Economic Policies within Labor Markets and Effects on Economy Introduction

Economic Policies within Labor Markets and Effects on Economy


Several facts have been highlighted on recent events surrounding economic policies within labor markets and how they affect economy both on the long and short term. It has been established that labor markets are critical in determining economy because such markets do not operate in institutional vacuums (Addison et al 45).  Economic focus in labor market revolves around sound policies in respect to centralized bargaining, corporate labor relations, wage compensation and social programs. It can be remembered that global economic crisis witnessed in 2008 had devastating effects on incomes and labor markets. This was witnessed high unemployment because companies ceased operations, it increased inequality and poverty. This prompted government and other agencies to come up with economic policies within labor market, though they have affected economy. This report aims to discuss such effects and ascertains whether governments should intervene in labor markets to save the economy.

Impacts of Minimum Wages Laws on the Economy

This policy lifts wages in labor markets and maintains level for low-wage labor markets. Most economies continue to create many low-wage jobs, and many families are trying to make ends meet through working for substantial number of hours. On way of addressing difficulties faced by these families, minimum wage laws are potential policy option. These laws cover on majority of low-wage workforce and dictate how much employees can be paid. This has come under strong criticisms with supporters arguing that this policy is instrumental in lifting wage of workers and thus improves their living conditions. However, other people believe that minimum wage laws costs workers their job by simply eliminating them out of labor markets. Moreover, it is believed that individuals working under minimum wages are always from families with relatively high levels of income (Addison et al 84).

Minimum wage laws affect economy because it directly influences small business organization. It is important to note that most of the earning from small business activities often goes to payment of operating expense, employee wages and benefits. To control cost of operations, business managers often moderate on wages paid to workers. However, if higher minimum wages laws and policies are enacted then businesses must scale down workers so as to meet high operating costs. This leads to unemployment and closure of some small business hurting the economy. This stifles economic growth because of reduction in taxes that were otherwise paid by business enterprise, unemployment is one of hindrances to economic growth. Moreover, minimal wage laws promote poverty because most of the people under minimum wages are often part time employees whose income is not reliable in sustaining higher living standards. Poverty affects economy both in the long and short term because of reduced investment and thus slow economic growth. Furthermore, it affects labor markets because labor is a commodity that is subject to market forces. If government intervenes in initiating minimum wages, then educated individuals will seek pay increases just like the unskilled whose wages increase because of a mere government policy. This increases volatility in labor markers and may not be accepted by employers who may close business organizations or lay off workers and thus affect the economy because of reduced investment.

Impacts of Unions in the Economy

It has been affirmed that unions offer a pathway for increased wages and prosperity of middle class workers (Glocker 17). Studies have confirmed that unions are comparable to cartels because they restrict number of workers in companies in order to scale up wages (Glocker 38). This is comparable to OPEC that often attempts to cut down supply of oil in order to raise prices. This means that unions benefit members but hurt consumers and non-unions members who are often denied job opportunities and thus promote unemployment. Unions do not negotiate higher wages for newly employed workers and only thrive in companies that have competitive advantages; this is because they are the only organizations that can pay higher wages.

Unions affect economy both in the short and long term because they effectively tax investment by negotiating for higher wages thereby lowering profits for business organizations. Companies respond to this tax by reducing investment making companies less competitive and thus affecting economy because of reduced money flow. They also reduce job opportunities because they prompt companies to lay off workers and thus reduce the number of job in the economy. Trade unions also make it difficult for recovery from economic downturns and in the process, stifle economic growth and development. Unions are mostly concerned with winning higher wages for their members but bring less investment into the economy. Effects of unions on business organization have been grave. Through their regulations, they may increase the number of people required to perform a given task and when this happens, companies experience increased costs of operations. In response, companies increase price of products and services, stimulating inflation and increase cost of living. When cost of living is high, consumers do not invest in the economy but instead spend most of their incomes to make ends meet.

Government Intervention in Labor Markets

Government should intervene in labor markets to help protect the economy and promote good labor practices. It has been established that government intervenes in labor markets to address discrepancies and inefficiency witnessed (Banerjee and Goldfield 78). This is because unequal distribution of income and resources may potentially affect economy, and so governments try to address the inequities through regulation, taxation and provision of subsidies. This can be achieved through providing unemployment benefits especially for low income workers. This policy need to be balanced on the basis of providing job safety for those who are unable to find employment opportunities. Intervention can also come in form of incentives that increase income tax progressively without hurting workers. Taxes are used in developing economies through building infrastructure that are critical for development of economy. Moreover, government can intervene through regulation of trade unions; this is because if government abides by their constant demands then economy can be in turmoil. Significantly, governments can effectively deal with the problem of restricted labor supply, ensure sound negotiations, ensure job security and ensure labor market flexibility.


Labor markets are potential economy drivers. This means that they can either impact positively or negatively to the economy. It has been discussed that economic policies aim to regulate labor markets in order to promote economic growth and development (Daft et al 73). Examples of such policies include minimum wage laws and that measures that control trade unions. Minimum wages can potentially hurt the economy by affecting new established and small businesses that can cease operation if operating costs are high. Unions can also hurt companies and potentially create unemployment in the economy. My take is that governments should intervene by regulating operations of business organizations and trade unions.

Works Cited

Addison, Tony, David Hulme, and S M. R. Kanbur. Poverty Dynamics: Interdisciplinary

 Perspectives. Oxford: Oxford University Press, 2009. Internet resource.

Banerjee, Debdas, and Michael Goldfield. Labour, Globalization and the State: Workers, Women

            and Migrants Confront Neoliberalism. London: Routledge, 2007. Print.

Daft, Richard L, Jonathan Murphy, and Hugh Willmott. Organization Theory and Design.

Andover: South-Western Cengage Learning, 2010. Print.

Glocker, Theodore W. The Government of American Trade Unions. United States?: Scholar

Select, 2015. Print.