Wages theory Flashcards
What is a wage
The reward for labour
What can be the two ways of producing something
Labour intensive
Capital intensive
What do we mean by labour being a derived demand
It is derived from the demand for a finished product
What is MPP
Marginal physical product, the extra output produced by each additional worker
What is the demand curve on a wages diagram
MRP
What is MRP
The extra revenue generated by each additional worker
What is on the x and y axis of wages diagram
x - Q of labour
y - Wage
Draw a wages diagram
Explain the shape of an MRP curve
MRP theory suggests that a fall in the wage rate will lead to an increased demand for labour
Give 3 causes of an increase in demand for labour (shift right of MRP)
- Increase in the price of finished good/service
- Higher productivity of each worker (better education/training)
- Increase in the price of capital
Why does an increase in the price of capital increase the demand for labour
If capital is more expensive, labour is now cheaper in relative terms, meaning it will be in greater demand
Give 4 reasons why wage rates differ
- Labour is not homogeneous
- Trade unions
- Monopsonies
- Discrimination
Explain two reasons why labour is not homogeneous
Education/training
Age
How does age affect MRP
MRP generally increases with age
Draw two diagrams showing the supply and demand for labour of a low skilled job, and of a high skilled job
Explain why the supply curve of a high skilled job starts higher up the Y axis than that of a low paying job
Below that point, you would not attract any labour
Explain how the MRP curve of a high skilled worker differs from a low skilled worker
The addition of a high skilled worker adds high value to the firm, hence a steeper curve. Whilst a low skilled worker adds relatively little individual value
What is the equation for elasticity of supply of labour
% Change in supply of labour/ % Change in wage
Explain why high skilled jobs have inelastic supply
In order to attract an additional worker there needs to be a large increase in the wage
What is the equation for elasticity of demand of labour
% Change in demand of labour/ % Change in wage
What is a trade union
An organisation that is formed to protect the interests of a group of workers by operating on the principle of collective bargaining
What is collective bargaining in a trade union
The union speaks for all the workers when negotiating pay
What do trade unions do to the price of labour
They set a minimum price
Draw a diagram showing the effect of a trade union on the supply and demand of labour
What are two free market/neo classical criticisms of pay rises from trade unions
- The trade union creates an excess supply of labour (unemployment)
- Pay rises not based on increased productivity are inflationary
What are the 4 factors which determine the power of a trade union
- Membership
- Militancy
- Level of profitability of the industry
- Elasticity of supply of labour
What is the militancy of a union
How likely a union is to take action
What are examples of less militant trade unions
Nurses, doctors, careworkers
(UNISON is the largest union for student nurses)
How does the level of profitability of an industry affect the power of a trade union
Trade unions will fight to secure a greater proportion of an industries profits for their members in the form of higher wages, if it is not a profitable industry, there is not much to fight for
How does the elasticity of supply of labour affect the power of a trade union
The more inelastic (skilled) that labour supply is, the more bargaining power a trade union will have
What are the two ways a trade union can benefit an employer
- They may perform some of the functions of the HR department (Health & safety, legal advice, pay queries)
- Help facilitate the introduction of new working practices that improve efficient (e.g. new IT system easy to use for all members)
What a monopsony
An employer which demands a significant proportion of labour within a particular industry
Why do monopsonies have the power to supress wages
Workers have a limited choice in terms of where they can be employed
Give an example of a monopsony industry
NHS doctor
Police
(Government)
Draw the monopsony diagram showing the free market equilibrium too
What is the optimal number of workers for a monopsonist to employ
Where MC=MRP
Draw the diagram showing the effect on labour of a trade union in a monopsony market
How does a monopsony affect wage and quantity of labour compared to if there was a free market
A monopsony pays a lower wage and employs fewer workers than if there was a free market
How does discrimination affect MRP in 2 ways
- Affects MRP development (gaining skills training/experience)
- Reduces perceived MRP
What are the two common types of discrimination
Gender
Ethnicity
Draw the diagram showing no discrimination and discrimination
Give 4 costs of discrimination
Individuals suffer (lower wages)
Producers have a smaller pool of labour to select from (may miss out on best talent)
Government must spend more money on legislation against discrimination (and benefits for those unemployed due to D)
The economy suffers (lost output)
What is the effect of consumers discriminating
They face higher costs/less choice/inferior products
How does the economy suffer from discrimination
There will be less productivity which leads to less growth, and allocative efficiency decreases due to labour not being distributed evenly
What is positive discrimination
Where MRP is perceived to be higher
Give an example of positive discrimination
Oxbridge grads/PHD’s
What policies can the government use to reduce discrimination (5)
- Quotas (e.g. minimum number of underrepresented groups of workers in a firm)
- Anti - discrimination legislation (e.g. equal pay laws)
- Inclusive hiring & promotion practices (e.g. Blind recruitment - removing identifying information like name, gender, ethnicity from job application)
- Family friendly policies (e.g. parental leave, flexible work hours and affordable childcare)
- Support for workers in low paid sectors (e.g. raising minimum wage & union support)
Give an example of diverse shortlisting
Encouraging or mandating diverse candidate pools for hiring or promotion decisions
E.g. Pinterest’s Rule for Diverse Shortlists In 2016, Pinterest introduced a hiring policy inspired by the NFL’s Rooney Rule, which requires teams to interview at least one minority candidate for head coaching jobs.
Give an example of affordable childcare practices - state some issues
Government has subsidised free nursery places for all 2, 3 and 4 year olds (15hrs a week)
Additional means tested 15hrs provided for 3 & 4 year olds
Government roll out plan means that eventually all children under 5 will get a free 15 hours (projected September 2025)
Criticism:
Not funded enough - parents still have to pay for lunch or stationary / not enough free spaces
If the government wants immediate effects- why not allow free childcare for all children straight away rather than slow rollout - budget constrains
Give an example of a quota to reduce discrimination
Setting benchmarks for women in leadership or specific sectors
How can union reduce discrimination
Encourages collective bargaining to address pay disparities
How can increasing minimum wage aid those being discriminated against
What are the drawbacks to this
If due to discrimination, underrepresented groups in high paying jobs are now on low paying jobs, raising minimum wage can aid their situation - Yet this may not aid in reducing discrimination itself but may reduce its impacts on individuals
Explain the more complex version of the monopsony vs trade union diagram
Draw the more complex version of the monopsony vs trade union diagram
Give 3 arguments for increasing minimum wage
- Reduces poverty & income inequality
- increase productivity and worker morale
- Reduces government spending on welfare
- Stimulates consumer spending and growth (Multiplier effect)
Give 3 arguments against minimum wage
- Can cause higher unemployment
- increases business costs and prices (risk of inflation)
- can lead to informal or black market employment
- May hurt young and low skilled workers and employers may substitute them with more experienced ones of the price of labour is the same
- doesn’t actually reduce poverty but reduces the effects of it
