Wage Determination
Wage Determination
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Wage Determination
Labour Force – The total number of people employed and unemployed
National Minimum Wage – The minimum pay per hour that firms must pay their workers
Maximum Wage – Wages cannot exceed a certain amount for certain industries
What determines Wage Rate in a Competitive Market?
- Wage Rate – where demand and supply of labour meet and is the price of labour
- Perfect knowledge of available jobs
- No barriers to entry for labour
- Labour supply curve is perfectly elastic
- Firms can hire as many workers as they want, depending on their demand
[diagrams]
Impact of higher wages in a perfectly competitive market
Higher wages in a perfectly competitive market will result in an excess supply of labour and a lower demand for labour as firms don’t want to pay a high price for workers. This results in unemployment and the wage rate will eventually have to fall to clear the market
Impact of lower wages in a perfectly competitive market
Lower wages in a perfectly competitive market will result in an excess of labour demand and a lower supply of labour as less workers would want to work for a lower salary, causing a labour shortage. However, more firms will want to hire workers due to a lower cost. Wages will be forced to rise in order for the labour deficit to disappear
What determines Wage Rate in a Non-Competitive Market?
- Market power – Buyers possess monopsony power and suppliers possess monopoly power
- Exploitation of workers – In some industries, employers may exploit workers in a Non-Competitive Market and take advantage of their weak market power to drives the wage rate down.
- Exploitation of employers – Alternatively in some industries, workers may have more market power than employers and drive the wage rate up. However, these cases are quite rare.
Advantages / Disadvantages of a Minimum Wage
Aim of a Minimum Wage is to protect low-paid workers so they can earn enough to make a living
- Surplus of workers – In a competitive labour market, a surplus of workers is likely to occur if the wage rate exceeds the rate at equilibrium. This may lead to increased unemployment
- Motivates employees – A Minimum Wage ensures that workers will always earn a guaranteed amount of money to create a living as their salaries cannot fall below the Minimum Wage
Advantages / Disadvantages of a Maximum Wage
- Shortage of workers – if wages are capped, they could be a shortage of workers within a certain industry – workers may choose to go abroad to earn a higher wage for their work
- Deincentivises employees – wages being capped may also discourage workers to work in that specific field
- Reduce income equality – a maximum wages helps to reduce the distribution of income between the rich and poor
Factors determining the Price Elasticity of Demand for Labour
- Proportion of labour costs – The proportion of labour costs in comparison to the total costs incurred by a business determined PED for Labour. If these are high, the demand for labour may decrease as firms cannot afford to employ as many workers
- Demand for the final product – if the demand for the final product / service being provided is high, the demand for labour is likely to be high as more workers are needed to supply it
- How easily factors of production can be substituted – PED for labour is determined by how easily any of the factors of production can be substituted
Factors determining the Price Elasticity of Supply of Labour
- Elastic PES – determined by occupations which require less skills – if the wage rate increases, workers will respond quickly, and the supply of labour will expand
- Inelastic PES – determined by occupations where employees have a strong skillset / intense training / extra qualifications – the workers response to changes in the wage rate will be much slower and the supply of labour will not change drastically, regardless of a change in wages
Current Labour Market Issues
Young Workers
Those entering the workforce during periods of recessions are likely to earn less income then those entering during periods of economic growth.
Recent graduates or entry-level employees may struggle to find jobs initially as firms are reluctant to let go of their current workers to employ new workers
Lack of Skills
Market failure in the Labour Market exists due to Occupational Immobility and Geographical Immobility
Wage Inequality
Those on lower wages struggle to see their income grow as fast as those on higher wages
Zero-Hour Contracts
A rise in Zero-Hour Contracts has caused uncertainty amongst employees as they do not know how much income they will receive a week
Migration
Migration allows employers to employ from a larger group of workers – some which may have better skillsets than others
Gender
Despite there being equal pay laws, men still earn more on average than women. This could be due to career breaks, maternity leave or part-time jobs, which also make it harder for women to receive promotion
Discrimination
Workers may still be discriminated against factors such as age, gender, ethnicity, disabilities
Policies to tackle Labour Market Immobility
Improve the supply of houses
They could reduce the price of properties and increase the supply of houses, making it cheaper for people to rent when working between temporary jobs
Improve transport links
Having a better transport network makes it easier for people to get to their job interviews and for them to visit their friends / families
Improving occupational mobility of labour
By providing vocational training and encouraging further studies can improve the skillsets of workers, making them more attractive to employers. This will increase their chances of securing a job
Flexible work patterns
For e.g. parents who have to look after children but also want to work would benefit from flexible work patterns allowing them to do both
Quick Fire Quiz – Knowledge Check
1. Define ‘Labour Force’ (2 marks)
2. Distinguish between a ‘National Minimum Wage’ and ‘Maximum Wage’ (4 marks)
3. Using a diagram, explain how wages are determined in a Competitive Labour Market (10 marks)
4. Explain how wages are determined a Non-Competitive Labour Market (4 marks)
5. Explain the advantages and disadvantages of enforcing a maximum / minimum wage (6 marks)
6. Identify and explain what determines the PED for labour (4 marks)
7. Explain the difference between an elastic PES and an inelastic PES (4 marks)
8. Identify and explain what determines the PES for labour (4 marks)
9. Identify and explain five current labour market issues (10 marks)
10. Identify and explain four policies to tackle Labour Market Immobility (8 marks)
Next Revision Topics
- The Demand for Labour
- The Supply of Labour
- National Minimum Wage
- Price Elasticity of Demand
- Price Elasticity of Supply
A Level Economics Past Papers
