Topic 9 - Wage Determination

Question 1

Perfect Labour Markers

Answer 1

Everyone in the market is a wage taker.

– Free entry (i.e. no restrictions on the movement of labour).

– Perfect knowledge (for both employers and employees).

– Homogenous labour (i.e. all economists have equal productivity).

Question 2

Total supply of labour for a certain job/skill depends on:

Answer 2

• Wage rate (movement along the supply curve)

– The number of qualified people (shift of the supply curve)

– Other non-wage factors such as job pleasantness, security and annual leave (shift of the supply curve) – Wages and non-wage benefits in alternative jobs (shift of the supply curve)

Question 3

Backward bending supply of labour

Answer 3

Theoretically because the income effect outweighs the substitution effect:

– A higher wage rate makes working more attractive compared to leisure due to the higher opportunity cost of leisure (substitution effect).

– A higher wage rate means that to get the same income, fewer hours need to be worked and so as wages rises, workers may choose leisure over income (income effect).

Question 4

In the labour market, a firm will maximise their profit

Answer 4

where the marginal cost of employing an extra worker is equal to the marginal revenue from the extra output that the worker produces

Question 5

In a perfectly competitive labour market the marginal cost of labour (MCL) is equal to

Answer 5

market wages as the firm faces a horizontal supply of workers. IE MCL= W

Question 6

The extent to which the supply of labour changes with respect to wages will depend on

Answer 6

– The difficulties and costs in changes jobs

– The time period

– The mobility of labour

Question 7

The extent to which the demand for labour changes with respect to wages will depend on:

Answer 7

– The price elasticity of demand for the good the worker makes

– Labour substitutability

– How much wages contribute to the total cost of making the product

– The time period

Question 8

Monopsonists

Answer 8

Monopsonists are wage setters and face an upward sloping supply curve (hence MCL is not constant over the quantity of labour).

Question 9

Collective Bargaining

Answer 9

Unions can threaten to strike, working-to-rule (slowdown) or refuse to cooperate with management.

Employers can threaten plant closure, lock-outs, redundancies or the employment of non-union labour.

Question 10

Efficiency Wage Hypothesis

Answer 10

suggests that workers productivity increases as their wage rate does.

1) Less slacking off
2) Reduced labour turnover
3) High morale

Question 11

Monopsony Labour Market

Answer 11