Term 1 - Chapter 3 & Chapter 4

Question 1

What are the features of classical S&D?

Answer 1

• Unemployment is voluntary: people looking for jobs (frictions) or learning about conditions
• Wages move smoothly
• distinguish nominal and real wages - people negotiate nominal wages so as to achieve a given real wage (adjusted for inflation)
• nominal wages sticky (Keynes): people don’t like having nominal wages cut

Question 2

Draw the Keynesian S&D graph and explain

Answer 2

Look at notes

Question 3

Draw the wage adjustments graph and explain

Answer 3

Look at notes

Question 4

Draw a graph highlighting how inflation is pointless

Answer 4

Look at notes

Question 5

Draw the compensating wage differentials graph and explain

Answer 5

Look at notes

Question 6

Draw the optimum accident rates graph and explain

Answer 6

Look at notes

Question 7

Explain what the statistical value of life is

Answer 7

Statistical value is estimated to be around £10million: if a firm is at risk of 1 worker death per year, they will pay an extra £10m in compensating wage differentials across all workers

Question 8

Draw the GINI coefficient graph

Answer 8

Look at notes

Question 9

What is the GINI coefficient equation?

Answer 9

Area A / (A+B)

where 0 = perfect equality and 1 = perfect inequality

Question 10

Draw diagrams to show inequality issues between skilled and unskilled workers

Answer 10

Look at notes

Question 11

Inequality issues in the UK

Answer 11

• UK has high & growing inequality (other EU countries not so bad)
• those in bottom 10% have improved absolutely in real terms
• UK has good job creation: countries with more equal incomes have more ‘job inequality’

Question 12

Is the NMW a cure for income and earnings inequality?

Answer 12

• Most UK inequality growth is at the top end - out of range of the NMW
• Many poor homes do not work

Question 13

List some of the factors behind why some people have higher wages than others

Answer 13

• skill
• globalisation
• technical progress
• disequilibrium
• CWDs
• government policy (NMW)

Question 14

What is the principal-agent problem?

Answer 14

Agents pursue own objectives (principal knows more than the agent)

• sometimes sick
• sometimes need to be dismissed

Question 15

Draw the piece rates v times rates graph and explain

Answer 15

Look at notes

Question 16

Explain some of the features of piece-rate pay

Answer 16

• Linking CEO pay to share prices via stock options is a form of piece-rate pay
• In UK, piece rates more likely for women (shorter service, so deferred pay less possible)
• More piece rates in large firms (can pay to set up system)
• Adverse feelings for performance related pay in public sector because of distrust of management - how to measure ‘performance?’?

Question 17

Draw the deferred pay diagram and explain

Answer 17

Look at notes

Question 18

What are explicit contracts?

Answer 18

Court-enforceable

• cannot cover all contingencies

Question 19

Explain the features of ILMs

Answer 19

• relate to large firms - wages not closely linked to S&D but set bureaucratically
• ILMs mean: long-term contracts, promotion from within, seniority pay, last in first out, low quit rates
• large firms have ‘arms-length’ relationships with workers, so need different systems of motivation and governance

Question 20

Draw the fringe benefits diagram and explain

Answer 20

Look at notes

Question 21

Identify some fringe benefits

Answer 21

simply another form of pay

pensions
holiday pay
sick pay
maternity pay
health care
family-friendly working conditions
company car

other fringes: participatory management, flexitime, coy training schemes

Question 22

What are efficiency wages?

Answer 22

Wages > alternative MRP (meant to have beneficial efficiency/motivational effects

• If W > alternative MRP, workers have more to lose if fired, so tight supervising is not needed to prevent shirking
• but markets do not clear if efficiency wages are paid: unemployment is then required as a disciplinary device
• efficiency wages expected where supervision is difficult e.g. large firms

Question 23

Is deferred pay theory the same as efficiency wages?

Answer 23

Deferred pay theory has elements of efficiency wages (senior workers have W > alternative MRP)

• but, under deferred pay theory, markets clear (no unemployment) since low pay when junior, balances high pay when senior

Question 24

Since effort is generally hard to measure (piece rates), other methods of motivating people are used…

Answer 24

supervision, promotion ‘tournaments’, deferred pay, worker involvement and good fringes (improve moral and secure effort)