Wage determination Essay PDF

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Concise essay on wage determination with diagrams...

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Explain how wages are determined in the labour market and analyse the impact of rigidities in the labour market on wages and employment in the Australian economy. Explain how labour market policies can be used to achieve Australia’s economic objectives. Overview Since the labour market policy reform of decentralisation, wages and conditions are determined by the intersection of the demand and supply curves, in turn influencing wage growth and employment. Australia’s current industrial relation is governed by the Fair Work Act 2009, further developing the ten National Employment Standards (NES), which helped facilitate the movement away from a centralised wage system to flexible individual agreements at a firm or enterprise level. Wherein the minimum wage (currently $19.49) and conditions per type of employment act as a safety net of modern awards. In addition, the “Low-paid bargaining stream” system gave stronger bargaining power to low-income workers, as they were guaranteed union representation in wage determination processes. These intiatives and decentralisation will improve Australia's income distribution, with the NES allowing greater flexibility in wages and working hours in turn, improving productivity. Therefore during negative economic shocks, firms are able to cut back on hours and wages instead of retrenching workers—resulting in a flexible labour market which can easily cope with external economic shocks and structural changes. However, these improvements are largely offset by the ban of all new individual agreements with subdued wage growth, reduced incentives to raise their productivity. Statistic It has also resulted in increased wage dispersion (widened wage inequality), as enterprise agreements link wage increases and productivity growth. Hence, higher skilled workers can bargain for increased wages whilst low skilled workers will have less bargaining power. Despite the decentralised system linking wage increases to productivity growth, discouraging excessive wage increases. The Fair Work Act is weakening this link as cost-push inflation occurs when wage growth decreases the aggregate supply in the economy.

Wage rigidity Wage rigidity occurs when the government fails to prevent wages from falling until labour supply equals demand, or equilibrium levels. the failure of wages to adjust until labour supply equals labour demand. The unemployment resulting from wage rigidity and job rationing is called structural unemployment. Workers are unemployed not because they can’t find a job that best suits their skills, but rather, at the going wage, the supply of labor exceeds the demand. Thus they must wait for vacancies. As seen in Figure 1.1 if the real wage is stuck above the equilibrium level, then the supply of labor exceeds the demand. Result: unemployment U.

Another cause of wage rigidity is the monopoly power of unions. In Australia, only 15% of workers belong to unions. Union contracts often set wages above the equilibrium level and allow the firm to decide how many workers to employ. This results in a decrease in the number of workers hired, a lower rate of job-seeking, and an increase in structural unemployment. This unemployment is an instance of the insider-outsider theory, involving different groups of workers. The insiders, those employed by a firm bargain over wages, with an interest in maximising their own wages ratther than expanding jobs by holding wages down and allowing outsiders to become employed. Due to the labour turnover cost, or the high cost to replace workers, firms have a strong incentive to bargain with insiders. The outsiders (unemployed) become increasingly less relevant in the bargain as insiders use dissuade outsiders from underbidding their current wage. Therefore, the labor market does not see wage underbidding despite the willingness of many unemployed workers to work at a lower wage. Thus, resulting in market failure as the wage is not being set according to the market's needs or preferences. Job Services Australia, a federally funded network of employment agencies, provide assistance to job seekers, thus reducing frictional unemployment by helping people find jobs faster. Conclusion Conclusively, changes to the industrial relations policy has enabled lower wage growth, and increased the flexibility of the labour market. This has enabled Australia to experience unemployment levels about 3% lower than the OECD average, despite higher minimum wages. However, it has also created wage dispersion and potentially cost-push inflation with excessive wage growths....