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

2. 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

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

4. 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)

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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)

12. 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)

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

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

15. 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)

16. 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*

17. 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.

18. 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.

19. 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)

20. Your Work
Question 1 and 2 on page 173