Wage differentials Flashcards
What is wage differentials?
A term which refers to the differences in wages received by workers. Varying from unsustainable, sustainable, and very sustainable (life of luxury).
Why might wage differentials not work in a perfect competition?
If job A has an increase in income workers from job B will leave job B to work in job A ( assuming they have the skills and free mobility to do so). Meaning that the supply of workers in job B will decrease causing an increase in income for that profession and an increase in supply of workers in job A causing a decrease in income for that profession. This therefore equals out income eliminating wage differentials
What are some factors that can cause wage differentials?
Non-homogeneity of labour
Non-monetary rewards
Labour is not perfectly mobile
Discrimination
Explain non-homogeneity of labour
Workers have different attributes gained through training and education and unique characteristics which will result in an increase in MPP and higher wages
Explain non-monetary rewards
This refers to compensations received causing wages to be high or low between workers in the same field. For example workers may be fine with a low wage if they are compensated with housing, or they may have a high wage if their job is dangerous or high risk.
Explain immobility of labour
Not all workers will have the necessary skills to obtain a job and unemployed people may not be able to work in jobs in a different country. Of course the more developed countries will pay workers more.
Explain discrimination
Minorities within a work force may earn less income than majorities causing wage differentials.
Outline some assumptions made underlying marginal productivity theory
- Firms are price takers
- Diminishing marginal returns; the marginal product of a factor typically diminishes as more of a factor is employed
- Factors are homogeneous
- Firms and workers have perfect knowledge
- Factors like capital is fixed and labour is variable in the short run
What is marginal physical product and how do you calculate it?
MPP is the extra output gained by employment of one more unit of factor.
MPP= Change in total product/ change in quantity (labour)
What is marginal revenue product and how do you calculate it?
MRP is the change in total revenue caused by employing one more or one less unit of a factor
MRP= MPP X MR
What is the value of marginal product and how do you calculate it?
This is the market value of a factors’ marginal physical product
VMP= MPP X P
