Wages, Rent, Interest and Profit Chapter 7 - Continued Wages, Rent, Interest and Profit

Wage and its Determinants In Yesterday’s class we talked about supply and demand to determine the wages in a given market Today, we are going to look at the big picture of the various factors that affect wages for Canadian workers

Seven Main Determinants Labour Productivity Education Experience Job Conditions Regional Disparities Market Power Discrimination

1. Labour Productivity Remember from yesterday, the level of labour productivity (or the output per worker) determines the wage of the worker Is the most important factor Is influenced by education and experience (because this affects how capable they are)

2. Education In general, and as noted by the chart below, the more education needed to perform a job, the higher the pay Education University Degree Post-secondary diploma Some post-secondary High school graduate Some high school 0 to 8 years of school Average Family Incomes $82 570 58 566 52 942 53 456 47 358 39 633

Education and Opportunity Costs Due to the costly and time consuming nature of education, it also affects labour supply Education carries with it the opportunity cost of the income that could have been earned had the person worked instead of going to school

3. Experience On-the-job experience increases the demand for a worker and as a result their wages as well Also, in certain industries, workers gain more rights the longer they have worked with an employer

4. Job Conditions Often, two occupations with similar education and experience needed offern very different wages One possible reason for this could be if one job is unappealing for some reason, thus they are forced to pay higher wages or people would choose to be employed in the other occupation

5. Regional Disparities Wages often vary from place to place (i.e. influx of people moving to Alberta get paid more than in Ontario) In a perfectly functioning labour market, workers would move to where they can make more, but labour tends to be immobile

6. Market Power How much power workers have also greatly affects how much their wages are As a general rule, a unionized worker will make more in the same position as a non- unionized worker

Types of Unions There are two types of unions Industrial union – where all workers in an industry regardless of occupation are part of the union (i.e. C.A.W.) Craft union – where workers of a particular occupation form a union (i.e. bricklaying)

7. Discrimination While illegal, decisions of who gets hired are often based on some trait other than credentials or performance A wage gap exists in Canada where the average women earns 71.1% of the average man Studies suggest that while 40% of this is related to hours, 33% is based on job discrimination (ATP tennis is an example)

Task As a class, let’s discuss the cases given on page 169

Other Resource Income Up until now, we have only talked about labour as a resource There are other resource incomes

Rent Is the payment for use of a productive resource that is available only in a fixed amount Land is the most significant resource that provides rent and is generally only available in fixed supply the equilibrium rent for a particular type of land varies with demand for this land (e.g. a rise in the price of beef affects the rent for ranching land)

Equilibrium in the Market Land Figure 7.7, Page 181 Millions of Hectares Demand and Supply Curves for Land Rent ($ per year) 2 1 4 6 8 12 14 3 5 7 9 Demand and Supply Schedules for land (millions of hectares) Rent ($ per year) Quantity Supplied (S) Demanded (D) S 10 e 14 12 10 8 6 4 5 6 7 8 6 D 6 *Note that because the amount of land is fixed, supply is perfectly inelastic*

Changes in the Demand for Land Figure 7.8, Page 182 Millions of Hectares Demand and Supply Curves for Land Rent ($ per year) 2 1 4 6 8 14 3 5 7 9 Demand and Supply Schedules for land (millions of hectares) Rent ($ per year) Quantity Supplied (S) Demanded (D0) (D1) S 12 b 10 a 14 12 10 8 6 4 5 6 7 8 5 6 7 8 9 6 D0 D1 6 Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

Interest Interest is related to the supply of capital resources, and can also be viewed as a financial income. When money is lent, the lender requires repayment not only of the loan principal but also a charge for the use of the money. Interest is payment for the opportunity cost of the money being used.

Range of Interest Rates Four factors affect interest rates credit risk (how likely the borrower is to pay off the loan) the loan period Collateral (what the borrower pledges to give to the lender in case the borrower cannot repay the loan) the size of the loan (in general, the shorter the loan, the lower the interest rate)

Your Work Question 1 and 2 on page 173