Workers & Wages
Microeconomic Decision Makers
A question on what determines wages rewards distinct, well-explained reasons. They fall into demand-side, supply-side and institutional groups.
Demand-side and supply-side factors
Demand for labour depends on the demand for the product the worker helps to make (derived demand) and on the worker's productivity. A worker who produces more output per hour, or output the firm can sell for more, is worth more, so firms demand such workers more strongly and pay them more.
Supply of labour depends on how many workers have the relevant skills and are willing and able to do the job. The fewer the qualified workers available, the higher the wage employers must offer to attract them.
- Skills and qualifications. Jobs that need long training (surgeon, airline pilot, engineer) have a small pool of qualified candidates, so pay is high. Jobs almost anyone can do (cleaner, fast-food worker) have a large pool, so pay is low.
- Demand for the product. Demand for software engineers has risen with demand for software; demand for typists has fallen with the rise of personal computers.
- Productivity. A worker who generates more revenue per hour is worth more to the firm, which is willing to pay more to recruit and keep them.
Because demand for labour is derived, a rise in demand for the product shifts the demand for labour to the right. The demand curve moves from Demand for labour to Demand for labour 2, and along the unchanged supply curve the wage is bid up (here from the original equilibrium price to the higher equilibrium price 2) while the quantity of workers employed rises.
A shift in supply works the same way on the other curve. If fewer workers hold the necessary qualifications, if workers emigrate, or if a professional body lengthens the training needed to enter the job, the supply of labour falls and the SL curve shifts left to SL2. Reading off the unchanged DL curve, the equilibrium wage rises and the equilibrium quantity of labour falls: employers have to offer more to attract the smaller pool of available workers, and at that higher wage they take on fewer of them. The mirror case runs in reverse. If immigration, retraining schemes or a large cohort of new entrants increase the supply of labour, SL shifts right, the equilibrium wage falls and the quantity of workers employed rises. When a question asks you to use a diagram, label both curves, show the shifted curve as SL2, and mark the new wage and the new quantity on the axes.
Common exam question
How demand and supply of labour change a wage
Question: Analyse how market forces can raise wages, or what influences a firm's demand for labour (6 marks).
Asked in 2 of the 11 structured papers. Name the change and the market: one scheme gives a mark for an increase in demand and one for making it demand for labour, and likewise for a decrease in supply of labour. Then give the cause. Demand for labour is derived: it rises with demand for the product, with workers' skills and with dearer machines that could replace them, and falls when machinery gets cheaper. Supply falls if the labour force shrinks or fewer hold the skills.
The same idea is set in 4 of the 13 multiple-choice papers. Higher productivity shifts only the demand curve right, to a higher wage and more workers; options that move supply are wrong. More demand for labour raises the wage and extends the quantity supplied. Better working conditions are keyed to raise the supply of nurses.
Institutional factors
Two institutions can lift wages above the level the market alone would set: a can negotiate higher pay for its members through collective bargaining, and a national sets a legal floor below which employers cannot pay.
Common exam question
What gives a trade union bargaining power
Question: Choose the condition that would, or would not, strengthen a trade union's power to push up wages (1 mark, multiple choice).
Set in 2 of the 13 multiple-choice papers. A union is strong when the employer cannot do without its members: it supplies all the labour the firm needs, membership is high, workers are scarce or the economy is growing fast. Laws limiting strike action, rising cyclical unemployment and a move to short-term contracts all weaken it. The trap is the product market: when demand for the firm's product is price-elastic, a wage rise passed on as a higher price costs many sales and jobs, so elastic demand weakens the union rather than strengthening it.