1 

1. Wealth of Nations- Adam Smith

2. Factor mobility means that factors of production- land, labor, and capital- are free to move between firms within an industry and between industries within a country, but are immobile between countries.

Hence, the correct answer is option D.

2 

Answer:

Introduction

This course will give you a stimulating and insightful account of the ways in which economists have tried to understand what labour market discrimination is and what its sources are. Notice the reference to the ‘ways [plural] … economists have tried to understand’. The most basic message of this course is that economics is not a subject in which there is one single correct answer.

This course will also assist you in developing your ability to use and evaluate economic theory, and help you build or improve other academic skills. The evaluative skills developed will help you to begin to form a properly considered view about the merits of the alternative theoretical approaches.

This OpenLearn course provides a sample of Level 2 study in Politics.

Learning outcomes

After studying this course, you should be able to:

• understand the main features of the core neoclassical microeconomic theory

• give examples of key ideas, theories and debates in microeconomic theory

• illustrate a variety of applied economic theories and models to analyse economic problems and events.

1 Synopsis

1.1 A contentious issue

This course discusses a contentious issue in economics: why particular groups, such as women or minority ethnic groups, are disadvantaged in the labour market. It compares different theoretical and empirical explanations for why such systematic labour market disadvantage is experienced by some groups in society.

Click to view 'The neoclassical school of thought and its rivals'

Neoclassical theory would predict that profit-maximisation considerations by competitive firms would ensure that all workers are paid their marginal revenue product. Therefore, if one group of workers is systematically paid less than another it should be that the groups differ in their productivity. If this is not the case and workers of equal productivity are paid differently, then there is discrimination. Therefore, discrimination is due to a failure of competition that allows non-profit maximising behaviour to persist. Two neoclassical theories of how such discrimination could occur are examined in this course. Both explain labour market disadvantage in terms of discrimination against workers who have, or are thought to have, particular characteristics.

Click to view 'The institutional school of thought'.

This course also introduces an alternative institutional approach known as ‘segmented labour market theory’, which views the labour market as a collection of parts or segments. Using the idea of a distinction between primary and secondary labour markets, this theory argues that some groups of workers are restricted to secondary labour market jobs. These workers are then low paid because of the jobs they do. Labour market disadvantage, then, is not due to the characteristics of the workers, but the characteristics of the jobs that they do. The issue then becomes why such different labour markets exist and why particular types of workers are restricted in their access to the better jobs in the primary labour markets.

This course also provides good examples of how different theoretical perspectives lead to different policy prescriptions.

Neoclassical economists believe that making the world more like the characteristics of the neoclassical model of perfect competition will remove many problems. In particular, promoting competition will make discriminating employers go out of business, and improving information about individual workers would help remove statistical discrimination, so that firms did not need to use stereotypes based on group characteristics in deciding whom to employ.

Institutional economists, on the other hand, believe that the causes of labour market disadvantage are structural, built into the institutions of the economy, therefore effort has to be put into tackling the low pay and poor working conditions of secondary labour market jobs. Competition alone will not do this, nor will it remove the barriers that workers trapped in such jobs face in getting into better jobs. Institutionalists would be likely to advocate direct government intervention, possibly by promoting affirmative action or tackling low pay through equal pay legislation. In this case, as one might expect, a theory that sees these causes of labour market disadvantage as institutional promotes an institutional solution.

1.2 Key ideas

1. Labour market disadvantage can be manifested in a number of differences between the labour market experiences of different groups: differences of pay, of likelihood of unemployment, and differences due to occupational segregation.

2. Labour market disadvantage and discrimination are not the same thing. Discrimination refers only to those differences between groups of workers that do not correspond to objective characteristics that affect the productivity of these workers or the work they are doing.

3. If there is discrimination we need an explanation of why it occurs, since competition should eliminate it.

4. Even if there is no discrimination, we still need to explain why particular groups suffer labour market disadvantage. This might be due to discrimination somewhere else in society, e.g. in education, training opportunities or responsibilities for children.

5. Institutional theories tend to focus more on explaining why there are some jobs in which workers suffer labour market disadvantage. These workers will have low productivity so will not necessarily be facing pay discrimination. Rather, the labour market disadvantages that these workers face are institutional barriers to moving into better jobs. However, there may other forms of discrimination that explain why members of particular groups face such institutional barriers and so are concentrated in these poor productivity jobs.

6. Neoclassical theories explain labour market disadvantage by the characteristics of the individuals filling the jobs, and why, for example, such individuals may not have invested in their own human capital. They therefore focus on the supply side of the labour market to explain any labour market disadvantage that is not due to discrimination. They also have theories to explain why some employers may discriminate in their employment practices, for example through lack of information about individuals or a distaste for employing members of certain groups.

7. Both approaches focus on productivity differences. However, the neoclassical approach sees these as a result of differences between individuals, in inherent abilities or in tastes that lead individuals to invest differently in human capital. The segmented labour market approach, however, emphasises institutional structure as creating jobs of different productivity. Workers adapt to the jobs they can get rather than the other way round.

2 Discrimination in the labour market: introduction

Discrimination can manifest itself in all aspects of life. It may be evident in the type and location of housing available to certain groups, in their access to quality education and health care or how they are treated in the labour market. We will focus on the last of these considerations and, in particular, why the labour market status of some groups of workers is significantly worse than that for the population at large. This does not mean that discrimination in the labour market is a more relevant consideration than other forms of discrimination, nor should it imply that labour market discrimination is independent from other forms of discrimination. Indeed, some economists would argue that a satisfactory explanation of labour market discrimination can only be developed when it is recognised that all forms of discrimination are related.

The fact that some people do better or worse than others in the labour market does not, in itself, signify the presence of discrimination. It would be more surprising if such differences were not observed. What is harder to explain, however, is why particular groups of workers are disadvantaged in the labour market. Why do women and members of minority ethnic groups, for example, face significantly lower wages and poorer employment opportunities as a group? In this course we focus on the general observation that certain characteristics – gender, race, religion, age – actually matter in the labour market when there is no apparent reason why they should.

In the next section we outline the extent to which disadvantage in the labour market varies. There are, of course, many different dimensions to labour market disadvantage. The most obvious is differences in average earnings which may arise either because people from disadvantaged groups are paid less for doing a particular job or because they end up in (or are ‘crowded’ into) low paying jobs. A second dimension of labour market disadvantage is that the level of unemployment is higher for certain groups of workers than for others. Linked to this is the observation that disadvantaged groups are concentrated in jobs with higher turnover rates and greater job insecurity. Finally, some groups may be disadvantaged in terms of the type of work they have access to, with an emphasis on menial and repetitive tasks. Since there are many different ways in which labour market disadvantage can be measured, it is perhaps not surprising that there are also different types of discrimination. The two main types will be considered.

The theories proposed to explain discrimination in the labour market are equally diverse. Differences are reflected not simply in terms of the underlying theoretical framework adopted but also in the particular aspects of labour market behaviour which are focused upon. Explanations which can be grouped under the heading of neoclassical theories focus mainly on the supply side of the labour market, such as the relationship between labour market disadvantage, low productivity and low levels of investment in human capital. Other, non-neoclassical theories, such as segmented labour market theory, concentrate on the limited access certain groups of workers have to ‘good’ jobs (independent of their human capital) and upon why there is segregation in access.

3 Labour market disadvantage

3.1 Gender-based disadvantage

The post-war period has seen a significant increase in the participation of women in the labour market, with women now making up around 45 per cent of the UK workforce. Although women still undertake the major share of family responsibilities and domestic activities, an increasing number of women are entering the labour market. This increase is evident in many countries and has been associated with an improvement in the relative earnings of women. This trend towards greater equality is evident in Table 1, which shows the ratio of female to male earnings in a number of countries over the period 1960–1980.

Table 1: The ratio of female to male hourly earnings in selected countries, 1960–1980

	1960	1970	1980
Australia	0.59	0.59	0.75
France	0.64	0.67	0.71
Germany	0.65	0.69	0.72
Italy	0.73	0.74	0.83
Japan	0.46	0.54	0.54
Netherlands	0.60	–	0.71
Sweden	0.72	0.84	0.90
UK	0.61	0.59	0.75
USA	0.66	0.65	0.66
USSR	0.70	0.70	0.70

Source: Mincer, 1985

Activity 1

For the period 1960–80, identify:

1. the country with the largest reduction in inequality

2. the smallest reduction (or no reduction at all).

Reveal answer

The labour market is complex and the two observations that more women now participate in the labour market and that there has been a narrowing of relative wage differentials reflect a number of possible relationships. On the one hand, it may be the case that more women participate because female wages have increased over time. On the other hand, the stronger commitment of women to the labour market could, in itself, increase female wages and narrow the earnings differential. Thus, if higher wages and higher participation are statistically associated, there are various views on causation which the labour economist must disentangle.

Despite the improvements that have taken place overtime, however, it would be misleading to overemphasise the advances that have occurred in the relative position of women in the labour market. Nearly 45% of working women in the UK, for example, are employed part-time, at pro-rata wages well below those of full-time workers. According to People Management, ‘Women working on a part-time basis earn only 58% of male full-time workers' pay rates’ (6 February 1997, p. 8).

Data from the New Earnings Survey (1995) reveal that the earnings of women working full-time are also significantly below those of men in comparable jobs. As Table 2 shows, the average weekly earnings of women managers in 1995 was 68 per cent that of men. This ratio, earnings of women to men, of about two-thirds, was reported in six out of nine occupational groups.

Table 2: Average weekly earnings by occupation 1995 (£)

	Men (£)	Women (£)	Ratio: women/men %
Managers	537.00	367.80	0.68
Professionals	499.70	407.90	0.82
Associate professionals	442.90	333.30	0.75
Clerical and secretarial	269.90	230.40	0.85
Skilled manual	318.30	191.20	0.60
Personal services	296.10	198.70	0.67
Sales	310.30	199.90	0.64
Plant and machine operators	293.70	201.50	0.69
Other	250.50	170.80	0.68

Source: New Earnings Survey, 1995

Women may have to wait many years before they achieve equal pay with men. People Management state that, ‘… the average earning discrepancy between men and women remains at around 20 per cent. At the current rate of improvement, women will have to wait until 2040 before they achieve parity’ (6 February 1997, p.16). Also, according to People Management, ‘… surprisingly, the gap remains widest of all in professional occupations. For example, women bank and building society managers earn 36 per cent less than men in similar posts’ (ibid).

That women are paid less within even narrow occupational categories can arise for a number of reasons and does not necessarily involve women being paid less than men for doing the same job. It may reflect the nature of the organisations that employ women or the fact that women are typically employed at lower grades within occupational categories. For example, there is evidence that women academics are appointed at lower points on the university lecturer scale than comparable men and that they are less likely to become senior lecturers, readers and professors (McNabb and Wass, 1997). The failure of women to make significant progress in the professions and in senior management and administrative posts has led to the idea that there is a ‘glass ceiling’ which means that women are under-represented in positions of responsibility and influence.

In addition to this disparity in pay across all occupations, women tend to be heavily concentrated in occupations and industries that are characteristically low paying. The 1991 Population Census (OPCS, 1992) recorded that just over 28% of women were employed in clerical and secretarial jobs, 13% in personal service occupations and 10.5% in sales occupations (Table 3). The corresponding figures for men in these areas are much lower. In contrast, nearly 30% of male workers are managers and professionals. These occupations employ only just over 19% of women. Moreover, within broad occupational groups we find further concentrations. For example, two thirds of women in professional occupations are teachers whereas teaching accounts for only a quarter of professional males. Similarly, more than half the women in associate professional jobs are nurses.

Table 3: Distribution of employment by occupation (%)

	Men	Women
Managers	19.3	11.6
Professionals	9.5	7.6
Associate professionals	7.8	9.9
Clerical and secretarial	6.7	28.1
Skilled manual	23.1	3.5
Personal services	6.1	13.0
Sales	4.5	10.5
Plant and machine operators	14.3	5.1
Other	7.5	9.9
Not adequately described	1.1	0.8

Source: 1991 Population Census, 1992, OPCS

3.2 Ethnicity and disadvantage

Detailed information on other disadvantaged groups in the UK is more limited. Recent studies of the labour market disadvantage faced by Britain's minority ethnic groups indicate not only that they fare badly relative to white employees, but also that their relative position deteriorated throughout the 1980s and early 1990s. According to the General Household Survey, non-white employees in the UK earned 7.3 per cent less, on average, than white employees over the period 1973–9: this deteriorated to 12.1 per cent through the period 1983–9. The Campaign for Racial Equality reports an even larger disparity in earnings: using the Labour Force Survey, they found that the average hourly rate of pay for ethnic minority workers in Inner London was £5.62 compared with a figure of £9.82 for white workers.

A similar picture both of relative disadvantage and deterioration since the 1970s emerges in unemployment rates. Table 4 shows unemployment rates for different ethnic groups since 1979.

Table 4: Unemployment rates for UK males in selected years

Year(s)	White (total %)	Non-white (total %)	Indian (%)	Pakistani or Bangladeshi (%)	West Indian (%)
1979	4.0	6.0	4.8	8.1	7.3
1981	9.7	17.2	15.4	20.4	20.6
1983	12.0	22.0	17.0	32.0	28.0
1984	11.0	21.0	13.0	38.0	28.0
1985	11.0	21.0	18.0	28.0	23.0
1984?–?6	11.0	21.0	15.0	30.0	25.0
1985?–?87	11.0	20.0	15.0	29.0	24.0
1987?–?89	8.0	15.0	10.0	25.0	18.0
1989?–?91	7.0	13.0	10.0	21.0	16.0
1994	11.0	25.0	16.0	29.0	33.0

Source: Blackaby et al., 1995

What is interesting about this table is that the information is also broken down by ethnic group. This enables us to highlight not just the differences that exist between white and non-white workers but also those that exist between minority ethnic groups. Several points are worth noting. First, unemployment in all the years shown is lower for whites than for non-whites: in 1994 the unemployment rate among non-whites was more than twice that for white workers. Second, although the 1980s was a period of rising unemployment for all workers, the increase was much larger for non-whites than for white workers. Finally, there are significant differences within the non-white population. Workers of Indian descent fared significantly better than workers of Pakistani/Bangladeshi descent; workers of West Indian origin have faced the greatest deterioration in their chances of being in work.

Unemployment among young workers paints an even bleaker picture with 37 per cent of those from minority ethnic groups unemployed in 1994: amongst young black workers the figure is 51 per cent (Blackaby et al., 1995).