Wage Determination

Wage Determination

1. ECONOMIC RENT AND TRANSFER EARNINGS

   • Economic rent - The payment received by a factor of production over and above that which is needed to keep it in its present occupation
   • Transfer earnings - The minimum payment needed to keep a factor of production in its present use
     • Above the supply curve is economic rent and below it is transfer earnings
   • The proportion of a workers earnings made of economic rent depends on the elasticity of supply
     • Economic rent will be higher when supply is inelastic e.g. most premiership footballers enjoy playing the game and would continue to do so even if their wages were reduced as most would earn a lot less in their next best paid jobs

2. TRADE UNIONS

   • A trade union is an organisation of workers who join together to further their own interests.
     • A trade union will act as a monopoly seller of labour in order to increase wages for the workers, as shown by the graph
       • This will increase wages from W to W1 however this will create excess supply of labour as workers will not be prepared to work for less that W1, this in turn will mean that some workers will lose their jobs
         • It could be argued that a trade unions attempts to increase wages will be at the expense of jobs, however this is not the case, if they can increase the productivity of their membership they can shift the MRP to the right, possibly increasing wages and creating more employment opportunities
     • The increase in wages that the union manages to secure is known as the trade union mark-up

3. WAGE DIFFERENTIALS

   • DEMAND AND SUPPLY
     • The labour force is its own market, this means that the forces of demand and supply play a key role in determining wages
       • An increase in the demand for workers will increase the wage rate.
       • Wages will be high when demand is high and inelastic, supply is low and inelastic
         • The supply of surgeons is low compared to demand, due to lengthy training and the high qualifications needed.
   • Wage differentials are the differences in wages arising between individuals, occupations, industries, firms and regions.
   • GOVERNMENT POLICY
     • The national minimum wage has affected the lower earners as it means that they will earn more
     • Increased government spending in the public sector means that public sector workers will be earning more.

4. DISCRIMINATION IN THE LABOUR MARKET

   • Discrimination is where different groups of workers are treated differently to other workers in the same job regarding pay and employment
   • Labour market failure is where the free market fails to achieve and efficient allocation of resources in the labour market
   • Negative discrimination is when a group of workers is treated less favourably than others.
   • Positive discrimination is when a group of workers is treated more favourably than others. This means that the MRP curve can be seen as higher than it actually is and workers can be paid higher than they should be.

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