Wage Determination

Question 1

What type of workers can command high wages?

Answer 1

Workers that are highly skilled/specialise, who are in short supply.

Question 2

What are the two main reasons for a change in the wage rate?

Answer 2

1) A change in the demand of labour, e.g. an increase in productivity will increase the demand for labour, raising the wage rate.
2) An increase in the supply of labour, e.g. an increase in the number of migrants to the UK will increase the supply of labour, lowering the wage rate.

Question 3

In perfectly competitive labour markets, what is the demand for labour curve equal to, and what is its shape?

Answer 3

D = MRP, and is a downward sloping line.

Question 4

In perfectly competitive labour markets, what is the supply of labour curve equal to, and what is its shape?

Answer 4

S = MC, and is a horizontal line, as supply is perfectly elastic.

Question 5

At what point on the demand/supply of labour graph will firms employ workers?

Answer 5

Firms will employ the number of workers where MC=MRP.

Question 6

What are 5 potential reasons why wage rates may differ?

Answer 6

1) Age.
2) Gender/sex.
3) Ethnicity.
4) Education/training/experience.
5) Ability/skill.

Question 7

What are the 2 types of non-competitive labour markets?

Answer 7

1) A monopsonist labour market, where a firm is the dominant buyer of labour. E.g. the NHS is the main ‘buyer’ of doctors/nurses.
2) A monopolist supplier of labour, such as a trade union.

Question 8

What is the minimum wage?

Answer 8

A limit set on the lowest firms can pay employees, set above the market wage rate.

Question 9

Why would a government install a minimum wage (2)?

Answer 9

1) Low wages can lead to relative poverty.
2) Low wages impact the economy, as people will spend less.

Question 10

What is a maximum wage?

Answer 10

A limit on wage rates.

Question 11

Where must a maximum wage be set in order for it to be effective?

Answer 11

Below the market (equilibrium) wage rate.

Question 12

What are 2 benefits of imposing a maximum wage?

Answer 12

1) Less inequality in society.
2) Lower labour costs for firms.

Question 13

What are 2 drawbacks of imposing a maximum wage?

Answer 13

1) Reduced motivation for workers, potentially lowering productivity.
2) They impede a market which would reward talent/scarce skill with higher wages.

Question 14

What are 2 ways that the government can tackle labour immobility?

Answer 14

1) Training programmes for skills that may be in demand/lacking in an area/industry.
2) Relocation subsidies, incentivising workers financially to move to a different area.