3.5.3 Wage determination

Question 1

Wage differentials

Answer 1

The differences in wages between different groups of workers, or between workers in the same occupation. There

Question 2

Reasons why wage differentials exist

Answer 2

• Workers that are highly skilled tend to be paid more, e.g. if they’re highly trained or have high-level qualifications.
• Wages vary in different regions and between industries – in some locations/industries, workers will earn more.
• A trade union can influence the wage rate paid to a group of workers.

Question 3

How does elasticity of supply and demand affect wages?

Answer 3

Wages will probably be higher if demand is high and inelastic, and supply is low and elastic. Wages tend to be low when demand is low and elastic, and supply is high and elastic.

This can be seen in the examples below:

Question 4

Wages in perfectly competitive labour markets

Answer 4

In the whole labour market, the market wage (W) is determined by demand and supply.

Individual firms have no power to influence the wage level so they’re forced to accept the market wage, i.e. firms are price takers.

The market wage for individual firms is perfectly elastic because the wage rate is set by the market and the firm can hire as many workers as it wants at this wage rate.

Question 5

Wages in a monopsony labour market

Answer 5

In a monopsony labour market there’s a single employer, so workers have only one choice of employer to work for.
- For example, the NHS with medical staff.

A monopsonist employer can pay a wage that’s less than what would’ve been paid in a perfectly competitive labour market. Monopsonist employers can also drive down the level of employment below the level that would exist in a perfectly competitive labour market.