Chapter 4: Wage and Compensating Wage Differential Flashcards
refers to the payment that workers receive for their labor.
“wage”
This payment
may be in the form of an hourly rate, a salary, or some other form of compensation, such as commissions or
bonuses.
wage
The___________ is typically determined by supply and demand in the labor market, with workers
generally receiving higher wages in industries or occupations where there is high demand for their labor,
and lower wages in industries or occupations where there is less demand.
wage rate
________ explains the determination of how wages are set in the labor market or in the economy.
Wage theory
Advanced by David Ricardo
Subsistence Theory of Wages
Also known as Iron Law of Wages
Subsistence Theory of Wages
This suggests that wage rates would always tend toward the minimum required for subsistence.
Subsistence theory of wage.
If there were more workers available, wages would ultimately decline and there would be less labor
available. The population would expand until the greater labor force forced wages back down if the
pay increased over the subsistence level.
Subsistence Theory of Wages
Developed by Adam Smith
Wage Fund Theory
The theory suggests that wages are determined by the amount of capital available for investment
Wage Fund Theory
The more capital there is, the higher wages can be because there will be more investment
opportunities and therefore more demand for labor.
Wage Fund Theory
Advocated by Karl Marx (Marxian Theory)
Surplus Value Theory of Wages
The exchange value of any product was determined by the hours of labor necessary to produce it
Surplus Value Theory of Wages
The price of a product is determined by the amount of time; a labor devotes for its production. And
the proportion of time spent by the labor on work is much less and, therefore, paid a minimum price
and the surplus amount is utilized for the other expenses.
Surplus Value Theory of Wages
Developed by John Davidson
Bargaining Theory of Wages
If workers are stronger in bargaining process, then wages tend to be high. In case, employer plays
a stronger role, then wages tend to be low.
Bargaining Theory of Wages
Wages are determined by the relative bargaining power of workers of their union and of employers.
Bargaining Theory of Wages
Developed by Francis A. Walker
Residual-claimant Theory of Wages
He views that once all other three factors are rewarded what remains left is paid as wages to
workers.
Residual-claimant Theory of Wages
The wage is the amount given in return for the amount of production and thus is paid after the
payment of all other factors. Thus, the wage is considered to be a residual claimant, and is
computed as:
𝑊𝑎𝑔𝑒 = 𝑊ℎ𝑜𝑙𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 − (𝑅𝑒𝑛𝑡 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝑃𝑟𝑜𝑓𝑖𝑡)
Residual-claimant Theory of Wages
Propounded by Phillips Henry Wicksteed and John Bates Clark
Marginal Productivity of Wages
This theory is based on the assumption that wage is determined on the basis of last worker’s
contribution in the production i.e. the marginal production
Marginal Productivity of Wages
Employers pay workers based on how much they contribute to production.
The more productive a worker is, the higher his wages will be.
Marginal Productivity of Wages
Developed by some behavioral scientists (viz. March and Simon, Robert Dubin, Eliot Jacques)
Behavioral Theory
According to them, the amount of wage to be disbursed among the workers is determined by
various factors such as employer’s concern for the workers, size of company, prestige attached to
certain jobs in terms of social status, etc. that determine the amount of wage to be disbursed among
the workers
Behavioral Theory
is the lowest wage rate that employers are legally allowed to pay their workers.
The minimum wage
is typically set by the government, and it is intended to ensure that workers are able to earn
a fair wage for their labor.
The
minimum wage
have been defined by International Labor Organization (ILO) as “the minimum amount of
remuneration that an employer is required to pay wage earners for the work performed during a given
period, which cannot be reduced by collective agreement or an individual contract”.
Minimum wages
Minimum wages have been defined by _________ as “the minimum amount of
remuneration that an employer is required to pay wage earners for the work performed during a given
period, which cannot be reduced by collective agreement or an individual contract”.
International Labor Organization (ILO)
is typically set at a level that is intended to cover the basic needs of workers, such as
food, shelter, and clothing. It is also intended to protect workers from being exploited by employers, who
may be tempted to pay very low wages in order to increase their profits.
minimum wage
century, most nations had implemented minimum wage legislation.
By the end of the 20th century,
was the first country to implement a minimum wage in 1894, followed by the_____ in 1896, and the _______ in 19
New Zealand
Australian state of Victoria
United Kingdom
Over _____of 186 ILO member States have one or more minimum wages set through legislation or
binding collective agreements
90%
The purpose of minimum wages is to protect workers against unduly low pay.
Rationale of Minimum Wage Laws
▪ They help ensure a just and equitable share of the fruits of progress to all, and a minimum living
wage to all who are employed and in need of such protection.
Rationale of Minimum Wage Laws
▪ Minimum wages can also be one element of a policy to overcome poverty and reduce inequality,
including those between men and women, by promoting the right to equal remuneration for work of
equal value.
Rationale of Minimum Wage Laws
When the minimum wage is set above the market
equilibrium wage rate, some employers may not
be able to afford to pay their workers the higher
wage, and may choose to reduce their workforce
or not hire additional workers. This can lead to
higher
Unemployment
Factors that Determine Minimum Wage
The cost of living and changes or increases therein. The minimum wage is typically set at a level
that is considered to be sufficient to meet the basic needs of workers, such as food, shelter, and
clothing. As the cost of living increases, the minimum wage may also need to be adjusted to ensure
that it remains adequate for workers to meet their basic needs.
▪ Demand for living wages
▪ Wage adjustment vis-a-vis the consumer price index
▪ The needs of workers and their families
▪ The need to induce induces industries to invest in the countryside
▪ Prevailing wage levels
▪ Fair returns of the capital invested and employers’ capacity to pay
▪ Effects on employment generation and family income; and
▪ Equitable distribution of income and wealth along the imperatives of economic and social
developmen
Positive Effects of Minimum Wage
Increased job growth and creation.
▪ Encourages efficiency and automation of industry
▪ Encourages education, resulting in better paying jobs.
▪ Improves functioning of the low-wage labor market which may be characterized by employer-side
market power (monopsony).
▪ Raises family incomes at the bottom of the income distribution, and lowers poverty.
▪ Removes low paying jobs, forcing workers to train for, and move to, higher paying jobs.
▪ Increases technological development. Costly technology that increases business efficiency is more
appealing as the price of labor increases
Negative Effects of Minimum Wage
Results in higher long-term unemployment
▪ Slows growth in the creation of low-skilled jobs
▪ Results in jobs moving to other areas or countries which allow lower-cost labor.
▪ Reduces quantity demanded of workers, either through a reduction in the number of hours worked
by individuals, or through a reduction in the number of jobs.
▪ Encourages employers to replace low-skilled workers with computers, such as self-checkout
machines
▪ Higher prices for consumers, where products and services are produced by minimum-wage worker
is a major determinant of standard of living that affects the quality of life.
Income from labor
determines that extent of disparity in the distribution of income between
individuals, group of people, or countries.
Income inequality
can be examined by looking at the size distribution of income, the functional distribution
of income, the distribution of income by recipient, the distribution of wealth, or the extent and nature
of poverty.
Inequality
refers to the uneven distribution of income across various segments of a
population. In simpler terms, it means that a small percentage of the population earns a
disproportionately large share of the total wealth, while the rest earn significantly less.
Income inequality
The ____ two commonly used tools for measuring inequality in an
economy.
Lorenz curve and Gini coefficient
The_______ is a graphical representation of the distribution of income or wealth in an
economy.
Lorenz curve
Lorenz Curve plots the percentage of total income or wealth on the _________ against the
percentage of the population on the ___________.
vertical axis,
horizontal axis
The curve shows how much of the total income
or wealth is held by different segments of the population, from the poorest to the wealthiest.
Lorenz curve
The _________is a measure of inequality that is calculated based on the Lorenz curve.
Gini coefficient
It is a
number between 0 and 1, with 0 representing _________ (where everyone has the same
income or wealth) and 1 representing _________ (where one person holds all of the income
or wealth).
perfect equality
perfect inequality
A higher________ indicates greater inequality in the distribution of income or
wealth.
Gini coefficient
provide a useful tool for measuring inequality in an
economy, and can help policymakers and researchers to identify trends and patterns in the
distribution of income and wealth
Lorenz curve and Gini coefficient
a graphical representation of the
distribution of income or wealth within a population or economy.
It plots the percentage of total income or wealth on the y or
vertical axis, against the percentage of the household
population on the horizontal or x-axis.
A Lorenz curve is
is demonstrated by a 45-degree,
upward-sloping line. In the graph above, it is denoted as the
dashed line.
The line of equality
is demonstrated often by an upward
sloping but often exponentially rising curve. In the graph above,
it is denoted as a solid line.
The Lorenz curve
the gap between the line of equality and the Lorenz curve.
The Gini coefficient
Factors Affecting Income Inequality
Ability and Attributes
▪ Education and Training
▪ Work and Leisure
▪ Risk Taking
▪ Wage Discrimination
▪ Unequal Distribution of Wealth
calculated as the ratio of the area
between the perfect equality line and the Lorenz curve (A)
divided by the total area under the perfect equality line (A + B).
The Gini index is
refers to one’s ability to complete a task or job, and it can be affected by hard
work and perseverance.
Ability
are things like personality traits or physical characteristics that make
someone more capable of earning money than others around them
Attributes
These are two very important factors that can influence how much money
someone makes
Education and training.
Workers who work more hours have higher incomes, and thus can afford to buy more
goods. This means that they’re able to afford a larger share of the overall wealth of society. Conversely,
leisure time impacts income inequality by reducing or increasing one’s ability to earn money.
Work and Leisure
if people are more _______
they will be less likely to start a business and work their way up the income ladder.
risk-averse,
is when an employer pays one employee less than another for
the same job. It can be based on race, gender, age, or other factors. This can happen because employers
may have something against those groups of people, or they might just not want to pay more to an
employee who’s better at their job or has more experience or education.
Wage discrimination
Income inequality is when there are large gaps between the incomes of
different groups within a country or society. For example, a small group of people controls a large amount of
money and resources, while most people have very little
Unequal distribution of wealth
is an amount of money that is paid directly to an employee for their work.
A wage
are often paid
weekly or biweekly in cash or check form, but some employers may offer direct deposit as an option for
wage payment.
Wages
can be based on a standard hourly rate, piece rate (the number of products
produced), or commission (the number of sales made).
Wages
is a fixed amount of money paid on a regular basis to an employee.
A salary
are typically paid
monthly or annually in the form of a check or direct deposit into the employee’s bank account. Because they
are fixed amounts, do not change based on productivity or sales figures like wages do.
Salaries
Factors/Reasons why Wages Vary
Credentials, Experience and skill, Industry or employer, Job tasks, Geographic location, Success and performance.
is characterized by a small number of persons dominating their and
earning tremendous sums of money.
Superstar Phenomenon
they bring in more revenue than the average worker.
superstars
Example of superstar phenomenon
For example, professional basketball players like
Lebron James and Stephen Curry
For example, musicians like Taylor Swift and Justin Bieber
proposed the idea that job characteristics influence labor market equilibrium
Adam Smith
arise to compensate workers for non-wage characteristics of the
job (i.e. how ‘pleasant’ or ‘unpleasant’ a job is).
Compensating wage differentials
Indifference curves reveal the worker’s preferences between wages and risk.
Utility = f(wage, risk of injury).
The supply of labor to risky jobs ______
because as the wage gap between the risky
job and the safe job increases, more and
more workers are willing to work in the risky
job.
slopes up
The demand curve __________because
fewer firms will offer risky working conditions
if risky firms have to offer high wages to
attract workers. The market compensation
differential equates supply and demand, and
gives the “bribe” required to attract the last
worker hired by risky firms.
slopes down
