Government Intervention in Labour Markets

Government Intervention in Labour Markets

  • A government may intervene in the labour market to correct market failure and so raise efficiency, and also promote equity and social cohesion
  • Government intervention affects wages in a number of ways:
    • Employment of public sector workers
    • The provision of information
    • Regional policy
    • Training
    • Education
    • National minimum wage
    • Anti-discrimination legislation
    • Trade union legislation

The Government as an Employer

  • Government employs a lot of people (e.g. NHS, teachers), and the decisions on its workers’ wage rate will affect private-sector wage rates
    • g. raising the pay of public sector teachers will put pressure for the pay of private school teachers to increase.

Labour Market Information

  • The government provides informative services such as careers advice, information about pay and working conditions, and job centres that inform workers of vacancies

Regional Policy

  • Regional policy seeks to influence the distribution of firms and people
  • To reduce the problem of geographical immobility of labour and regional unemployment, the government usually takes the action of ‘bringing the work to the worker’, by giving financial assistance to firms willing to relocate to areas of high unemployment


  • The government can seek to raise the level of training to the allocatively efficient level in a variety of ways
    • It can subsidise individuals to engage in training and/or firms to provide training
    • It can pass legislation requiring firms to provide training
    • It can directly train its own employees and the unemployed.


  • Providing education to youths should increase the occupational mobility of labour, reduce the shortage of skilled labour and raise the productivity of labour
  • Measures to raise qualifications and skills in workers are known as investments in human capital

Minimum Wage Legislation

  • Minimum wage legislation is introduced to help raise the pay of low paid workers
  • To have any effect, the minimum wage has to be set above the market equilibrium wage rate


  • If a minimum wage is established, firms may seek to cut the cost of employing low skilled workers by decreasing fringe benefits
  • It may also encourage workers who earned near the new minimum wage to press for a wage rise
  • There are other reasons why a NMQ may not cause unemployment
    • A NMW increases wages, and this, in turn, will increase aggregate demand for goods and services, which, due to the derivation of demand for labour, would increase demand for labour
    • The higher wages may also encourage people to not miss out (by being sick) and raise morale, and hence increase productivity
  • As most low wage earners are women who work part-time, a NMW may reduce the gender gap in pay
    • It may, therefore, not have much of an impact on income inequality if a relatively high proportion of these women are from middle to high income households.

Discrimination Legislation

  • Legislation has made it illegal for employers to discriminate on the grounds of gender, race, marital status and age
  • As a result employers may find that a group which had previously been discriminated against is more productive than they first thought
  • However, some employers may still discriminate, and in practise, such legislation is hard to legally enforce

Trade Union Legislation

  • If a government thinks trade unions have been weakened too much by previously legislation, and so they have little bargaining power in relation to employers, then a government may repeal some legislation
  • If the opposite is true, then the government can introduce new legislation that reduces the industrial action unions can take, and weakens them.