Wage Determination

Wage Determination

1. Wage Determination

   • Demand for and supply for labour key role in determining wages
     • Wages likely to be high when demand is high and inelastic and supply is low and inelastic
       • Long period of training involved and high qualifications required to start training = supply inelastic
       • Rise in WR not attract workers in SR
       • Demand also inelastic as no viable substitutes
       • MRP is high
     • Wages likely to be low where supply is high relative to demand and both supply and demand are elastic
       • Supply high and elastic
       • Requires no qualifications and minimum training
         • large number of people capable of doing the job
       • Rise in WR may attract extension in supply
       • MRP is low so demand is low
   • Other Influences
     • Relative Bargaining Power of employers and workers
       • Wages likely high when workers have strong bargaining power relative to employers
     • Government Policy
       • Affects WR directly and indirectly
       • Govt major employer- passes legislation that affect bargaining power (TU) and directly affects WR (NMW)
     • Public Opinion
       • Attitudes towards what people deserve to be paid
       • Value prepared to undergo long periods of training and study
         • Also value certain groups over other groups
           • Many societies work dominated by white middle class males held in higher esteem than work by lower class females and people from ethnic minorities

2. Economic Rent and Transfer Earnings

   • Transfer Earnings are what a worker could earn in best paid alternative employment - the opportunity cost of performing the current job. Minimum amount that has to be paid to ensure the worker stays in present job.
     • Transfer Earnings- the amount a factor of production could earn in its best alternative occupation; the minimum amount that has to be paid to ensure that a worker stays in present job; if wages fall below this level worker will transfer to the alternative employment
   • Economic rent is the surplus over transfer earnings- total earnings minus transfer earnings.
     • Economic Rent- a surplus paid to a factor of production above what is needed to keep it in its current occupation.
   • Total wages received OWXQ
     • YWX Economic rent OYXQ Transfer earnings
       • Economic rent- area above supply curve and below wage rate
         • First worker prepared to work for considerably less than WR actually paid- relatively high proportion of wages will be economic rent
           • Last worker employed prepare to work only for going WR so earns no economic rent
   • EVALUATION
     • Depends on elasticity of supply of labour
       • Economic rent will form large proportion when supply is inelastic
         • Most would earn considerably less in their next best paid jobs (footballers)
       • More elastic the supply of labour the greater the proportion of earnings accounted by transfer earnings
         • If WR falls high no. may switch to other unskilled work
     • Non Pecuniary Factors
       • Some people may be earning less than they could earn in another occupation - receiving negative economic rent

3. Wage Differentials

   • Wage Differentials Between Particular Groups
     • Skilled and Unskilled Workers
       • Skilled workers paid more than unskilled workers because demand for skilled workers is higher and their supply is often less
       • MRP of skilled labour is high because skills possessed will lead to high output per worker
       • Often more difficult to substitute skilled labour with machines
       • Skilled workers usually have high level of human capital
         • Human capital- the skills, knowledge and experience that workers possess
           • Investing by providing education and training raises productivity of labour so increases workers earning potential
       • Reducing no. of people with very low skills had more impact on average productivity than increasing no. with highest skills
     • Male and Female Workers
       • Despite equal pay legislation men still paid more than women- gap is narrowing
       • On average MRP of women is lower than men
         • Now changing as more women than men studying at uni
           • MRP remains low despite this because women are disproportionately concentrated in low paid occupations that generate low MR
       • Women lose out promotional chances because leaving labour market in order to bear children
       • Discrimination- some employers undervalue services of female workers
     • Ethnic Minorities
       • lower paid than white workers
       • Particular group low pay -Bangladeshi origin
         • because high proportion work in catering industry
         • Qualifications (particularly Bangladeshi women) currently below rest of population
         • Discrimination
     • Part-time and Full time workers
       • PT workers on average receive lower hrly earnings than FT employees
         • Supply of people wanting to work PT is high relative to demand
         • PT work is convenient for people bringing up children/ pursuing uni studies/other interests
       • PT less likely receive training - productivity tends to be lower
       • Smaller % PT workers belong to TU & higher % are women

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