Euro Areais struggling. Countries such as Germany have managed to keep long-termunemployment at reasonably low levels through a combination of retrain-ing programmes, job-search support and supporting highly flexible labourmarkets.


Mild Questions1

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Medium Questions1

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Hot Questions1

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Unemployment rate

Long-term unemployment

Cyclical unemployment

Demand deficient

unemployment

Geographical mobility of labour

Occupational mobility of labour

Common Market

Hysteresis

Flexible labour market

Essential Key Terms

SAM

PLE

When a National Minimum Wage was first introduced into Britain in 1998, scaremongers claimed that it would have a detrimental impact onemployment levels, because the law of demand tells us that when prices,or in this case wages, rise the quantity demanded (of labour) will fall.There was scant evidence of this actually happening. A huge raft of labourmarket studies from many countries show that time and time again, a relatively modest minimum wage, set somewhere less than 50% of medianincome and with lower rates for younger, less experienced workers, haveno noticeable impact on unemployment. In fact, the NMW may have evenboosted output in the UK, causing rising productivity as a result of higherworker morale and increased incentives to work, plus a lower level of staff turnover.

However, policy makers across the developed world are increasingly suggesting that minimum wages should be higher. A new “Living Wage”will be introduced in the UK in April 2016, taking minimum wages from47% of median pay to around 54%. In the US, Hillary Clinton’s two main rivals for the Democrat nomination for the 2016 Presidential Election arecampaigning for a $15 NMW. Blanket rates across a country can cause issues – Germany’s NMW is pretty low compared to median wages in therich West of the country, but a large 62% of median pay in the poorer East.The higher the NMW, the greater the chance that it will cause unemployment.

As technological advances make many jobs redundant – think of self-servicecheckouts, for example – there will be fewer alternative jobs for those wholose theirs if the NMW is raised too high. Higher NMWs could encouragefirms to substitute even more capital for labour where possible. Finally, anNMW is not necessarily the ideal way to tackle poverty – it only reachesthose in work, whereas the very poorest have no job, and often no chanceof getting one. Higher wages cause labour costs to rise, and if firms maintain profit margins, that means higher prices for everyone – effectively,an NMW can act like a sales tax, and these are regressive.


Mild Questions1

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Medium Questions1

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Hot Questions1

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Law of demand

Median wage

Productivity

Marginal Product

Marginal Revenue Product

Labour turnover

Living Wage

Regional pay differentials

Unemployment

Classical unemployment

Capital-labour substitution

Poverty

Inequality

Regressive

Unit labour costs

Essential Key Terms

SAM

PLE

Britain’s flexible labour market has been touted by right-wing economistsand politicians as a key reason why unemployment in the UK during therecession from 2007 was not as high as in many countries. One element of Britain’s flexible labour market is the zero-hours contract. Such contractsallow an employer to employ someone for as many or as few hours as theemployer requires, often with very little notice. In the UK as a whole, about4% of workers are on zero-hours contracts, but this is much higher, ataround 25% in the hospitality sector, where demand for services can bevolatile.

47% of workers on zero-hours contracts are said to be really happy withtheir contract – most of these are also students, who need the flexibility in order to be able to study, and others are pensioners, who are simplyworking occasionally to top up their pension. However, one quarter of allworkers on zero-hours contracts say they are deeply unhappy with theterms. Many of these workers were forced into jobs with zero-hours contracts when recession hit and they lost permanent jobs; businesseswere reluctant to take on permanent employees because of the additionalcost, especially if there was a risk of declining demand and the subsequentcost of redundancy payments.

Zero-hours contracts can allow businesses to tentatively expand withoutmaking firm commitments, and test out new ideas. However, they can give too much power to exploitative businesses. Some contracts contain“exclusivity” clauses, whereby the worker cannot seek alternative work to supplement their income even if they work few or no hours. Employersknow that many workers on zero-hours contracts are highly immobile –tied to an area with family commitments, or have low skills that make itdifficult to change jobs. Some businesses also refuse rights such as maternity pay/leave and sick pay to those on zero-hours contracts.

Such contracts are not as new as we might think. In Britain’s manufacturingheyday, workers could be put on “short time” when demand was low, andworkers have worked seasonally for centuries – harvesting in late Summerand Autumn, for example.


Mild Questions1

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Medium Questions1

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Hot Questions1

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Flexible labour market

Unemployment

Under-employment

Wage elasticity of labour demand

Wage elasticity of labour supply

Pension


Demand-deficient / Keynesianunemployment

Redundancy payments

Geographical immobility oflabour

Occupational immobility oflabour

Employment rights

EU Directives

Seasonal unemployment

Essential Key Terms

SAM

PLE

In August 2015, Minister for the Cabinet Office Matthew Hancock MP, announced that from April 2016 unemployed young people would need to attend a 3 week “boot camp”, in which they would practise interview technique and job application writing, in order to continue receiving benefits.The youth unemployment rate in the UK is three times the national unemployment rate, and is remaining stubbornly high.

Young people are both structurally and cyclically unemployed. The youthunemployment rate has been on the increase since 2004, when the Britisheconomy was booming suggesting some sort of underlying cause, and hasunsurprisingly worsened since the onset of the Great Recession. During recession, it is not surprising that young people are laid off quickly – firmsseek to keep hold of those, usually older, workers with experience andskills.

Outside of recession, high youth unemployment in the UK can be attributedto a number of factors. Firstly, young people are often unsure of the careerpath they would like to follow so may move about between jobs frequently;effectively, frictional unemployment is quite high. Secondly, many youngpeople are not geographically mobile – they may live with parents, orstruggle to access social housing. Being young, they are unlikely to havesaved enough to put down a deposit to buy a house, or their income is too low to pay for rent. Thirdly, skill deficiencies amongst the young haveincreased. One in seven British youngsters leave school early, and consequently Britain has the third highest share of youngsters with poorliteracy and numeracy skills amongst OECD countries. British NEETS(youths Not in Employment, Education or Training) are the most illiterateand innumerate in the OECD. These young people are increasingly describedas the underclass of Britain. Fourthly, the recent EU Directive on AgencyWorkers further limits the opportunities for young people to gain valuable,albeit temporary, work experience. Finally, a Canadian study recentlyshowed that minimum wages can really hurt the young. In the UK, theNMW for 18-21 year olds is set at 65% of median pay for that age group.The Canadian study suggests that a youth NMW over 45% of median paywill cause unemployment.


Mild Questions1

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Medium Questions1

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Hot Questions1

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Youth unemployment rate

Unemployment rate

Structural unemployment


Economic growth

Great Recession

Human capital

Frictional unemployment

Geographical immobility oflabour

Occupational immobility oflabour

Skill shortages

Transferable skills

NEET

EU Directives

Labour legislation


Classical Unemployment

Essential Key Terms

SAM

PLE

The National Basketball Association (NBA) is the US has experienced 4 so-called “lockouts” in its history, and another one appears to be loomingfor 2017. The most recent lockout was in 2011, lasting 161 days and cuttingthe season from 82 to 66 games, resulting in a huge loss of revenue, around$2.7bn, for the NBA, and loss of revenue from advertising of $1bn for TVcompanies. An estimated 400 jobs were lost at the NBA, and the lockoutreduced the salaries of players by around $220,000 each.

The NBA is a major brand, and is responsible for the process of signingplayers to teams and organising fixtures. All US-based basketball playersbelong to a trade union, the aptly-named National Basketball Players Association (NBPA). The 2011 lockout was prompted by the expiry of the2005 Collective Bargaining Agreement (CBA) that had been reached betweenthe NBA and the NBPA. Neither side could agree on salaries, or the shareof revenue earned by the NBA that was to be distributed to the players. The NBA wanted to reduce the share of their revenue going to players fromthe previously-agreed 57% down to 47%, but the NBPA demanded 53% as a compromise. The NBA also wanted to implement a “hard” salary cap(effectively a maximum wage which cannot be exceeded) but the NBPApreferred a “soft” salary cap (a maximum wage that can be breached butthat is “fined”). During the lockout, basketball players could not attendtraining sessions, or access the professional NBA facilities or staff. Manyplayers went to play in Europe or Asia on short-term contracts that allowedthem to return to the US once the lockout ended.

Technically, the CBA that was signed in 2011 is only due to expire in 2021.However, there is an opt-out clause allowing the two sides to renegotiatefrom December 2016. This current season has seen a huge injection in TVrevenue, as a new contract worth $24bn with sports channels ESPN andTurner comes into effect. This has raised the salary cap automatically by33% for the 2015-2016 season. The NBA is unhappy with the additionalmoney going to players, and would rather keep more of it for itself. Theoutcome is not an obvious slam-dunk.


Mild Questions1

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Medium Questions1

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Hot Questions1

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Monopsony employer

Monopoly

Trade union

Collective bargaining

Bilateral monopoly

Zone of bargaining

Salary

Salary cap

Maximum wage

Essential Key Terms

SAM

PLE

Judges in America are currently grappling with the issue of “what is anemployee?” Some Uber drivers want to be classified as employees, ratherthan independent contractors or freelancer, as being an employee givesthem more rights. Such rights include access to benefits such as sick pay,maternity/paternity allowance, access to employer pensions, employercontributions to national insurance, and also a guarantee of a minimumwage. When Uber was founded in 2009, 88% of their drivers were alreadyworking as contractors / freelancers.

Whether firms should use freelancers or actually take on employees is aquestion tackled by Ronald Coase’s well-known 1937 work on transactioncosts. He said that when the transaction costs of dealing with a worker arehigh, it can be better to employ them, but when transaction costs are low,they should be freelance, and just “contracted in” when needed. Industriesin which tasks can be divided up and easily monitored tend to be those industries in which contractors are used.

A key issue being explored by the judges in this case is the market share,or dominance, of Uber. They feel that the more powerful Uber becomes the greater the negotiating power that the firm will have over its drivers. At this point, Uber drivers may need to have some additional protection inorder to “even up” negotiations.

This issue of freelancer vs employee looks set to spread into other industries,especially in the UK. Following the Great Recession, many of those whowere made unemployed, or who couldn’t make ends meet on reduced-hours contracts, turned to self-employment and freelancing. This is onereason why the unemployment figures perhaps didn’t look as worrying asin previous recessions. In a recent survey, 69% of graduates thought thatworking freelance would give them a better work-life balance, with 29%saying that freelancing was part of their career strategy over the next 5years.


Mild Questions1

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Medium Questions1

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Hot Questions1

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Employee

Employment rights


Transaction costs

Monopsony employer

Great Recession

Income effect

Substitution effect

Essential Key Terms

SAM

PLE

In September 2015, the British Medical Association (BMA) announcedplans to ballot its members regarding a strike over the Department forHealth’s plans for junior doctor contracts. The proposed new contract includes pay cuts of up to 30%, no overtime payments for unsociablehours, a cut of 40% in pay for trainee GPs, and no payment protection forfemale doctors who go on maternity leave. Most doctors would prefer notto strike, but see very little option. For once, even the general public seems to support strike action.

However, industrial action has been on the decline for several decades, as has union membership, which in the UK has fallen from a peak of 13min 1979 to around 6m in 2015. One reason is the change in the structure of the economy. Unions were particularly powerful in manufacturing industries, but as the UK has become more service-based, membershiphas declined. Globalisation has also made it more difficult for unions to negotiate better pay deals, because firms can simply move manufacturingabroad. There has also been a large rise in the amount of labour marketlegislation in the UK (mostly stemming from EU Directives, which compelthe UK government to convert the EU law into UK law). This legislation effectively replaces the role carried out by unions, in terms of negotiatingminimum wages, benefits, and paid time-off, for example. Finally, as theworkforce becomes more flexible, with a greater number of self-employedand part-time workers, union membership just seems less appealing andless relevant.

To reverse the trend, some unions are trying to modernise by, for example,engaging with younger people over social media and developing employmentapps, and making it clear that they offer a broader range of services, suchas free legal advice, rather than just focusing on strike action. They havereceived a large boost in the form of Jeremy Corbyn’s election as Leader of the Labour Party – he even attended the Trades Union Congress inBrighton immediately following his election, saying “I am, and always will be, an active trade unionist”. Unions are also piggybacking on risingeconomic growth. Rising growth should result in higher pay, and unionswant to ensure that happens.


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Trade union

Strike action

Industrial action

Ballot

Structural change

Globalisation

EU Directives

Labour market legislation


Welfare State

Flexible labour markets

Derived demand for labour

Essential Key Terms

SAM

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Britain’s workforce is ageing. Between 1995 and 2015, the number of peopleaged over 65 and still in work doubled to 1m. Over the same period, thenumber of workers aged 50 to 64 rose by 60%, to around 8m. Despitesoaring unemployment during recession, employment of the over 65s actually rose. Clearly, one obvious explanation of this trend is that peopleare living longer, and therefore need to earn money for longer. Another explanation is that from 2006, the government has allowed people to workwhilst claiming their state pension. The retirement age is also rising, andwill reach 67 by 2028. Pensions now pay less in real terms than they usedto – a combination of poorly performing investment plans and fewer final-salary pensions – so pensioners need to work in order to maintaintheir living standards.

Companies are also actively recruiting older workers. In 2012, a branch of B&Q (a DIY store) had a 95 year old employee; B&Q actively scrapped its retirement age back in the 1990s following an experiment at their Macclesfield branch in which the store was entirely staffed by people over50 for 6 months, resulting in an 18% increase in profits and a five-sixthsreduction in staff turnover. In August 2015, Barclays Bank launched itsBolder Apprentices scheme, in which over half of its initial intake of recruitswere over 40, with several in their 50s. Companies generally praise the“soft skills” of their older workers, especially reliability, communicationskills and loyalty. A 2013 study by Mercedes-Benz at one of its truck-assembly plants in Germany found that its older workers made slightlymore mistakes but they were significantly less severe than those made by younger workers.

However, old people do still face issues when trying to enter employment.Younger managers may not understand their qualifications (O levels, ratherthan GCSEs), or fear that having older people in the workplace may blockprogress of young bright workers. There is also a concern that older workerswill cost more if redundancy payments are needed. However, with a largeskills shortage problem in the UK, we may well come to rely on our olderworkforce.


Mild Questions1

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Medium Questions1

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Hot Questions1

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Ageing population


State pension

Defined-contribution pension

Defined-benefit pension

Final salary pension

Living standards

Transferable skills

Soft skills

Productivity

Redundancy

Skills shortage

Essential Key Terms

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A2 Essential Economics

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Weak to Strong


Question Set 1 – economies of scaleExample question and answerQuestion: State and explain two types of economy of scale from which a large airlinecompany may be able to benefit.

A weak answerQuestion: State and explain two types of economy of scale that a large, national carhire company could benefit from.

Weak answer: Economies of scale are something that large firms can take advantageof. There are many different types of economies of scale, such as purchasingeconomies, financial economies, technical economies, division of labour, marketingeconomies etc. National car hire companies can definitely buy in bulk and benefit fromlower interest rates compared with small local companies.

Your task: from weak to STRONG. Rewrite and improve on the answerto the question above.

Answer: Economies of scale can be defined as‘falling long-run average costs as the level of outputrises’. There are many different types of economiesof scale. Two which are likely to be relevant to an airline are purchasing economies of scale and technical economies of scale. Purchasing economiesof scale arise because large firms are able to negotiatediscounts with suppliers because of the large quantitiesthat they buy i.e. bulk-buying discounts. Goods/services that large airlines might buy include airlinemeals and cans of fizzy drinks, jet fuel and seat-backTV screens. Because they buy so many of theseitems, they are likely to be able to buy them at a lowcost-per-unit. Airlines may also benefit from technicaleconomies of scale, for example, British Airways hasits own maintenance depot at Heathrow airport withlarge engine-testing machines and its own airplane-spraying machines – smaller airlines may not be ableto justify buying such large and expensive capitalequipment of its own as it would get little use.

Theory of the firm application questions – making your answers GREAT!Given below is a set of questions relating to market structures and business economics.Read the example answers and accompanying commentary, and then use these skills toconvert the weak answers into great answers!

Good definition to start with – showssound knowledge /AO1.

Clearly answers thequestion, giving twodistinct types ofeconomy of scale.

Each economy of scaleis then described andspecifically related tothe market/industry inthe question, showingprecisely how it contributes to fallingaverage costsSA

MPL

E


Weak to Strong


Question Set 2 – monopolyExample Question: Comment on the extent to which Kelloggs has a monopoly overthe breakfast cereal market.

Question: Comment on the extent to which Dyson has a monopoly over the market for vacuum cleaners.

Weak answer: A monopoly is a market structure in which there is just one firm. Mosthouseholds these days have a Dyson cleaner and it is the main type of vacuum cleanerthat is bought. This means that Dyson has a monopoly.


Example Answer: The main characteristics of a monopolyinclude price-making power due to being the dominant supplier in an industry, supernormal profits in both the shortrun and long run, and high barriers to entry and exit. We canassess whether Kelloggs has a monopoly by consideringeach of these characteristics in turn. Kelloggs is certainly a very large company and offers consumers a huge rangeof well-known cereal brands. However, it is difficult to arguethat Kelloggs is the most dominant cereal manufacturer,since Nestle has a large market presence, and there is arange of smaller but still popular cereal companies such as Jordans, Quaker and Weetabix. So, whilst Kelloggs iscertainly a large and significant player in the cereal market,it faces competition from other large companies, suggestingthat perhaps the market is more oligopolistic than monopolistic when assessed in terms of number of firms.Without having access to data on whether Kelloggs is profitable, it is difficult to assess its structure against the2nd characteristic, that of long run supernormal profit.However, it is likely that the company is profitable given its large presence in many family homes and the relativelyhigh prices of Kelloggs cereal compared with supermarket own-brand cereal. We turn now to the 3rd characteristic,that of high barriers to entry. There are many cereal companies selling goods in the UK, including some specialist/niche providers in health-food shops, for example. Cerealdoesn’t appear to be a particularly difficult product to makeas raw materials are relatively abundant and non-complex,and it cannot really be patented. This suggests that barriersto entry are relatively low. However, it would be difficult forsmall firms to compete with the marketing firepower of acompany such as Kelloggs – they advertise their productson prime-time TV which is expensive and their branding isinstantly recognisable. It would be difficult for new firms to compete with this, suggesting that Kelloggs does have market power. Overall, it is likely that the market is closer to oligopoly than monopoly.

Sensible start with an outline of the characteristics of monopoly – picking upAO1 marks straightaway. This list of characteristics is thenused to good effect toform a sound structure.

Each characteristic istaken in turn and an argument in favour, with evidence, and an argument against isgiven – this means thatevaluation is automaticallybeing built in as the answer progresses.

The answer continuesby being specific aboutthe cereal market usingbasic general knowledge.

The answer finishes by directly answering thequestion – reaching ajudgement allows thehighest marks to bereached.

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Weak to Strong


Question: Comment on the extent to which a TV channel such as ITV aims to maximiseprofit.

Weak answer: All economic theory suggests that firms maximise profits. Profits are important for businesses so that they can keep going in the long run. Other objectivesof firms include increasing market share, reducing costs and being efficient. It is likelythat ITV will want to do all of these things, and that aiming profits is just one objective.


Example Answer: Economic analysis generally assumes that businesses aim to maximise profits (orminimise losses). Profit maximisation is achieved atthe level of output at which a firm’s marginal revenueis equal to its marginal cost. Profits are important tobusinesses because they are a source of funds thatcan be used for investment and R&D, as well as a reward for entrepreneurial risk-taking. It is likely thatevery privately-owned business wants to earn atleast normal profit. For a wine-dealer, profits may beused to fund travel to new vineyards and to maintaincontact with suppliers around the world, as well asinvesting in trying to find new clients. Therefore,profit is certainly going to be important. However, theextent to which a business is likely to maximise profitis debatable. For starters, very few firms are able tocalculate their marginal revenue and marginal cost,so they are unlikely to know whether they are at theirprofit maximising point. One reason for this difficultyis that firms rarely increase output just one unit at atime. Wine dealers are likely to buy and sell in bulk,and therefore won’t know what the extra costs/ revenues are likely to be. It is more likely that winedealers will have an objective of profit-satisficing i.e.earning an amount of profit with which they are happy– it is easier to set this sort of target and meet it.However, wine dealers may also have other objectives,such as trading in fair-trade or ethically-responsiblewines, or to be considered experts in wine from certain regions or grapes. These objectives, however,are still likely to be tied in to earning profit.

AO1 marks picked up at the start for a clearoutline of what is meantby profit maximisationand some technical detail.

The justification for maximising profit is alsogiven – this strengthensthe argument as to whyfirms want profit. This isthen applied specificallyto the example in thequestion.

A theoretically-based justification for not maximising profits isgiven, followed by otherobjectives that are specific to the wine dealer example ratherthan being generic.

A final judgement isreached.

Question Set 3 – business objectivesExample Question: Comment on the extent to which a business such as a wine dealeraims to maximise profits.

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PLE

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