Wage Determination

Question 1

Short run supply of labour: Substitution effect > income effect

Answer 1

Worker will substitute income for leisure as leisure now has a higher opportunity cost. This effect leads to more hours being worked as wages rise (generally happens at Lower wages)

Question 2

Short run supply of labour: Income > effect substitution effect

Answer 2

Worker works fewer hours when wages increase. This is because workers can get a higher target income by working fewer hours (generally happens at higher wages)

Question 3

Key determinant of supply of labour in the short run

Answer 3

In the short run, workers do not have time to change occupation. So key determinant of individual supply of labour is wage

Question 4

Limitation of individual supply of labour theory

Answer 4

Workers are often unable to have a great deal of control over the number of hours that they work.

Question 5

Long run supply of labour

Answer 5

Workers can change their occupation. Supply of labour is influenced by the net advantages of the job

Question 6

Pecuniary factors

Answer 6

• wages
• overtime
• commission
• bonuses

Question 7

Non-Pecuniary factors

Answer 7

• flexibility of hours
• location
• promotion chances
• skills/ qualifications
• job security
• holidays
• pleasantness of job
  etc

Question 8

Elasticity of supply of labour

Answer 8

The responsiveness of the supply of labour in relation to changes in the wage rate

Question 9

Determinants of elasticity of supply of labour (4)

Answer 9

• Qualifications/ skills required (more = inelastic)
• Length of training (long = inelastic)
• mobility of labour (mobilie = elastic)
• Time period (longer time period = elastic)

Question 10

Demand for labour: Marginal Revenue Product (MRP)

Answer 10

The change in a firm’s revenue resulting from employing one more worker

Question 11

Demand for labour: derived demand

Answer 11

Demand for labour depends significantly on demand for the goods that they produce

Question 12

Determinants of a firm’s demand for labour (6)

Answer 12

• demand for good/service
• Productivity per worker (higher productivity = higher demand)
• wage rate (lower = higher demand)
• complementary labour costs (high = lower demand)
• price of other factors of production
• substitutes for labour

Question 13

Marginal revenue product theory

Answer 13

Quantity of any Factor of production employed will be determined where the marginal cost of that factor= marginal revenue of that factor

Question 14

Limitations of Marginal revenue product theory (2)

Answer 14

• Difficult to measure individual productivity gained by adding one worker/of one worker
• Difficult to measure marginal product in tertiary sector

Question 15

PED for labour

Answer 15

The responsiveness of the demand for labour relative to a change in the wage rate

Question 16

Determinants of the PED for Labour (5)

Answer 16

• PED for product produced (elastic = elastic)
• Proportion of wage costs in total costs (high = elastic)
• Ease by which labour can be substituted by other FOPs (easy = elastic)
• size of potential pool of workers, if small number possess necessary qualifications/ skills then it will be inelastic
• time period (more elastic over longer time period)

Question 17

Other influences on wage determination (3)

Answer 17

• Government policy
• Bargaining power of workers relative to employers
• Attitudes towards “what people deserve to be paid”

Question 18

Assumptions of a perfect labour market (4)

Answer 18

• All labour is homogeneous (the same)
• No employer dominates industry
• No barriers to entering market
• everyone has perfect knowledge

Question 19

Wage determination in competitive markets

Answer 19

• In competitive markets firms are wage takers because if they set lower wages workers would not accept the wage
• Therefore supply of labour to firm is perfectly elastic as any lower wage and no one would work

Question 20

Wage differentials

Answer 20

Differences in the wage rate, can occur between occupations, regions, industries, firms and individual workers

Question 21

Explanation of wage differentials (4)

Answer 21

• differences in demand and supply
• Bargaining power
• Impact of government policy
• public opinion

Question 22

Human capital definition

Answer 22

skills, knowledge and experience that an individual possesses

Question 23

Transfer earnings

Answer 23

what a worker could earn in his/her next best paid alternative. The minimum income necessary to encourage a worker to take a particular job
(can be thought of as the opportunity cost of performing that current job)

Question 24

Economic rent

Answer 24

Surplus over transfer earnings
Surplus paid to a worker above what they would receive in their next best paid alternative
(economic rent will form a large proportion of wage when supply is inelastic)

Question 25

Limitation of economic rent/transfer earnings theory

Answer 25

-People take into account non-pecuniary factors as well as pecuniary factors. Maybe NP factors (location, hours, etc) are more favourable

Question 26

Negative economic rent

Answer 26

When a worker has a job that pays less than an alternative. Maybe because non-pecuniary factors are more favourable. They are losing potential income