Wage Determination Flashcards
Short run supply of labour: Substitution effect > income effect
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)
Short run supply of labour: Income > effect substitution effect
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)
Key determinant of supply of labour in the short run
In the short run, workers do not have time to change occupation. So key determinant of individual supply of labour is wage
Limitation of individual supply of labour theory
Workers are often unable to have a great deal of control over the number of hours that they work.
Long run supply of labour
Workers can change their occupation. Supply of labour is influenced by the net advantages of the job
Pecuniary factors
- wages
- overtime
- commission
- bonuses
Non-Pecuniary factors
- flexibility of hours
- location
- promotion chances
- skills/ qualifications
- job security
- holidays
- pleasantness of job
etc
Elasticity of supply of labour
The responsiveness of the supply of labour in relation to changes in the wage rate
Determinants of elasticity of supply of labour (4)
- Qualifications/ skills required (more = inelastic)
- Length of training (long = inelastic)
- mobility of labour (mobilie = elastic)
- Time period (longer time period = elastic)
Demand for labour: Marginal Revenue Product (MRP)
The change in a firm’s revenue resulting from employing one more worker
Demand for labour: derived demand
Demand for labour depends significantly on demand for the goods that they produce
Determinants of a firm’s demand for labour (6)
- 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
Marginal revenue product theory
Quantity of any Factor of production employed will be determined where the marginal cost of that factor= marginal revenue of that factor
Limitations of Marginal revenue product theory (2)
- Difficult to measure individual productivity gained by adding one worker/of one worker
- Difficult to measure marginal product in tertiary sector
PED for labour
The responsiveness of the demand for labour relative to a change in the wage rate
Determinants of the PED for Labour (5)
- 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)
Other influences on wage determination (3)
- Government policy
- Bargaining power of workers relative to employers
- Attitudes towards “what people deserve to be paid”
Assumptions of a perfect labour market (4)
- All labour is homogeneous (the same)
- No employer dominates industry
- No barriers to entering market
- everyone has perfect knowledge
Wage determination in competitive markets
- 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
Wage differentials
Differences in the wage rate, can occur between occupations, regions, industries, firms and individual workers
Explanation of wage differentials (4)
- differences in demand and supply
- Bargaining power
- Impact of government policy
- public opinion
Human capital definition
skills, knowledge and experience that an individual possesses
Transfer earnings
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)
Economic rent
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)
Limitation of economic rent/transfer earnings theory
-People take into account non-pecuniary factors as well as pecuniary factors. Maybe NP factors (location, hours, etc) are more favourable
Negative economic rent
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
