Labour Market Economics reflective essay Example

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Labour Economic Theory: Effects of the Reduction in Penalty Rates by FWC

Effects of the Reduction in Penalty Rates by FWC

This short commentary is a short reflective essay that deals with a contemporary labour market issue. The issue at hand is the reduction of penalty rates decided by the Fair Work Commission (FWC) in February 2017. It will address emerging issues as a result of variations in the penalty rates provisions in view of the labour economic theory. In Australia, penalty rates are usually paid to employees in an industry who work on public holidays, weekends, late night shifts, overtime and early morning shifts. The payment or mandated benefit is usually higher than the normal minimum wage. The Fair Work Commission (FWC) took a decision to vary the penalty rates provisions in awarding employees working in the restaurant, hospitality, and retail sectors of the economy (Fair Work Ombudsman, 2017). This decision has the tendency of improving the wages of the employees in the affected labour market. Higher wages will result to increased effort and working hours by the employees. This will consequently lead to an increased labour supply. The attractive wage rate will increase the urge for work and reduce the need for leisure. This situation will force the employers to reduce the level of employment at higher wages. This then would mean that the demand for labour will reduce drastically owing to higher wages. The reduction in penalty rates will therefore have the effect of increasing labour supply and at the same time reducing the demand for labour.

At this point, the labour market equilibrium can be attained when the conflicting interests between labour supply and labour demand are balanced. This situation will mainly determine labour and wage fluctuations in the market (Pissarides, 2011). The government’s intervention measure of providing mandated benefits through reducing the penalty rates provisions will impact heavily on the competitive equilibrium in the market. This intervention measure will make the market structure to be less competitive since the affected industries will have to grapple with adjustment costs (Manning, 2004). The affected firms will be forced to alter their output levels and this will come at a cost. The firms will, for instance, be forced to cut down on their output in order to operate optimally. The major cost factor here will be the labour cost. This will result in adjustment costs such as redundancy payments and lower staff morale resulting in far reaching effects on the efficiency and competitive levels of the affected firms (Lee and Saez, 2012). This is because they will be forced to operate at a sub-optimal level by reducing their demand for labour (Chetty et al., 2011). This will greatly affect their operations and productive capacity and reduce their competitive edge.

In summary, it should be noted that a government’s intervention measure, such as the provision of mandated benefits to employees, greatly impacts the labour market. It can lead to labour and wage fluctuations which greatly affect the industry’s market equilibrium.


Chetty, R., Friedman, J., Olsen, T. and Pistaferri, L. (2011). Adjustment Costs, Firm Responses,

and Micro vs. Macro Labour Supply Elasticities: Evidence from Danish Tax Records. The

Quarterly Journal of Economics, 126(2), pp.749-804.

Fair Work Ombudsman. (2017). Welcome to the Fair Work Ombudsman website. [online] Available at: [Accessed 30 Jun. 2017].

Lee, D. and Saez, E. (2012). Optimal minimum wage policy in competitive labour markets.

Journal of Public Economics, 96(9-10), pp.739-749.

Manning, A. (2004). Monopsony and the efficiency of labour market interventions. Labour

Economics, 11(2), pp.145-163.

Pissarides, C. (2011). Equilibrium in the Labour Market with Search Frictions. American

Economic Review, 101(4), pp.1092-1105.