Wage determination essay There are several factors that can influence wages. One will be in the question e.g. discuss the extent to which the minimum wage influences wages The one in the question is what you write about first Pick two to three of the others as the however level 4 points

Factors that determine (influence) wages MRP Elasticity of demand National Minimum Wage Elasticity of supply Trade Unions Monopsony

MRP – how does it influence wages? The marginal revenue product of labour is the change in a firm’s total revenue from employing one more worker. It is found by multiplying the MPP by the price of the product The MRP curve, in effect, becomes the demand curve for labour. Changes in MRP can therefore result from either a change in the price of the product or a change in the productivity of labour. An increase in either will shift the MRP curve to the right. Assuming that the supply of labour remains constant then this change will result in wages rising in that occupation. Similarly a shift to the left of the MRP curve causes wages to fall. As illustrated in the diagram

Evaluation It assumes That workers are homogenous but they are not – they bring different skills and abilities to a firm Firms have no buying power when demanding workers (i.e. they have no monopsony power)but in reality monopsony employers can drive down the wage There are no trade unions or minimum wage. Workers can join trade unions and this can influence the wage more than the MRP as the TU can push the wage up above the MRP rate. Min wage can also pay the worker more than their MRP That workers’ productivity can be measured accurately whereas it is difficult to measure output per worker in some occupations e.g. nurse

Supply elasticity – how does it influence wages? If the supply of labour is inelastic, an increase in demand will raise the wage more than if supply is elastic. Supply elasticity is affected by the qualifications and skills required, the length of training and the mobility of labour. A premiership footballer would have inelastic supply owing to the high level of skill required to do the job. Therefore, if the demand for labour rose, the wage would rise much higher than for example the wages of a cleaner which would be relatively inelastic in supply. This is because there is a low level of qualifications and training to be a cleaner. This is shown in the diagrams. Hence, the elasticity of supply for labour can be a determinant of the wage

NMW – how does it influence wages? The National Minimum Wage is the minimum pay per hour almost all workers are entitled to by law. It becomes illegal to pay below the minimum wage. This wage may be above the market rate. This is shown on the diagram. The NMW is the minimum the employer can pay but this is above the market rate of W, QL. Therefore the minimum wage can be a determinant of the wage rate.

Evaluation The extent to which the NMW influences the wage rate depends on the level at which it is set If it is set at below the market rate then it will have little influence on wages. For example the under 18 rate is currently £3.79 but many college students are paid at least £5.30 suggesting that the NMW for the under 18 age group is not influencing the wage. When the new over 25 rate of £7.20 is enforced in April 2016, this might have more influence on pay as some workers will be automatically entitled to a pay rise from £6.70

TUs – how do they influence wages? Workers in unions may be able to get higher pay because the union can put pressure on the employer to increase wages. On the diagram the TU wage is higher than the market rate. The TU can threaten to strike and use other methods to disrupt productivity, causing the employer to lose profits if the wage is not raised Therefore the TU can influence wages

Evaluation A union has more bargaining strength when demand for labour is inelastic. There has been a decline in trade union membership in recent years which will reduce the TU’s power to influence wages..but public sector unions still have a large membership therefore TUs could influence wages more in the public sector than the private sector currently. Whilst the TU can influence wages, it can also cause unemployment therefore causing labour market failure

Demand elasticity – how does it influence wages? Demand elasticity for labour explains how sensitive demand is to a change in the wage rate. If demand is inelastic, wages are likely to be higher if there is a reduction in supply than if demand is elastic as shown in the diagram Elasticity of demand for labour is influenced by the price elasticity of demand for the product, the ease of factor substitution and the proportion of wage costs to total costs Therefore the elasticity of demand for labour can influence the wage, a brain surgeon might be more inelastic in demand as they cannot be replaced with capital. A retail worker could be more elastic in demand as they could be replaced with capital e.g. self service checkouts. Therefore a brain surgeon could earn more than a cleaner

Monopsony – how does it influence wages? As the only employer in the market it is faced by the supply curve of the whole industry and can choose any point on the supply curve. The employer will employ at the level of employment where MRP = MCL. Q2 on the diagram. The assumption is that the employer will act in a maximising manner and employ labour as long as the MRP of labour is greater than the marginal cost of employing the labour (MCL). In order to attract Q2 workers the monopsonist has to offer a wage of W2. The impact of monopsony power is, therefore, to lower wages compared to the free market equilibrium level. Therefore the monopsony can be said to influence wages

Evaluation Monopsonies can influence wages to a certain extent however, – If the monoposony interacts with a trade union there is a bi lateral monopoly and the trade union can force the wage back up to the market rate thereby limiting the monopsony’s power to influence the wage – The monopsony cannot pay below the NMW thus limiting its power

Essay plan Explain the theory in the question (L marks) Explain the other theories that could affect wages (L4b marks) Evaluate these theories where possible (L4a marks) Judgement (18 marks) Discuss judgement (19-20 marks) Explain the theory in the question (L marks) Explain the other theories that could affect wages (L4b marks) Evaluate these theories where possible (L4a marks) Judgement (18 marks) Discuss judgement (19-20 marks)