Government Intervention

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Government Intervention

Unemployment Benefits

Unemployment benefits have an important influence on labour supply, especially for low income workers. If unemployment benefit is provided at too high a level then workers may opt to live on unemployment benefits rather than take up low-skilled (and low-paid) employment. A reduction in unemployment benefits may induce an increase in labour supply. However such a policy needs to be balanced against the need to provide a safety net for those who are unable to find work.

Incentive Effects

There are dangers in making the taxation system to progressive. Most people agree that income tax should be relatively progressive (those who are on higher incomes should pay a higher rate of tax than those on lower income as a form of redistributing incomes within a society and preventing inequality from extremes). However there comes a point where the tax rates are so high that a large proportion of additional is taxed away, reducing the incentives for individuals to supply additional effort or labour. This may result in a shift from highly skilled, highly paid jobs.

Minimum Wage

The market for labour shows an example of government intervention in the form of minimum prices. This is known as the national minimum wage (NMW) were every worker has to be paid a certain wage. The effect of this is shown on the graph to the left.

Firms want to buy Q1 units of labour at the minimum wage, whereas workers want to supply Q2 units of labour at the minimum wage, this causes excess supply (unemployment).

If the NMW was to be lowered then there would be an increase in the quantity of labour demanded but at a lower wage.

We can see that there is a lower excess in supply as the NMW is reduced.

Trade Unions

Trade unions are associations of workers that negotiate with employers on the pay and working conditions of members of the union. Trade unions have 3...
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