An Alternative View On Unemployment

In my reading I’ve come across a really interesting alternative view on unemployment that I thought I’d go though on this blog. Throughout A-Level Economics, I’d always been taught that the market for labour could be drawn as a standard supply and demand graph, where the equilibrium point was the wage (unless this fell below the minimum wage in which case there was excess supply). An example of this diagram is shown below:

Economics wage determination graph
Graph Courtesy of Wikipedia

However I have now come across a significant flaw in this theory. In many situations a rise in wage can lead to an employee who many have been previously working full time reducing their hours to part time. This fundamentally contradicts the idea that the supply of labour increases as the wage rate increases. An example of where this happened has been anecdotal evidence from the NHS in the UK. In the late 2000s the Labour government introduced a significant increases in GP pay. As a result of this many GPs decided to switch from being full time to being part time (contradicting the assumptions made above). This being because the improvements in their welfare from going part time outweighed the extra welfare benefit of additional income. Theoretically then another pay rise may give them the incentive to work longer than they initially did at the start of the scenario. On a graph this could look similar to the graph below.

Economics Diagram showing three equilibrium points where supply and demand equal, similar to one found in Anthony Atkinson's Inequality.
Adapted from a similar diagram found in Anthony Atkinson’s Inequality.

This scenario interestingly leads to there being multiple equilibrium points. Might be a useful piece of evaluation in Economics A-Level when discussing pay, wages, minimum wages etc!

I’m only a first year (undergraduate) economist, so I write what I believe to be correct. Please don’t hold mistakes against me! My inspiration for this article came from Inequality by Anthony Atkinson. 

 

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