Question

Discuss four reasons why a labour market may not allocate labour efficiently. Include in your answer an example for each of the four reasons

Answer 1

Answer: When labour market fails to allocate labour EFFICIENTLY this results into labour market failure.Here we are presenting 4 reasons for this:

1.HIGHER SKILL MISMATCH or LACK OF SKILLED LABOUR i.e. with rapidly changing market world where every day technology is changing and becoming much more advanced hence labour skills updation with same pace is required.In lack of this labour allocation lacks efficiency.

As an example with rapid digitalisation in developing countries,labour which are skilled in technology knowledge is requied in absence of this unemployment gap persists.

2.LOWER LABOUR PRODUCTIVITY is an another dimension which sets important dimensions for productivity.Though it is linked with skilling as labour with high in quantity though low in skills can't results into much productivity for market.

Example can be taken of textile industry in developing countries where industry is labour intensive yet not much skilled,result into less productivity.

3.Another dimensions is MARKET EXTERNALITIES like price ceiling,price flooring etc by governments like higher wages can lead to excess availability of labour in the market hence more unemployment.

Example is deciding increasing in lower wages more than equilibrium level.

4.INCOME INEQUALITY is another parameter which affects very basic unit of lavoir market i.e. labour itself ,its skills.It may lead to more exploitation of labour hence less efficiency in the market.

Example can be seen in form of unregulated labour laws in least developing countries market mechanism.

Hope it helps!

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