James Cook University Faculty of Law, Business and the Creative Arts School of Business BX3024 / EC5207 Contemporary

Economic Policy and Social Welfare Semester 2, 2011 Tutorial 11 (27 October) Question 1: OECD Job study In its 1994 job study the OECD recommended its members to reform the labour market (i.e. its institutional setting) in several ways. a) Discuss the recommendations related to micro economic deregulations. 1. Increase working time flexibility. 2. Nurture an entrepreneurial climate. 3. Increase wage and labour cost flexibility. 4. Reduce employment security provision. 5. Improve labour force skill levels. 6. Reduce the level and length of unemployment benefits. In 2007 the OECD reviewed its recommendations and revised some of its recommendations: notably two. b) Discuss these two revised recommendations. The OECD concluded that there are many roads that lead to Rome. It distinguished three such roads. c) Discuss the characteristics of the three roads put forward by the OECD. The Anglo-Saxian, the Rhineland and the Scandinavian models

Question 2: Work Choices The Work choices labour market reform package implemented by the previous Australian government is a clear example of a policy package that was inline with the OECD Job Study 1994. a) What 1994 recommendations did the Work Choices package address?
b)

How should that package be evaluated in hindsight, i.e. knowing the back flip that the OECD made?

* Question 3: Labour unions The influence of labour unions on wages has been hotly debated over the last decades. Textbook economics would suggest that the introduction of labour unions in wage negotiations would lead to upward wage pressure, reducing employment. The influence of unions in a labour demand / supply framework usually runs through the labour supply curve. So lets focus on that curve. The labour supply curve can be derived using a trade off between leisure and (earning) income. The upper panel of Figure 1 gives such a trade off. a) Show that trade-off in the upper panel of Figure 1 and use it to derive an upward sloping labour supply curve in the lower panel. Justify your answer.

income

w2 w1 Es1 leisure wage Es2 Es3 LS w2 w1

Es3

Es1

Es2

employment

The analysis in sub question a) does not incorporate the presence of a labour union. b) Use Figure 2 to demonstrate the consequences for the wage and employment outcome of introducing a labour union. Justify your answer. Figure 2

LSunion LS

LD

employment

Though textbooks would suggest that the presence of labour unions would lead to higher wages (i.e. wage pressure), reality is (as per usual) more complex. Empirical evidence seems to suggest that wage pressure because of labour unions depends on the degree of centralisation of wage negotiations. That is, if the wage negotiations predominantly take place at the firm level (so firms negotiate with the labour union representing the employees of the firm), wage pressure is limited (for example in the US). If wage negotiations take place at the sector level, wage claims are relatively significant (Australia?). If wage negotiations take place at the national level, wage claims are moderate again (Sweden). Figure 3 shows this humped shaped relation between the degree of centralisation and wage pressure. c) Explain this phenomenon. Figure 3
Wage pressure

Unions may not only negotiate wages for employees, they may also be involved in bargaining nonwage income. 13th month pay is such an example. Assume youll get it of wage bargaining many hours Degree of centralisation regardless how you work per week. d) Use Figure 1 to demonstrate what the impact of the introduction of 13th month pay would be on labour supply.

income

w2 w1 Es1 wage LS2 LS1 Ess2 E3 leisure

w2

w1

Es3

Es1

Es2

employment