3.5.3: Wage Determination

Question 1

What are the characteristics of a perfectly competitive labour market?

Answer 1

• Many buyers of labour eg firms
• Perfect knowledge regarding wage rates, jobs available and conditions in the market
• Homogenous jobs
• Homogenous workers with the same experience and skills
• Many suppliers of labour ie workers
• Individual firms and workers have no impact on the wage level

Question 2

How are wages determined in perfect competition?

Answer 2

• Wages are determined by demand and supply, as all workers are paid the same.
• This is if workers were not paid the same, they would simply find a job somewhere else

Question 3

How is the labour market in a monopsony market?

Answer 3

• Only one buyer of labour meaning businesses know that if they want to increase their labour force, they will have to increase the wages they offer
• The MC curve is above the supply curve of labour (AC), as it costs more to employ an additional worker than the average cost of labour

Question 4

What is the labour market like in a monopoly?

Answer 4

• The existence of trade unions means they can operate as the only seller of labour.

Question 5

What is a trade union?

Answer 5

• A trade union is an organisation with members who are usually workers or employees, which protect the rights and pay of workers through a process of collective bargaining

Question 6

What are the two ways to increase wages in a monopoly market?

Answer 6

• Setting barriers of entry which reduce the supply of labour. EG teachers unions lobbied for a rule where teachers must have a degree
• Setting wages at a specific wage and ensure workers are not prepared to work for less
• This creates a kinked supply curve
• To get higher wages, the firm will employ where supply is equal to demand, but this will cause a fall in employment.

Question 7

What is a bilateral monopoly?

Answer 7

• Where there are both monopoly and monopsony in a labour market.

Question 8

What is the labour market like in a bilateral monopoly?

Answer 8

• The firm may be monopsonist, however the union may decide to set a minimum wage, causing a kinked supply curve.
• There is a battle going on between MC and AC; the wage that is set will depend on the relative bargaining strength of both

Question 9

Factors that cause wage differentials

Answer 9

• Human capital
• Trade unions
• Elasticity of labour
• National Minimum and Maximum Wage

Question 10

Arguments for the national minimum wage

Answer 10

• Reduces poverty as it mainly impacts the lowest wages and ensure that people have enough to live on
• Can reduce male/ female wage differentials as women are more likely to take up lower paid jobs (vocational; flexible hours) and so minimum wage is able to decrease the gaps
• More content workforce as they will be more motivated and making the business more productive and increasing it’s profits. ( EV, assumes that all workers are motivated by money)
• It ensures everyone receives a fair wage, ND is not exploited.

Question 11

Arguments against national minimum wage?

Answer 11

• Raises costs for companies and so man increase prices, which could lead to a fall in profit.
• Could be ineffective at reducing poverty, as it doesn’t take into account regional differences and the fact many people on minimum wage are secondary earners

Question 12

What are the effects of a maximum wage?

Answer 12

• It helps reduce inequality, as this puts a limit on the maximum wage some one can get.
• Excess demand as some people may not have the incentive to work if they believe the work that they would do doesn’t match the salary that they receive.