A 4-mark "explain the factors that determine wages" question rewards distinct, well-explained reasons. The five most important fall into three groups: supply-side, demand-side, and institutional.
Supply-side factors
The supply of workers with the relevant skills. If only a few workers have the qualifications the job requires, employers must offer more to attract them.
Three drivers of labour supply:
- Skills and qualifications. Jobs that need long training (surgeon, airline pilot, engineer) have a small pool of qualified candidates; pay is high. Jobs that almost anyone can do (cleaner, fast-food worker) have a large pool; pay is low.
- Geographical mobility. If workers cannot easily move to where the jobs are (high housing costs, family ties), local labour supply is restricted and wages must be higher to attract them.
- Occupational mobility. If workers cannot easily retrain for the role, the supply stays low and wages stay high. (Geographical and occupational mobility are defined in topic 2.)
Demand-side factors
The demand for the firm's product. When demand for a product is rising, firms expand and compete for the workers who make it.
Two drivers of labour demand:
- Demand for the product the worker helps to make. Demand for software engineers has risen with demand for software products; demand for typists has fallen with the rise of personal computers.
- Productivity (value of output produced). A worker who produces more output per hour, or output that the firm can sell for a higher price, contributes more revenue to the firm. The firm is willing to pay more for such a worker.
Institutional factors
Trade union membership and government legislation can lift wages above the level the market alone would set.
- Trade unions (covered in section 4) negotiate higher pay through collective bargaining for their members.
- The national minimum wage (covered in section 6) sets a legal floor below which employers cannot pay.
A typical 4-mark answer pairs two skill / supply points, one demand point, and one institutional point, each with a one-line explanation.
Example — Explain four factors that explain why doctors earn higher wages than cleaners. (4 marks)
- Skill and qualifications. Doctors require many years of medical training; the pool of qualified people is small. Cleaners need very little training; the pool is huge.
- Productivity / value of output. A doctor's hour of work is worth far more in revenue to a hospital than a cleaner's. Firms are willing to pay accordingly.
- Demand for the product. Healthcare is in high demand; demand for cleaning services is also high but the value per hour is lower.
- Trade unions / professional bodies. Doctors have strong professional bodies (e.g. medical associations) that bargain on their behalf; cleaners are less likely to be unionised.