2.3labour Market and Govt Intervention

\ 4 4 \ \ ‘ atovol Economics (MCQ) Co TOPIC 2.3 Labour Market Forces and Government Interventio! - Demand and Supply of Labour, ~ Wage Determination in Perfect Markets, - Wage Determination in Imperfect Markets. MCQ Section 1, The table shows the current posi of a firm in a perfectly competitive industry. factor X | factor ¥ Inarglnal physical product| 2 8 factor pri $5.00 | $10.00 Ifthe firm sells its product for $1 and sims to maximise profits, what should itemploy? ‘A. more of both X and Y B_ more of X and less of ¥ C more of ¥ and less of X D_ less of both X and Y (u0siP3/4] 2. The government imposes a maximum ‘earings limit on recording artists. What must result in the short run if the measure is effective? ‘A. a decrease in the economic rent eamed by recording artists B a decrease in the transfer camings of recording artists © a decrease in the supply of recording artists D_adecrease in the profits of record ‘companies ([008/P3/05} 5 A firm curently employs 30 workers at a daily wage rate of $40. It calculates that the marginal cost per day of hiring an additional worker would be $102. By how much would the daily wage rate have to be increased to attract an extra worker? A ® B $2 c m7 D si02 {NO8/P3/05] In which circumstances is a trade union most likely to be successful in raising wage rates? ‘A. The demand for the good produced is price-elastic. B The industry faces substantial foreign competition. C The industry's cost structure is capital-intensive. D_ The workers are unskilled. [N08/P3/Q6] To increase its labour force from 100 to 10] workers, a firm has to increase its daily wage rate from $400 to $405. What is the marginal cost of labour per day? A S$ B $405 Cc Ss D = $40905 os/PyoH7 HELPS tb MCQ 4, D. Since per unit cost is higher than the price, therefore, less employment of both X and ¥ would increase MP and lower par unit cost. 2. A. The excess that recording artists are paid ver earnings from alter- ralive occupation is going to docrease. 3. A_ Marginal factor cost (MFC) is the adai- Tional cost of hiring an extra worker. TFC = number of workers xwage tale, le, 1200 = 30x40 TFC rises by $102 due to the hing of 31st worker. Hence wage rate eel = Rate Naas 2 4. © Capital intensive cost structure suggests that the proportion of labour costs to total costs islow, therefore, the trade union enjoys bargaining strength. Options A, C and D would weaken tho bargaining position of trade unions. 5c rate |cost off cost of (8) [labour labour +00} 400 }20009 ot) 405 [4090 tel tota [marginal 908 Be ——sesessesaA Level Economics (McQ) What could cause the demand curve for labour to shift to the left? A a decrease in immigration Ba decrease in labour productivity Cc afl D_ arise in the money wage rate ([J10/P 3/03] in real wages 7. In the diagram S, is an individual worker's supply of labour curve. Sy S wage rate ° hours of work What could cause the curve to shift from S, to S;? A adecreasi B a decrease in work satisfaction Ca decrease in the opportunity cost of leisure D_ adecreased preference for leisure ‘(s10/P 3/04) the hourly wage rate 8. A firm's workers join a trade union which negotiates an increase in the workers’ wage rate, ‘The increase in the wage rate results in an increase in the number employed by the firm. What could explain this? ‘A. The demand for the firm's product is price-elastic. B_ The firm is a monopsonist within its local labour market, The firm operates in a perfectly competitive labour market. D_ There is a high degree of substi- tutability between capital and labour. (HOP HOS} 9, A firm in a perfectly competitive dustry employs two factors of production, X and Y. ‘The table shows the factor price and the current marginal physical product of these two factors. 62 [ facorX | hetor¥ ) WPA decease uctity ernie sso | sson| Nbr stl rig pysicl oduct | 2 | mandomne i i aa thle A gti If the firm sells its product for $1 and aims to maximise profits, what should it do? ‘A. employ less of both X and Y B_ employ less of X and more of Y employ more of both X and Y D_ employ more of X and less of Y [N10P 04] 10. To increase its labour force from 100 to 101 workers, a firm has to increase the daily wage rate from $300 to $302. What is the marginal cost of labour per day? AD B $202 Cc $302 D $502 {NI0(P3/06] 11. The diagram shows a worker’s supply of labour curve. wage rate per hour w 0 10 20 30 40 hours per week ‘The worker is required to work a minimum of 40 hours a week at the hourly wage, OW. Which area measures the economic rent obtained by the worker? A x-y B xty © y-x D ytz pntorrso7] mint Bly care anda rmonoy wegen resulting Ret along they a tae eet D are incre wg fon Cis nab 7 DA ean preference tor ‘cn means a ders portunity cost of ut hence woulda fe supply of labor, A crease inbouty wea would cause dome movement aon esp ply cure berce Ais correct wile B ad ¢ would shit sey labour eure tie 8B Bapsrirgpo of trade unin i wen when demande e's elas, tarca A208 inoortect. Ina pets sompaiive aba a trade rion meats wage increas le pense of nuntet & ployed hence © is rect. Only in an it tec comgottie bie? market increase it #2 ‘wage rae esuls 0 crease in nuit ployed.‘a veve! Economics (MCQ) at is meant by ‘real wages"? the marginal physical product of labour the opportunity cost of labour the purchasing power of money wages D_ wages net of tax. 12. Whi A B ¢ pntorrs/ols} table shows the main characteris 13, Thet n tics of employment in two occupa tions. ‘occupation | oeupation x Y rage annual wage | $100.000 | $60.00 numberof weeks annual eave Sweeks | 10 weeks average length of wing week 48hours | 44 hours jbsecuiy low high engl of taining course fovbtn job qualification | 1 year | 2years What can definitely be deduced from the table? ‘A. Those employed in occupation Y attach greater importance to job security B_ Those employed in occupation X attach less importance to leisure activities. C There will be more competiti for places on training courses to enter occupation X tha ‘occupation Y. D’ Occupation Y has greater. non- Pecuniary- advantages: thar ‘ccupation:X. (H/P3/Q3] 1M. The diagram shows. the’ supply and demand'for labouit in an industry. Initially the industry's labour market is in equilibrium. What effect will the introduction of a minimum wage OW have on the level of employment in the industry? ‘A. Itwill decrease by an amount LM. B_ It will decrease by an amount LN. € It will increase by an amount LN. D_ twill increase by an amount MN. [11/P3/06] 15, Individuals are free to choose the number of hours they work, how much of their income they save and which goods and services they buy. Which type of tax will not distort the choices individuals make? ‘A. a tax levied on the wealth accu- mulated by individuals Ba uniform tax which raises the same fixed amount from all ind viduals C indirect taxes on specific goods D__ proportional income taxes [11/P3/012] 16. An actor is paid $100 000 a year. The next best paid job he could get is as a lecturer at $60 000 a year. ‘What are his transfer earnings and his economic rent? transfer economic earnings rent A] $60000 $40 000 B} $6000 zet0 cc} $40.000 $60 000 ‘| _ 40.000. zero INIUP3/O5] Topic 2.3 © pags 3 HELPS » MCQ 9 B_ Aproft maxiiz- ing firm would hire diferent inputs where: Lid Px Py Curent employment gives 28 the following: =< 5 In order to equate the val tues the firm should hire less of X which would increase MPx and henco the value of fraction. It also needs to hire more Y s0 that MPy decreases. 10.0 1. of | age jworkers| rate ce 10 | 00 30000 tor_| sce {soso soe 44. A Economia rent is measured by the area above the supply curve and bolow the wage rate. ‘AL OW wage rate the worker obtains economic rent marked as X but t- angle ¥ remains unattain- able at OW. 12, C Wage rate adjusted for inflation is the real wage. 43. D_Norpecuniany benefits are non-monetary benefits such as curation of annual leave, average length of working week or Job security. From the table the definite conclusion is that there are greater non-pecuniary advantages: associated with occupation ¥ than X.A Level Economics (mea) 17, The diagram shows a perfectly com petitive firm's average product of labour (APL) and marginal product of labour (MPL) curves, wage ©, labour product (units) duces ompayncs the amour yg 4 18.8 Both a Hy wealth and workers employed one an ee ‘The market price of the firm’s product 19, ‘The diagram shows a backward slop- SI _ choles of ny, is$1. ing supply curve of labour, bet hous How many workers will the firm fore andi employ at a wage of OW? oearenrat A ON, B ON, i ovat stay indiect tax on spe Cc ON, D ON aa goods wil sit te peso W208 holes of god 18. A. Economists the citference betes present eamings at 18. In the diagram, MRP, is a firm’s marginal revenue product of labour curve, S is its supply of labour curve, and ° nour woken 2atrings from aan MC, its marginal cost of labour curve. er viea amoloyment (rane . rings) Tus: vrslere $ What is correct about the substitution pings = $6,000 21 effect and the income effect when the sconomi et real wage rises above OW? 100000 -$60000 w, . = 0000. ws substitution | income 17. MPP =, * effect effect ‘Aid MAP, Wage Wy A| negative negative ‘will determine empl” BY] negative positive ie sitive a 18, A Mo, = NAP, C| positive eat Sats ub ol i ar BP positive while $ curve indi Assuming profit maximisation, how ANDROS van many workers will the firm employ and 19.0. towel what wage will it pay? positive subst es sd is outweighed by' number : income etc. ‘employed wage A Nr Wi B N Wy . c N W: D Ne Wa INI2P304] 4ja novel Economics (ica) — : aig Dy and Saree inh 122. A fashion model is paid $100 000 a ata and supply curves for build- year. ae he next best paid job sho could get is as a teacher at $60 000 a year. What are her transfer earnings and her economic rent? transfer earnings | economic rent $ $ A 60000 ‘zero B 60000 40000 ° Cc 100000 zero quantity of labour Dd 100000 40.000 ifthe demand for building workers i a [J131P3/06] ow much does the reases t0 D; by h oe ant earned by buil economic rent ea ng 23. The table shows the current position workers rise? aw B TXZU of a firm in a perfectly competitive c vWX D XY dustry. wizPxo6) Factor X [factor ¥ marginal physical product 2 frctor price $10.00 21. A firm operates under perfect competition in both product and factor markets with labour as the only variable If the firm sells its product for $1 and aims to maximise profits, what should factor input. Inthe diagram, the line JK shows the it employ? relationship between the marginal Fysial product of labour and the” STO of both X and ¥ Pes tad Bmore of X and less of ¥ an more of ¥ and less of X D_ less of both X and Y 8 ([JIIP3ION] ‘marginal physical product of labour . tints) 4 | 2 ( thousand man-hours Whe ter the holy wae is $3.20, the ploys 4000 man-hours per day. Wat isthe pri price of the product? hae 24, A firm operates under perfect compe- © 829 B $200 tition in both product and factor mar- D $640 kets with labour as the only variable piseugs} factor input, In the diagram, the line JK shows the relationship between the marginal physical product of labour and the man hours hired. Tople 2.3.9 page § HELPS » MCQ 20, 8 The area above tho market supply and below the equirium wage rate indicates economic rent. 21, A MPP, = 2 and wage rate = $3.20, thus, 3.20 320 _ $1.60 2 22 B Earnings from the next best job is called transfer earrings while the ailfeence between cur rent earings and transfer earings is known as economic ent 23. © Aprofit maximiz- ig fe ite te iadors up tte vel were ex Mey my Following is the given sitvation, oie 5°10 In order to equate the two fractions the frm neds to hire less of factor X so that the MP, increases and hence, increases the value of its fraction. The firm also needs to hire more of factor ¥ so that IMP, decreases and hence reduces the value ofits fraction, Th frm needs 19 do this until the two frac> tions wil have the same values.marginal physical gf product of labour The price of the producti What will be the number of man-hours hired by the firm if the hourly wage is 25, The diagram shows the of a labour market. ‘number of workers ‘The government increases the number of statutory paid holidays to which workers are entitled from 10 days a year to 15 days a year. How will this affect the supply and demand curves in the diagram? employers’ workers’ supply curve caeS 3 4 thousand man-hours 26. In the diagram, HN is the initial supply of Inbour curve faced by: firm, and RM is its initial marginal cost of labour curve. N wage, M cost of labour K a 4 R H ia @ quantity of labour What will be the firm's new labour supply curve, if the workers join a trade union and achieve a union negotiated wage, OW? A RIX B HKX c WIM D WKN {N13/P3/06] 27. In the diagram S, is an individual worker's supply of labour curve. Ss S wage rate ° hours of work What could cause the curve to shift from S, to S,? A. adecrease in the hourly wage rate B a decrease in work satisfaction ac $4, 16 When MPP ber of manta %. A Ince holds wi net abou cost hse cae fe ‘more workers wil wa ew curve wil shit oy, 26D Ofgials cure= HN New § cue = Wis KH part of $ cane wt now change o WK, 7D A decries preference for gests an increased pe tence for work. Optin A will bring. a movenent along the cure whit 8 & C will shit the cane to the lft all= pwn eoroios (CO) decrease inthe opportunity cost of leisure pa desreased prfernce oe leisure [P3104] arginal revenue able shows the m w lof labour schedule of a profit ng firm prodeing under con erfect competition. 0] 135] 140] 135] 130] 125) 31. A worker is considering accepting a $135, what is the maxi wage is rte wa or of workers the firm will sum number 0 employ? a3 cs B 4 D6 [s14/P #05] 29, 1n 2004 union officals and business- men in Argentina agreed to increase the minimum wage from 350 to 450 pesos. In which circumstances would such a rise increase employment? ‘A. Investment increases at a more repid rate than consumption. B Labour and product markets are competitive. © The higher wage rate produces a proportionately greater rise in labour productivity. D_ The minimum wage is set above the equilibrium level. [s141P3105] 30. The diagram shows an individual Workers supply curve of labour. a5, ‘umber of hours ‘The hourly wage is W and the worker required to work a standard 40-hour week, Which area measures the minimum amount per week he would be willing to accept? Av B vtx Cc vox D zx [u10P3108} 28.6 Aprott maxim ing frm bres workers up job she has been offered. She draws up a list of the annual monetary values she places on the advantages and disadvantages of the job. to the point where its MRPL = MCL In such a market W =MCL. Also a lirm decides. number of workers hired only on the decreasing part of MRPL, therefore Bis incorect. advantages and value disadvantages ofthe job | (8) income 750 23.6 It wil donpzroes working conduions | 300 |- Zand lor bout and 250 | hence rest in an ie soo | 88s nenploymet 30, B Miu amount acceptable refers. to Jong working hours high prestige ofthe job cost of providing own uniform | 150 opportunity for travel 100 | transfer eamings je. the short holidays 50 | area below the supply une. What can be concluded from the aA [Pecuniary (Monetary) advantage income $780 Inon-Pecuniary (Non-Alonetary) table? ‘A. She values the pecuniary advantages more highly than the non-pecuniary advantages. B_ She would take the job even if it had none of the non-pecuniary advantages. The job has no pecuniary disadvantages. D_ The non-pecuniary advantages outweigh the non-pecuniary disadvantages. [NIUPHOA] long working hours stot pring own unto $180 otal 200‘A Level Economics (MCA) 32, To increase its Inbour foree fiom 100 to 101 workers, a firm has to increase its daily wage rate from $500 to $502, What is the marginal cost of Inbour per day? Ag B §200 © so D $702 [N14/P3/05] ‘The diagram shows an individual 3B. worker's supply curve of labour. hourly 2 wage ° 40 umber of hours ‘The hourly wage is W and the worker is required to work a standard 40-hour week. Which area measures the net improve ‘ment in the worker's welfare ifhe were allovred to choose the number of hours he wished to work per week? Ax Boz-x Cc zt Dz [N14/P3/Q6] 34. A firm’s workers join a trade union which negotiates an increase in the workers’ wage rate. The increase in the wage rate results in an inerease in the number employed by the firm, What could explain this? ‘A. The demand for the firm’s product is price-clastc. ‘The firm is a monopsonist within its local labour mar The firm operates in « perfectly competitive labour maket. There is a high degree .* substi- tutability between cap 1 and labour. B twine #07] introduction of a minimum hourly over 21 years of nerense the aver- e workers. 38. The wae for all workers age is expected to nye wages of thes {What willbe the likely effect on work xs unsler 21? i —Tremployment | average wages forunder 21s | foruinder215 | } al falls fall 1 B falls vise c rises fall ise vise i UIE HA Taser, [NI/PHQI6] cates that at fale the water dy? 36. A firm operates under perfect compe- ess than 4Ohoun tition in both product and factor mar- fore, avoids tg els with labour as the only variable $0, 8 tren factor input. alow eee In the diagram, the line JK shows the relationship between the marginal physical product of labour and the hours worked: ron 38 28 ae9 ° 7 ByS 4 Be 2 0 k o 1 2 3 4 5 thousand hours When the price of the product is $1.60, the firm uses 3000 hours of labour. oe BA trata wt What is the hourly wage? fasag 2 meopt a) B $240 manages to oruseb? c wage rate and ent ae 2 ‘ment. Options A& 0% [15103705] weaken We barge position of trad Ui while Dis i because in 8 pt competitive markt aot unions manage © cease wage 2 promising one — |rowty wage) 40 number of hours which would re- ig offered a job wich woul 1 atid JOU avi hich area cases the Lost wetount fe woud ave Ce PAE ter wok o get him go accept ts job oer? A wiz © xty-2 B xty D wixtzty [s1sPVO6) rent introduces a minimum The govern ‘the equilibrium market wage above wage rate. How will his affect low-paid workers? ‘A. All those initially in employament will receive the new guarantecd minimum wage. B Fewer of those not already ‘employment will enter force, © There will be an increase in the umber of low-paid workers in employment D Some low-paid workers will lose their job. [s151P3/015} a will result from the differences in the non-pecuniary advantages of ious occupations? A disequilibrium i Shortages of lab cents of labour in particular misexoy 41. A fashion m 42. A firm employs a worker WI 40. A firm currently pays its omployees onan hut baie Even though the management acknowledges that its employees work to the best of their ability and could not work any harder, the firm decides to switch to a plece-rate system of remuneration whereby the wage paid to each employee depends on their level of output. Why might this new system of remuneration result in a_ significant improvement in labour productivity? A It will dispense with the need for management to monitor the actions of its employees. Bb It will increase the losses that sworkers will incur if they are dismissed for not working hard enough. It will lead to the recruitment and retention of more highly talented workers. 1D It will strengthen the incentives for workers to increase their earnings. {NISIP3/O6] jodel is paid $500 000 a year ifthe next best paid job he could get ig ng a teacher at $100 000 a year, what camnings and his ec0- are his transfer nomic rent? ‘eeonomie rent s “400 000 400 000 zero 100 000 [NISP3/O7) a pf 100000 c| 400.000 pt 400 000 hho adds less to output than the previous worker employed. What does this illustrate? ‘A. decreasing marginal costs diseconomies of scale B C increasing returns to scale D_ the law of diminishing returns [s16P3x1Q14) Tople 23. page 9 HELPS w McQ 25, BL Incroase in rin ‘mum wago of abovo 21 wil encourage to eno rs fo amploy more of those bolow 21, thorofore demand for warkers below 21 and hence their wage rate is likely to increase. 38, D_ At three thousand hours MPP, =4unis and the firm is operating ina perfectly competiive product market, hertore, MPP, x P = MRP, le, (4x $1.6 = 864), Since in a perfectly competitive labour market @ firm hires labour upto the point where its MAP, = wage rato, theetore, We $64. WB The S cune represents minirum wage rate acceptable to work ‘on tis jo foreach hour Thus, it shows the worker's opportunity cost {transfer earings). So the ‘worker will accept this ny when his eamings at least equal is tansler earnings measured by the area balow the supply curve upto. 40 hours 38D Arminimum wage {ate fixed above the market equilrium wage fate causes demand for labour to contract, therefore, results In less employment 39, B Lower wages ‘aro compensated by roremonetary acvantages atherwise wage diferen- tials willbe eliminated by the movement of labour from low wage market to those offer higher wages. foc Because it will halp to identity who produces how much in & ven time. 3A Level Economics (mea) 43. To increase the number of cleaners at @ local school from 10 to TH, the employer has to raise the hourly rate of pay from $8.00 to $8.50, What is the marginal cost of Iabour per hour to the employer? © quantity of labour A 9050 B si350 Cc $s8.s0 D = $93.50 [167730015] 44, For a firm in imperfect competition, the ae ‘marginal revenue product of labour at any given level of employment is equal © quantity of labour to ‘A. marginal revenue divided by the number employed. Which two areas represent B_ marginal revenue divided by the economic rent? wage rate, A Tand3 the marginal physical product of | and 4 $8x10-$0) labour mutiptie bymarginalev- yang 3 sean] 7 D 2and4 D_ the marginal physical product of —| labour multiplied by the wage INIGPSOIS] yy rate, MRP, =P, 1 [163016] 47. The table shows the short-run production function of a firm with labour 45, © By dalton 45, ‘The addition to revenue which re- a8 the variable factor of production. yg gi iy ay | sults from employing one additional above the Sanees | unit of a factor of production, the {number of workers total output below the wager, | quantities of all other factors of pro- employed per day 7. B Labour csp duction remaining constant’. 1 10 mn What does this define? A 20 unto capa A_ marginal factor cost a a B_ marginal revenue 4 50 } C marginal revenue product D_ the law of diminishing returns 2 eo | ENI6P30I7] If workers are hired in a perfectly competitive labour market at a wage rate ‘of $50 per day, when will the labour 46. The diagrams show the demand for cost per unit of output be at its low- and supply of labour. est? A. 2workers B 3 workers C4 workers D5 workers INI6P3/019]given period the amount of e worked in manufacturing 4s, over @ overtinn jndustry increases what is likely to be a consequence of tis? ‘a deerease in employment a infath the rate of inflation Bp adecrease ¢ amore rapid growth in average Jamnings than in hourly wage rates ‘a more rapid growth in manufie- turing output than in productivity [N16/P3020] |g. The diagram shows the supply and demand situation in a ps lar labour roarket 50, In 2015 a company drilling for oil wished to reduce its workforce be- cauise of a fall in the price of oil. The workers’ trade union opposed the pro- posal. Which situation would have helped the trade union in the negotiations? ‘A. Capital and labour were close substitutes. B_ The cost of labour had been small percentage of total cost. © The demand for oil had been price inelastic. D There had been a large supply of labour, [17P3/018] quantity of labour When the market is in equilibrium, which areas measure the economic rent and transfer earnings received by employees? economic rent [transfer earnings| Al JLN OKLI B] ML OKLI c|NML OKLM D|OKLM NML (iTPyvO17) wage 51. The diagram represents the market for labour. ° N number of workers What would be the effect on transfer ‘earnings and economic rent of a change in the supply curve from S, to S,? transfer earings | economic rent A fall falls B fall rises c rises D falls (NI7/P 9/018] Topic 2.3 © page 11 HELPS MCQ 48, C Overtime wage rate is usually higher than the normal time wage rate. 49, B_ Area above the supply curve and below the wage rate is labeled ‘as economic rent while total earnings ~ economic tent = transfer earings. (OMLK ~ MIL = OJLK). 50, B. Inolastic demand for labour would help the trade union's cause. Op- tions A & B suggest slastic demand for labour ‘nile D would clearly not help. 51, D_ Economic rent is the area thats above the supply curve and below the wage rate and S, shiting to 8, reduces it ‘Area below the supply cune is transfer earings andit rises.A’Lovel Economics (MCQ) 452, The total cost to a school of employing ten cleaners is $60 per hour, The school estimates that the hourly rarginal cost of employing an elev- centh cleaner would be $11.50. By how mach would the hourly wage have to inerease 10 employ an additional cleaner? A $050 B 9065 c $225 D sis0 LisPxQ14] ductivity of labour? A. an increase in indirect taxes B_ an increase in the quality of capital ) 3, What would cause a rise in the pro- © arise in consumer surplus D_ arise inthe elasticity of supply of labour pisPx91sy 54, In the diagram D, and S are the initial demand and supply curves for building workers. wage 58, What would help (0 explain why there was a reduction in wage ine equality ina country during the post-2008 economic recession’? A adecline in the share of wages in national output B a decline in trade union bargaining power © the existence of a minimum wage D_ the trend towards later retirement INISPHOLS) 56. How is marginal revenue product calculated? A_ marginal physical product « marginal revenue B_ marginal physical product + price € total physical product « marginal cost total physical produet + marginal cost INI8/P3/015] quantity of labour Ifthe demand for building workers ine creases to D, by how much does the economic rent earned by building workers rise? A RUZ B TUzx Cc vxzw D xyz Lisi 3/916) 57. A firm currently employs 30 workers at a daily wage of $50 each, ‘The marginal cost uf employing one extra worker is $112 per day, By how much will the firm have to increase the daily wage in order to increase its labour force from 30 to 31 workers? Ag BS © 9 D siz IntsPx016} Sool dagan exe, ‘ent i measured bby tea below the nae, and above the sp) ‘curve. 80 at D, eat ‘economic ton = Ait hl at D, = RUZ he it increases bye a TUX. 55, © Minimum ae ‘must have prvi wage fall for ele) lower income grag st ever, In recassin | woud at have pt a wage fal fr ho wore on il pay scale, Tus tt have reduoed nan ‘equalities. pions AE B would have nest Inaqualtis while 0 inlevert. 58, A By ceiin st. A ag=T0l" of workers. si ic of enpet . 2, tH increases TO 112TE ‘a Level Economies «wicq) — a, Inthe dingram, HN isthe intial supply $F Inbour curve faced by a firm, and RM isits initial marginal cost of labour curve, wa99, cost of labour w quanti of labour What will be the firm's new labour supply curve if the workers join a ‘rade union and achieve a union negotiated wage, OW? A RX B HKX c wi D WKN [NIS/P3/017] 59, Output per worker in an industry it creases. more slowly than the industry's total output. ‘What could explain this? ‘A. a decrease in labour productivity B_ an increase in employment Can increase in overtime working, D an increase in the hourly wage rate (wisiP3/o18} i Topic 2.3 2 HELPS » MCQ 58, D Wago fixed by the union provents it fom decreasing below OW, therefore HK part of tha supply curve is replaced by WK. Beyond WK if tha frm hite more work: ars it will be facing KN part of the old supply curve. 59, B Total output in- sreases more than a riso in productivity oniy when an economy employs rmore workers. Option A vill decrease total output while ¢ & D will affect cost"RS Level Economics (Essays) ai a2 a3 a4 Labour Market Forces - Demand and Supply - Wage Determination - Wage Determination TOPIC 2.3 and Government Intervention; of Labour, in Perfect Markets, in Imperfect Markets. | ESSAY Section UIST OF QUESTIONS (sos/P4/a3) In some countries the power of trade unions has decreased. In other countries, trade unions have organised major strikes resulting in employees refusing to work. (2) Is tho oxistence of a trade union likely to be the main factor that affects the supply of labour? (10) (b) Discuss how the theory of wage determination through market forces might need to be altered when trade unions exist in an industry. [15] (Nos/Pa/as) The economic theory of wages assumes first that there is a perfect market and secondly that the market will reach a stable equilibrium. It therefore has little relevance to a commercial world full of change and uncertainty. Discuss whether you agree with this of (sos/Pa/a3) Disouss what might cause inequalities in wage rates in an economy. 5] (Nos/P4/a3) By 2007, the telecommunications business had become dominated by fewer organisations. One of them, Cable and Wireless, announced there would be 3000 job losses. Another, Tiscali, announced 800 job losses and BT, the UK telecoms giant, announged a £450m major investment and restructuring resulting in thousands of job cuts. Analyse whether the above is what marginal revenue product theory predicts will happen when a labour market becomes loss competl- tive and large investment takes plac. [25] a5 a6 a7 as (u10/Pa/a4) (a) Analyse whether an increase in the wage rate always leads to an increase in the number of hours worked by an individ, (i (0) A government stated that pay increases in the coming year should be kept to a min- mum, Discuss whether the main detem: nants of wage rates are factors such as trade unions and the government rater than market forces. (18) (torpaiaay Recently, employers in some countries have employed foreign workers instead of local workers. The local workers argue that they should have priority over foreign workers and also that more products should be produced fat home rather than being imported. (a) Explain, with the help of a marginal rev enue productivity diagram, why an em ployer might prefer to switch to foreign workers. 112) (0) Discuss whether it would be beneficial f° a country to give priority to ts loot) workers, (13) (u11/Pa1a5) In imperfect competition, labour markets ¢ load to worker exploitation in terms o e wage rates they receive compared wih Wie rates in perfect competition. DIsc¥s> |p.) opinion. NI1/P 4/4) : , go deter The market is the fairest means of WA" mination, To what extent do you SUPPO" ing) opinion? atl(r2Paad) "| wage rates In some non-essential occupa: | tone, such 48 entertainment, aro vory high \ tye wage rates In ossontial occupations, Meh as public sector hospital nurses, aro fruch lower. This Is unfair, Analyse how economic theory can explain those differences in wage rates and consider Whether you agree with the conclusion of this statement, [25] (wizard) some workers producing non-essential luxury goods or services aro paid very highly. The wvage rate Is not related to the economic value of a good or service but more to social factors or fashion, The economic theory of wages is, therefore, of litle use in explaining wage dif- 10 ferentials. ‘Assess this argument. 25) a mh ait (J13/P4/03) hing In 2011, as a result of a recession, the gov- : emments of some countries reduced the wagos that they paid to public sector workers. Trade unions organised mass demonstrations in protest. Discuss how the economic theory of wage determination in perfect competition can be adapted to explain such a situation. [25], (N13/P4/03) (@) Analyse whether in a perfectly competitive ar oe labour market it is true that a profit ef maximising firm will employ labour only up ye te to the point where the marginal revenue fe product of labour is at its maximum. [12] (0) Discuss whether the: marginal revenue productivity theory: of wages is useful in explaining wage determination in an imperfect market where there is a trade union, 113) O13 (s14para4) (@) Some top executives and some sports people are paid very high salaries. It is argued that this is inevitable as people are paid the market rate for the job. Use a economic analysis to support this opinion. ‘ (12) (©) itis argued that the wage determination in imperfect markets leads to exploitation. It 's therefore necessary and beneficial if the Sovernment intervenes in the determina- ‘ion of wage rates. Discuss whether there 'S any truth in this argument. (13) ara ais a6 Q17 ais Topic 2.3 © page 2 (Nt4/paiaa) A huge company with a turnover Co of $99.3 bit. lion pald its chief executive $10.9 million in 2011. At tho samo timo it was reported that the company did not pay what was regarded as a living wage to all its omployeos. (a) Use economic analysis to help oxplain why there can be wide differences in wage rates, (ay (>) Discuss how this analysis could be adapted if a trade union intervened in the Process of wage determination. [13] (s15/Pa/04) ‘Wage determination in the factor market is just like price determination in the product market. {tis entirely dependent on the forces of supply and demand,’ Do you agree with this statement? (N15/P4/07) (a) Distinguish between supernormal profit and economic rent and consider the circumstances when each occurs. [12] (b) Discuss whether you agree with the opin- jon that a trade union might be able to achieve higher wages for its members but only by causing some unemployment. [13] (ui6ipaia4) {a) ‘In perfect competition in the short run, wage rates in some occupations will be higher than in others.’ Explain the economic analysis underlying this. (2) Do you agree that in an imperfect labour market any activity by trades unions de- signed to increase wage rates would inevitably lead to unemployment in that market? [13] (nig/Para6) (a) Some occupations that do not have pleasant working conditions, such as rubbish collection, receive low pay, while those with pleasant conditions, such as senior managers, recelve high pay. How far does economic analysis explain this situation? (12) Discuss what influence a trades union ans a government can have in determining wage rates. 113] (25) (o) (b)19 (u17/aIa4) azo gat 22 (b) In 2016 tho Trado Unions callad t strike of bus and train drivors after a dantand for highor wages was rojoctd, Uso the oconomle thoory of wages to dis cuss whether a demand for higher Wages Is likaly to be successtul. {19} (N17/P 4/8) ‘The merit of the economic theory of wage determination is that it clearly shows what the best level of wage rates should be and thus Is evidence that there is no need for olther the government or trades unions to fix wages. Discuss this assertion, (5) (oterPaia4) (@) Explain how a firm derives its demand curve for labour and consider how the structure of the product market in which the firm operates affects the firm's demand curve for labour. [12] (0) Discuss whether it is possible for a trade Union to negotiate higher wages and more employment. (13) (NtarPaiag) Consider whether wages are only determined by the market forces of supply and demand, (25)— - eae power of trade won as dee jae euler countries, trade ions have geste mot kes resulting in employees refusing i or 8 we owt ofa trade union likely to be the g existence ects the supply of labour? [10] @ co that affect now the theory of wage determination Discuss Mrket forces might need to be altered aust mat sexist ina industry. [1] when 17 {208/P4/03) js the effort, both physical and mental, n. By the sup- mprlabour we mean the number of hours of work My ed, The total supply of labour fo a market de- ‘onthe price of labour i.e. wage rate, the size Bethe population, the age composition of the ulation, te labour force participation rate the eupational and geographical mobility of the about force and the tendency of labour force in terms of trade off between work and leisure. ‘The wage rate is all important in determining the supply of labour. We first begin by deriving the supply curve of labour for an individual worker and then extend our analysis to market supply of labour ‘The individual's supply curve of labour is backward bending, This means that after a certain wage rae, higher wages will result in fewer hours being worked per day, with individuals demanding more ‘esute time as shown in fig, below: Waeraef 5 Income effect outweighs | Substitution effet | Substitution effect offsets income effect ° No. of hours worked agteard bending supply curve can be et feel applying income and substitution ef- oa tet of aise in wages on mum el Nous is postive whereas income Beran At low wage rate substitution i spp income effect resulting in up slop- Nbaitiin aie eat When income effect offsets \ ‘ffect, higher wages can lead to less | Tople 2.3 % page 4 hours worked and a backward bendi — rd bending supply The industry's supply curve of labour is obtained by the horizontal summation of the supply curves of individual workers and it will normally be posi- tively sloped. Thus, the supply of labour in a particular market can be expanded by increasing the wage offered. This will attract labour of the same or of a nearly similar kind from other industries, occupations, and localities. The extent to which quantity supplied changes depends on occupa- tional and geographical mobility of labo However, the position of the market supply curve of labour will depend on the number of people willing and able to do the job at each given wage rate. This in turn depends on three factors: Firstly, any changes in the number of qualified people for a certain occupation results in a change in supply of labour. Secondly, the benefits and costs of the job such as the pleasantness or otherwise of the working environment, job satisfaction ‘or dissatisfaction, status, power, the degree of job security, holidays, perks and other fringe benefits also alter the position of supply curve. Thirdly, the ‘wages and non-wage benefits in alternative jobs ‘can change the position of the supply of labour curve. For instance, the higher the job-attractive- ness in an occupation the greater the supply of labour, Alternatively, higher wages and attractive benefits offered in other similar industries will reduce the supply of labour in an occupation, Trade unions are made up of groups of workers who share the same interest. Their aims can range from increasing the wage rate to improving the working environment or taking up the case of those who the trade unions see as being unfairly treated. A trade union may be significantly strong to restrict the supply of labour by lengthening the time it takes to complete apprenticeship or by restricting membership and have closed shop agree- ‘ments preventing non-members from being employed. However, in a situation of open shop a union is weak and cannot influence the supply of abour, Thus, the ability of a trade union to limit the supply of labour is detrimental to certain factors such as union friendly legislation, its ability to control employment contracts and most importantly the size of its membership relative to the total market supply of labour. Hence, it can be stated that mere existence of trade unions is not the main factor that affects the supply of labour, rather it depends on the relative strength rendered to them by legislation and the size of their membership.©) Wages are the price paid for labour, In a perfectly competitive labour market, so the economic theory oes, wage rate is determined by the demand for and supply of labour. Many firms competing with one another in hiring a specific type of labour characterize this type of market. Also, there are numer- ‘ous qualified workers with identical skills indepe dently supply labour, There exist perfect knowledge, perfect mobility and freedom of entry and exit. Consequently, both firms and individual work- ets are wage takers. The total, or market, labor demand curve is found by summing horizontally the labor demand curves (the marginal revenue product curves) of the indi- Vidual fies. The marginal revenue product, MRP, is the increase in revenue due to employing one more unit of labour, MRP, is determined by the MPP; (marginal physical product of labour) multiplied by the MR i.e. MRP, = MPP, x MR. On the supply side of the labor market, we assume there is no union; workers compete individually for available jobs. The supply curve for each type of labor slopes upward, indicating that employers as a group must pay higher wage rates to obtain more workers, This is so because firms must bid these workers away from other industries, Wage MARKET Wage IRM = ens A aL Aen, Re ° ° = In the figure above the equilibrium wage rate and level of employment are determined by the intersection of the market demand and supply curves, Each individual firm will find it profitable to hire this type of labor up to the point at which marginal rev- ‘enue product (MRP,) is equal to marginal resource cost (MC). However, labour markets are likely to contain imperfections, for instance, there may be a single buyer of labour-a monopsonist. If this i the case, then the monopsonist will be facing upward slop. ing market supply curve and hence in order to re. cruit additional workers it has to offer a higher wage rate, This is illustrated in the figure below: St Wage * > - mate, ‘MC, A Stacy W,] . Wy B ‘MRP ° a The marginal cost curve for labour (Mc above the average cost euve fe labour (gy be explained by te use ofa simple ramp. wage rate of £100, 50 workers may be employes i however the monopsonist wishes to employ go more worker he ors forced t0 offer £10, ae crease being pad to all workers. The averages ismow £101 but the marginal cost is £151, comp ing of £101 paid to the SIst worker plus 1 pais each of the 50 original workers, The monopsonist, being a profit maximiser, wy employ where the MC,, is equal to the MRP, ie point A, hence L, workers will be employed. The wage rate, however, is given by the average ci curve S(AC,) and this will be W,, The overall age bill to the monopsonist will, therefore, be OW, Ina perfectly competitive non-monopsony matiet the wage and numbers being employed would have been W, and L, respectively, Trade unions seek to increase the wage rate of their members by either restricting the supply of labour (explained in part a) or by direct negotiation Collective bargaining involves wage negotiation between trade unions, acting on behalf of theit members, and the employers. Successful bargai: ing could raise the wage rate, for instance, from W, to Ws, as illustrated in figure below: Wage 4 ul £22 ° 5 eos ‘The monopsonist facing a large number ofan ces in the industry will force the wage rales ‘et {o OW, and restrict employment 10 Ly. TH ofa trade union to the industry, which sels weve of mum wage of W,, will’kink the supply = (|psuevel Economics (Essays) a1 Econo ur and produce a discontinuity in the marginal labore of 1abOU. cost curne onopsonst has profit incentive (0 hie ex hem Tong. he marginal event rode wa wetiour, shown by the demand eurve, veto pan the magia east of Tabu, Hence i ‘vill employ La Falling a union forced wage rise not only do Foltorkers get a higher wage, but the monop- ih employer actualy employs more workers, I ry when the union forces the wage rate above What employment starts t fall ‘The bargaining strength of trade unions when ‘Mating with employers depends on a number of teers, For instance, a trade union will be in a bet- er argaining position when itis not easy for employer to substitute labour with eapital and the Fait of demand for the product that the firm groducesiselatively lo. Also the low proportion Pe abour costs out of the total costs, majority of the workers belong to the union and most importantly suitable political and economic climate will Mito their bargaining strength. On the other hand high price elasticity of demand for the product, possibility of labour substitution with capital, high proportion of labour costs to total cost, low prof- itsand a period of high unemployment will weaken their power. To sum up, the introduction of trade unions is deemed to change the analysis of wage determina tion but the extent to which changes have to be made is subject to the collective bargaining strength of trade unions. workers. Question 2 The economic theory of wages assumes first that there 2 perfet market and secondly thatthe market will Tacha sable equilibrium. It therefore has little rel- cg 28 commercial weld fill of change and uncer- Discuss w "ss whether you agree with this opinion. [25] EN08/P4/05] a Posy: Wages 7 Delve gg tee ald for labour. In a perfectly com- Saget math, So the economic theory goes, tte mamined by the demand for and supply aga pein: Ges ComPeting with one another in Pe of labour characterize this type of market, Aso, there re n identical sis dependent supply abo ta ake our. There ex- perfect knowledge, perfect mobility and freedom of entry and exit, Consequently, both firms and individu workers are wage takers. ced ‘The total, or market, labor demand curve is fo summing horizontally the labor demand ete marginal revenue product curves) of the individual firms. The marginal revenue product, MRP,, is th i crease in revenue due to employing one more unit of labour, MRP, is determined by the MPP, (marginal physical product of labour) multiplied by the MR i MRP, = MPP, * MR. : On the supply side of the labor market, we assume there is no union; workers compete individually for available jobs. The supply curve for each type of labor slopes ‘upward, indicating that employers as a group must pay higher wage rates to obtain more workers. This is so because firms must bid these workers away from other industries. Market Firm wage wage* rate sanits 9/5 te wl ve AC, = MC, MRP, ° a 3 0 cam In the figure above, both equilibrium wage rate and level of employment are determined by the intersection of the market demand and supply curves as depicted in the left panel of the graph. Each individual firm will find it profitable to hire this type of labor up to the point at which its marginal revenue product (MRP, ) is equal to marginal cost of labour (MC) shown in the right panel of the graph, At a wage rate above W there is an excess quantity of workers supplied and at a wage rate below W there exists a shortage of workers. A mismatch between QD and QS forces the wage rate to equi rium position. ‘The theory further forces will eventually restore a stable equi new wage level. ‘Although economic theory of wage determination as- umes a perfectly competitive labour market and com tmodity market with a stable equilibrium, however, the theory could be extended to allow various market imperfections, which exist in real world. For instance, there may be a single buyer of labour —a ‘monop- sonst where a large factory is the main source of employment in a locality. If this is the case, then the swage rate, (AC;) is no longer reperesented by a her: Zontal straight line and hence there is no stable equilib- assumes that changes in market ibrium at a EeAS Lovel Economics (Essays) Fium in the labour market, Instead the wage rate in~ creases as more labour is employed, Hence, monopsonist faces an upward sloping market supply curve and in order to recruit additional workers the monop- Sonist must offer a higher wage rate, Ii such a case, the size of an employer's demand for labour will affect the wage rate as illustrated in the figure below: MC, 4 sac) ™: € Ww, B ‘MRP > ° aa The marginal cost curve for labour (MC,) being above the average cost curve for labour (AC,) can be explained by the use ofa simple example. Ata wage rate of £100, 50 workers may be employed. If, however, the monopsonist wishes to employ one more worker he is forced to offer £101, the increase being paid to all workers. The average cost is now £101 but the marginal cost is £151, comprising of £101 paid to the Sst worker plus £1 paid to each of the 50 original workers. The monopsonist, being a profit maximiser, will employ where the MC, is equal to the MRP}, i.e. point A, hence L, workers will be employed. The wage rate, however, is given by the average cost curve S(AC,) and this will be W,. The overall wage bill to the monopsonist will, therefore, be OW, BL,. In a perfectly competitive non- monopsony market the wage and numbers being employed would have been W, and L, respectively, The analysis of economic theory of wage determination could be further extended to allow the presence of trade unions. Trade unions seek to increase the wage rate of their members by either restricting the supply of labour or by direct negotiation, Collective bargaining involves wage negotiation between trade unions, acting on behalf of their members, and the employers, Successful bargaining could raise the wage rate, for instance, from Wm to Wu, as shown in the figure below: Suppose a strong industrial union is formed by the workers. In other words the union is a monopolis- seller of labur supply and can influence wage rates, but it faces a monopsonistic employer of labour who can also affect wages by altering its employment. The result is bilateral monopoly, The monopsonist will seek the below-compettve sa. librium wage rate such as Wm and the union wil pe, for some above-competit i as Wu. The outcome is indeterminate since econong theory does not explain what the resulting wage rae In fact we should expect the wage outcome to lie sone where between Wm and Wu. All we can predict isthy the party with the most bargaining strategy will be abe to get its opponent to agree to a wage close to the ent it seeks. ‘The bargaining strength of trade unions when dealog with employers depends on a number of factors. For instance, a trade union enjoys better bargaining po. tion when it is not easy for employer to substitute labour with capital or the elasticity of demand for the product that the firm produces is relatively low, Also, the low proportion of labour costs to the total cost, majority of the workers belonging to the union and ‘most importantly suitable political and economic climate all add to their bargaining strength. On the other had high price elasticity of demand for the product, poss- bility of labour substitution with capital, high propo tion of labour costs to total cost, low profits and a pe riod of high unemployment will weaken their power. To sum up, the conclusion drawn on the basis of ec nomic theory of wage determination is that it has mote than little relevance to the real dynamic commerctl world, In fact the theory needs to be modified to allow various market imperfections such as mnopsony and trade unions, but the extent to which changes have 10 be made is subject to the collective bargaining strengt! of trade unions and the monopsonist employer. ‘The monopsonist facing a large number of employes in the industry will force the wage rates down to OW> and restrict employment Ly. The entry of a trade unio to the industry, which sets a minimum wage of W;, Will kink the supply curve of labour and produce a disco” tinuity in the marginal cost curve of Inbout ‘The monopsonist has a profit incentive to hire ex! workers so long as the marginal revenue product 0greater that the marginal cost of labour, it a {sb0UF will employ L workers. Hence union forced wage rise, pollowing © Vpigher wage, but the monopsonist ent othe Ey employs more workers. His only when ayer ae forces the Wage rate above W... that employ- m enon FES et starts 10 fall question 3 sjanss what might ease inequalities in wage rates in gn economy. 5] ([009/P 1/03] —_—— Essay tages or the price of labour, like other prices, are determined by economic factors. However, social and po- fel factors also play a part in wage determination, as iabour is 2 unique factor, being the human factor. ‘The main factor which determines the level of wages in : paticular occupation is the interaction of demand for lebour and supply of labour involved in that occupation, demand is high for a category of labour then it is ikely that wages will rise and vice versa, If supply of a certain category of labour is limited then, again, it is likely that wages will rise and vice versa. If labour was homogeneous factor and was sold in a perfectly competitive labour markets, every person would earn the income in equilibrium. Disequilibrium differentials in wages would arise, but workers move from lower in- ‘ome to higher income jobs until the differentials had Aisappeared, Inthe real world, however, some workers scrape out a {are living, others earn modest but adequate incomes, waile yet others earn enough to afford many of life's loxuries, a peshed labour produces a certain physical amount etd seh sells at a particular price (marginal rev- “site then the employer cannot afford to pay ihn Wa8e greater than the MRP. The MRP 2 oF Mapa ed mand) is obtained from the prod- “rinproverca out and price of the product. Hence he dan he Broductivty of labour would i Brice op £0 labour; likewise, an increase in lous Tyg n’ Product will increase the demand for evalug the demand for labour is greatly affected ue of its MRP. The high 7 enon a. 1¢ higher the MRP of Jabour willbe ages ner’ demand for labour and the higher Uday £18 1 labour. ice toner Penticular type of labour is inelastic is that labour will receive higher ‘Wages. Demand for labou wa labour by las fnotors cannot casily be aubatiuted fa oe demand for the Q ‘hala ee wood it prod useur (Gees, only a sial hour's total costs, If I aaa demand for its services Ito in expanding eh than Iabour in declining indvenia Brobably cam more hhave a high MRP and demand for their ernest Pen lemand for their services will be la loreover skilled workers, compared to un. skilled workers, will, also have a high MRP and inelas, demand so again their wages will tend to be higher. ‘The supply of labour to an industry is said to be determined by the principle of net advantages. Labour will tty to move from an industry of lower net advantage to an industry of higher net advantage. The supply of labour in a particular occupation depends on the skills and ability required, qualifications and training required and the ability of trade unions and professional bodies to restrict entry into an occupation. Some income differentials arise because basic human characteristics cause the supply of some types of labour to remain low relative to the demand for it, even in the long run. For instance, pop stars or footballers where relatively rare ability is required. Similarly if job requires specific qualifications training then supply of labour will be reduced and wages higher; For instance, barristers and doctors need good qualifications and a Jong period training which limits the number of people who are able to do these job. Investment in such training is usually costly, and the return is usually in terms of higher labour productivity and hence higher earning power. ‘The strength of a trade union to achieve higher wages will also be a considerable factor determining the level .of wages to a particular occupation. If trade unions and professional bodies can limit entry into certain occupations by apprenticeships and the need to pass exams then supply will be limited and wage higher. Thus industries with a strong trade union are likely to pay more than those with a weak trade union. Likewise some forms of discrimination makes it difficult, or impossible, for certain groups to take certain jobs, even if they are equipped by skill and education for these jobs. Until very recently, non-whites and women found many occupations closed to them. Even today, when overt discrimination in hiring is illegal, many feel that more subtle forms of discrimination are applied. To isolate the effects of discrimination, we begin by considering a non-discriminating labour market and then introduce discrimination between two groups of equally qualified workers called group X and group Y. ‘The analysis, however, applies generally to’ ‘situations luces is inelastic and if 1 percentage of the labour has a high Mr is inelastic then the prob labour will be high. Thus\ Jf on grounds other which workers 4 ; an their ability, such as female a ral, ik d ite, ali it tholic and Protestant. white, alien and citizen, iT arts half ofthe peop! that, except for the Fact that , Vise with X and the other half are mar ed bine +; cack he same numbet oups are the same; each has tl eons the same proportion who are educated (0 dentcal distribution of talent, and sO vo occupations. Occupa- te of above average edu= (ordinary) can use re distinguishes various levels, on, Suppose that there are. 0 tion E (for lite) requires peop! cation and skill, and occupation anyone. Wy, Wepre 08 guancity of © 4 quantity of labour labour tite market Ordinary market Sometimes the supply of labour toa particular occupation may be limited because the job is dangerous or dirty, Such occupations may command higher wages, as for miners. Other jobs, such as teaching or the "Civil Servic, have pleasant working condition, job security and good pension schemes. Consequently, such jobs tay earn lower wages. Similarly some jobs may have a treat many perks and fringe benefits and the money wages may be lower because of these advantage. Ifthe area has a large poo! of unemployed people because of declining industries then the supply of labour to many occupations may be high and may make for lower wages in comparison to similar occupations in ater parts of the country, Thus the more limited the supply of labour to a particular industry the greater likelihood of higher wages. Many wage inequalities result from several types of market imperfections which impede workers from moy- ing from their eurtent jobs o take higher-paying jobs. For instance workers may simply not be aware of job opportunities and wage rates in other geographic areas and in other jobs for which they quali quently, the flow of qualified labor from lower-paying to higher-paying jobs-and thus the adjustments in labor supply-may not be sufficient to equalize wages within occupations. Also many workers ae reluctant to move to new places; to leave friends, relatives, and associates, to force their children to change schools; to sell their houses; and to incur the costs and incon veniences of adjusting to a new job and a new commu aity, The reluctance or inability of workers to move Topic 23 5, a enables geographic wage differentials Pe : Wie ‘occupations to persist. thin, ey it ean thus be seen that wage inequities " demand and supply of Inbou, strength oye Me, ‘ous market imperfections and non monetary Sing Questions Pr By 2007, the telecommunications business ag dominated by fewer organisations. One of ho and Wireless, announced there would be yy tosses, Another, Tiscali, announced 800 job gg BT, the UK telecoms giant, announced a oq investment and restructuring resulting in tous job cuts. if ‘Analyse whether the above is what marginal rg product theory predicts will happen when « lis market becomes less competitive and large ites, takes place. - Essay ‘Wages are the price paid for labour. In a pert petitive labour market, so the economic theory gus, wage rate is determined by the demand for and spi of labour. Many firms competing with one anche hiring a specific type of labour characterize this yet market, Also there are numerous qualified workers identical skills independently supply labour. The ist perfect knowledge, perfect mobility and feedoms! entry and exit, Consequently, both firms and indivi workers are wage takers. ‘The total, or market, labor demand cure is found summing horizontally the labor demand cures (4 marginal revenue product curves) of th indivi firms, The marginal revenue product, MRPL. ist crease in revenue due to employing one more Ue Iabour. MRP, is determined by the MPP, (met2 physical product of labour) multiplied bythe MR* MRP, = MPP, «MR. (On the supply side ofthe labor markt, we ass is no union; workers compete individually or=¥ jobs, The supply curve for each type of labor aa ‘upward, indicating that employers 282 8°47 M5 higher wage rates to obtain more worker: TMS because firms must bid these workers away #0 industries. iTopic 2.3 © page 10 at Economics (Essays) 510 ps EE Market Firm a woe al Wi neg. i Q 2 Q th equilibrium wage rate and determined by the intersection re above bot loyment are ind and supply curves as depicted raph. Each individual firm will bor up to the jue product (MRP, is MC,) shown in the tn the fi jevel of emi market demal eft part of the gt ee ontable to hire this type of lal is marginal revent 1 cost of labour(1 h theory of wage determinat primarily oncermed with a perfectly competitive mar- mrpowever, the theory could be extended to allow ke pe market imperfections, which exist in real world. jartptance, there may be a single buyer of labour —9 large factory is the ma ‘monopsonist'—where @ iree of employment in a locality. If this is the case, spunthe wage rate, (AC) is no longer reperesented Dy rizontal straight line. Instead the wage rate in- teases as more labour is employed. Hence, monop- sever will be facing upward sloping market supply uve and in order to recruit additional workers it has tboffer a higher wage rate. In such a case, the size of an employer's demand for labour will affect the wage rte This is illustrated in the figure below: Zaual to marginal fant part of the grap ‘Although econo! ition is A MC, A StAc, wy (AC) w He ‘MRP . es ig Te ae, the ae i ‘curve for labour (MC) being above Blaine by ty ist curve for labour (AC,) can be ex- oto, 2p tse OF simple example, Ata wage rate enna ner may be employed. If however, the ifr ses to employ one more worker he ot Yaris Tye £101 the increase being paid to all Bal ong egertBe CO8t is now £101 but the mare lus 21 pa comprising of £101 paid to the 51st Monopsor id to cach of the 50 original workers. being a profit maximiser, will employ here th Lettie, j Work i otal © the MRPL, i. point A, hence @ ‘mployed. The wage rate, however, is given by the average cost curve S(AC, is wil bbe W,. ‘The overall wage bill to aceon therefore, be OW, BLy. In a perfectly competitive non- monopsony market the wage and numbers being employed would have been W, and L, respectively. In telecommunications, the decrease in demand for Jabour is unlikely to be caused by a decrease in demand for the product. In fact, the job losses appear fo be the fall out of large investment in capital which might have ‘caused factor substitution in favour of capital. It appears that the technology in communication is such that labor and capital are substitutable. The firms that they can produce some spe- Il amount might have estimated cific amount of output using a relatively small of labor and a relatively large amount of capital. The effect on the demand for labor will be the net result of two opposed effects: the substitution effect and the output effect. ‘The decline in the price of machinery or improvement in technology prompts the firms to substitute machin- cry for labor. This allows the firm to produce its outpet St lower cost. So, atthe fixed wage rate, smaller quanti- fies of labor are now employed. This substitution F fost decreases the demand for labor. In case when Firms ‘esult of a decrease in the make large investment as a r price of machinery, the costs of production might also aeline. With lower costs, the firm finds it profitable 10 produce and sell a greater output. The grealer output ecreases the demand for all resources, including labor So this output effect increases the demand for labor ‘The substitution and output effects are both present When the price of an input changes, but they work in he price of capi- opposite directions. For a decline in tl ta the substitution effect decreases the demand for labor and the output effect increases it. The net change i labor demand depends on the relative sizes of the two effects. Large investment provements whic! in response to some technological im- fn increase the quality of capital, have ire game effect. The better the quality of capital, the greater the productivity of labor used with and the treater the likelihood of higher wages for those re- mained employed. wn say that the outcome of large In conclusion we ca investment on employment of labour and wage rate depends on the net result of substitution and output effect.AS Level Economics (Essays) Question § ie ale (@) Analyse whether an inerease in the wage ways leads to an increase in the number of hours worked by an individual, (10) ©) A government stated that pay increases in the coming year should be kept to a minimum. Discuss whether the main determinants of wage rates are factors such as trade unions and the government rather than market forces. 05) [storvoy ee Essay (@) The wage increase not only influences the number of people in the labour force, but it also affects the number of hours worked for each worker. When ‘workers sell their services to employers, they are giving up leisure in order to gain income with which to buy goods. They can therefore be thought of as trading leisure for higher income and hence goods. Economic theory suggests that the real wage is a key determinant of the number of hours. The real wage is the money wage rate adjusted for changes in the price level and it measures the quantity of goods and services that can be bought from each hour worked. An increase in the real wage on offer in a job should lead to someone supplying more hours of work over a given period of time, although there is the possibility that further increases in the going wage rate might have little effect on an individual’s labour supply. Indeed, there is the possibility of a backward-bending individual Jabour supply curve. This is illustrated in the figure below: real wage # 8 — w,.—__ d In the figure above, higher real wages do lead to an increase in the number of exira hours supplied, although the rate at which the individual is pre~ pared to give up his leisure time diminishes as the real wage rises, But the labour supply curve meets ® “7 Topic 2.3 y the standard prediction that highe a people to work longer hours, Bt ye’ My, {wages step upwards, eventually an igh ® toy thhoose to actually Work fewer hour ly bus) thus producing a “backward beng Pe supply curve. se In order to understand this we consider and substitution effects that arise from 45s the real wage being paid to an indivigegt® We start with the income effect, We, Higher real wages inerease the ineome thy one can earn from a job, but they also mean, target real wage can be achieved with fever? Of labour supply. So this income effect niga” suade people to work less hours and enjoy tended leisure time. de ‘The substitution effect of a higher wage rg should unambiguously give people an incentive, Avork extra hours because the financial revarsq working are raised, and the opportunity cost of working (measured by the wages given up whe people opt for leisure instead) has increased, ‘The relative magnitude of these two effects dew. mines the slope of the individual supply cue. is normally assumed that the substitution esa ‘outweighs the income effect, especially at love wages thus producing an upward sloping sup curve. This can be noted on the upward sloping part of supply curve in the graph above whe wage increase from W, to Ws generates apse tively sloping supply curve. However ifthe wage rate becomes high enough for the income eff dominate, the supply curve will begin tle backwards. This occurs above a wage rate of Wy In a perfectly competitive labour marke, $0 the ‘economic theory goes, wage rate is determine!) the demand for and supply of labour. Many fins competing with one another in hiring specie type of labour characterize this type of market Also, there are numerous qual ified workers wilh identical skills independently supply labour exist perfect knowledge, perfect mobility a dom of entry and exit. Consequenti, bo® Si and individual workers are wage takers. The total, or market, labor demand cUrVe by summing horizontally the labor da (the marginal revenue product Curve) oft Mae vidual firms. The marginal revenue POO on is the increase in revenue due t0 emPl ue more unit of labour. MRPL is determine MPPL(marginal physical product © plied by the MR i. MRP, he ge is fouel as Level Economics (Essays) ‘onthe supply side of the labor market, we assume oars union; workers compete individually for inetale jobs. The supply curve for each type of fap slopes upward indicating that employers a5 ry higher wage rates fo obtain more oup must Pay : eae rhs is so because firms must bid these Mere away from other industries. Firm Market inshe igure above, both the equilibrium wage rate IA evel of employment are determined by the in- taseation of the market demand and supply Curves tS shown in the left part of the graph. Each indi- «jul frm will fin it profitable to hire this type of labor up to the point at which its MRPL is equal to marginal cost of labour (MCL) as given in the right part of the graph. “Although economic theory of wage determination is primarily concermed with a perfectly competitive market, however, the theory could be extended to allow various market imperfections, such as trade wns and government intervention. ‘Trade unions are made up of groups of workers ‘who have a common interest. Their objectives can range from improving the working environment f0 taking up the cases of those members the unions see as being unfairly dismissed. Their most impor tant funetion is to increase the wage rate of its members. Trade unions influence the market through collee- tive bargaining. It involves the direct negotiation between a trade union and the employers. Success ful collective bargaining in a perfectly competitive Inbour market could raise the wage rate from W, to We, a illustrated in figure below. wage % ae wy D, ot 4 . 15 No, of workers einplayed Tople 2.3 & ‘The trade union may be unwilling to Delow the wage rao of Wa therefore the senoiy curve becomes W,AS,, being perfectly clastic over the section WA. At the equilibrium wage of W with no mde union involvement, Lj workers would be employed. However, with a wage of W,, only L., gre demanded and therefore Ly - Ly are unable to find employment. There may be individuals who are willing to work for a wage below W, but they would be prevented from doing so by the union agreement. Government fixing a minimum wage to protect Jy non-unionised labour from being exploited jar outcome. largel by employers will produce the si However in a modern mixed economy the government acts as a monopsonist, paying wages below tho market equilibrium levels. This brings trade union and government into conflict. This can be ‘explained by the graph below: Wore * / : (AG) (MRP) ° Lob G {facing a large number of employ- ‘The government ge rates down ees in the industry will force the wa to OW, and restrict employment L,. The entry of @ trade union to the industry, which sets a minimum wage of Wp, will kink the supply curve of labour and produce a discontinuity in the marginal cost curve of labour. The government, acting a5 @ monopsonist, has an incentive to hire extra work= ers 50 long as the MRPL is higher than the MCL. Hence, it will employ L, workers Following a union forced wage rise, not only do the workers get a higher wage, but the monopsonist employer actually employs more workers. It is only when the union forces the wage rate above We that employment starts to fall. However, successful wage negotiation depends on ‘a number of factors. Firstly, a trade union enjoys better bargaining position when it is not easy for employer to substitute labour with capital, Seo- ondly the elasticity of demand for the product that the firm produces is relatively low. Thirdly, the proportion of labour costs out of the total costs is low and majority of the workers belong to the union. Lastly, the suitable political and economic climate ‘will add (o their bargaining strength.AS Level Economics (Essays) To sum up, trade unions ean influence the wage rate both in public and private sector whereas gov- emment can influence the wage rate only in the public sector of the economy. Question 6 Recently, employers in some countries have employed foreign workers instead of local workers. The local workers argue that they should have priority over foreign workers and also that more products should be produced at home rather than being imported, @) Explain, with the help of a marginal revenue productivity diagram, why an employer might prefer to switch to foreign workers. 02] () Discuss whether it would be beneficial for a Country to give priority to its local workers. [13] IN1aP104) Essay (@) Marginal revenue productivity theory predicts that 8 profit maximising firm will increase production up to the point at which the last worker employed ‘adds just as much to revenue as it does to cost. In other words firm’s marginal revenue product (MRPL)= firm’s marginal cost of labour (MCL), In outlining the theory we will initially assume; 1. Perfectly competitive product market, 2. Perfectly competitive labour market, Marginal Revenue Product of Labour (MRPL) is the additional revenue a firm eams from employing ‘one more worker. It is the revenue from output that each extra worker produces, ie. the marginal physi cal product multiplied by the marginal revenue. Hence: MRP labour= MPP labour x MR good Marginal Physical Product (MPP) is the addition to total product as a result of the employment of an additional unit of labour whereas MR is the addi. tional revenue from selling an extra unit. Marginal Cost of Labour (MCL) is the addi Qn to {otal cost resulting from employing an extra worker, Note, in a perfectly competitive labour market MCL = Wage rate and in a perfectly competitive Product market P= MR, wage rae f MRP In figure above a profit maximizing tg fetly elastic supply curve for labour yee 2 hich means that eitiona labour ay the same wage rate. So at W, wage rt gi ber of workers employed is 4 because the pay maximizing frm hte the quanty ot yan quate the MRPL with the MCL (yaya a wage rate was to fall to W, then the yes Gurve would shift to MCL = ACL, ana ge would, therefore, increase the number ort" employed to 5. Thus a decrease in wap eauses a movement along the cure fom and vice versa, The MRPL curve therefore ie sents the firm’s demand curve for labour rg Portant to note thatthe demand curve i ony downward sloping section of the MRPL curve, So profit seeking firms tend to hire more foreign Workers if. as compared tothe local worker, tie the cost of hiring them is low or ‘MRPL is higher or both. The graph below sums up the situation with the assumption that the firm is wage taker. Wel MCL=ACL. MPRL MPR (lea workers) ein nee) L__} cal worker} _veianvoie, NL NF labour In the graph MRPL curve of local workersis be" the MRPL curve of foreign workers. This cies could be explained by the differences in MP? a can be attributed to the superior skills and ie “ level of motivation ofthe foreign workers et in a much higher output in the given time bs local workers. This difference could also ats {0 health, vigor, education and taining ‘means that, even with the same quantity ity of natural and capital resources eee Would be more efficient than theit lol Coy, Parts. The result is higher MRPL and hen demand, = |as bevel Economics (Essays) can hire both foreign and local atthe given wage rate We then the profit oping rule of MCL™ MRPL reslls in NI en immanent of Toca! workers but NP employment of ployme parker. Overall firms would prefer fore feist Workers mainly due to the higher MRPL. ‘The other aspects bility and nclude easy av Tinively low wage aeceplability by the foreign workers which induces the producers to prefer them to loc: ‘al workers. Cheaper foreign labour thet reduce the cost and be reflected in the supply curve. assuming, firm Fs we conclude that higher productivity of for ‘Ton worker i reflected in higher MRPL and henoe treater demand for them whereas easy availability aspeap foreign labour is reflected in the supply uations profit-secking of labour curve. In both tusinesses would prefer to hire foreign workers to local workers. workers for the reasons discussed in part ‘a might cause unemployment of local workers thus worsening one of the most pressing ‘omic issues. In a larger perspective ployment of local workers brings ‘blems therefore it is important to Js as low as possible. (@ Hiring foreign macro econ srowing une ‘numerous pro keep unemployment level High unemployment is expensive for the govern~ ‘ment and, therefore, for the taxpayer. For every unemployed person, there are two costs to the government. First, the unemployed worker will be entitled to benefit. Secondly, there is the less obvious cost of the loss of tax revenue these workers would have been paying through their purchases. ‘There are other costs of unemployment. There is the cost to the whole economy in terms of wasted, unused resources. The existence of any idle re~ sources means that the economy will be at a point within is production possibility frontier (PPF), Furthermore, unemployed workers (young men, in Patticular) may create other external costs in the sconomy lke crime for example. Finally there is th pesonal human cost to each worker. In the mane ee worker has to put up ee But in the fong run, the job, as they ind i) it harder ‘and harder to find a les rele the skills they have become ae ey have had no new training. ‘erence to the local workers will hel Boies in ill help govern- of mee mime ese problems and sehieve one ler tn pert aro economies objectives ‘emittances cn = aes tend to make sizable se ni families at home, This would 8 outflow of income and would ze caus Topic 2.3 & result in worsening of current balance, Hiring more of local workers would keep most of the income cared with in the economy and hence would help tandard. to improve liv ring focal workers becomes even more important if a particular region is dependent on one major industry and does not offer alternative employment, Government may wish to increase employment of local workers in order to increase national income. Employment and national income are closely related therefore has a direct impact on the quality of life. Achieving higher employment rate may have an impact on country’s exports and imports and hence overall balance of payment. Government may wish to achieve high employment rate in order to produce goods the country is importing and to increase the output of goods country exports However, hiring foreign workers are not necessar- ily bad in all situations. Foreign workers increase the supply of goods and services with their labour ind simultaneously increase the demand for goods and services with their income and spending. In short foreign workers, in particular situations, prove to be an engine of growth. More efficient foreign workers can also help the country to main- tain its comparative advantage which otherwise would have been eroded by the rising wage rate of less efficient local workers. In the end it can be concluded that although for- Jign workers compete with domestic workers for scarce jobs, pull down the average level of real s and burden the welfare system yet, in par- wages ticular situations, they bring benefits in terms of efficiency, possibly higher growth and better living standard, ion, Iabour markets can lead to ree Question 7 In imperfect compe worker exploitation in terms of the wage rates the} ceive compared with wage rates in perfect compet Discuss this opinion. 5) pure-vos] ee Essay Wages are the price paid for labour. In a perfectly competitive labour market, so the economic theory goes, wage rate is determined by the demand for and supply of labour. Many firms competing with one another in hiring a specific type of labour characterize this type ofmarket. Also, there are mamerous qualified workers wth {identical skills independently supply labour, There ex- iat perfect knowledge, perfect mobility and freedom of ‘entry and eit, Consequently, both firms and individual workers are wage takers. The total, or market, labor demand curve is: found by summing horizontally the labor demand curves (the ‘orginal revente product curves) of the individual firms. The marginal revenue product, MRPL, is the increase in revenue due to employing one more unit of labour. MRPL is determined by the MPPL (marginal physical product of labour) multiplied by the MR ic., MRPL=MPPL x MR. ‘On the supply side ofthe labor market, we assume there is no union; workers compete individually for available jobs. The supply curve for each type of labor slopes upward, indicating that employers as a group must pay higher wage rates to obtain more workers. This is so ‘because firms must bid these workers away from other industries. Market Firm, wage A AG. = MC : MRP, 7 poof 10. 0f workers workers In the figure above both equilibrium wage rate and level of employment are determined by the intersection of the market demand and supply curves as depicted in the left part of the graph. Each individual firm will find it profitable to hire this type of Inbor up to the Point at which its marginal revenue product (MRPL) is equal to marginal cost of labour (MCL) shown in the right part ofthe graph. Although economic theory of wage determination is primarily concerned with a perfectly competitive market, however, the theory could be extended to allow various market imperfections, which exist in real world, For instance, there may be a single buyer of labour a ‘monopsonist’ — where a large factory is the main source of employment in a locality. If this is the case, then the wage rate, (ACL) is no longer reperesented by a horizontal straight line. Instead the wage rate ine creases as more labour is employed. Hence, monopsonist will be facing upward sloping market supply curve and in order to recruit additional workers it has to offer a higher wage rate. In such a case, the size of an employer's demand for labour will affect the wage rate. This is illustrated in the figure belo A SiAc Ww, : 6) wy, a IS Mp oO L, +h ar aa ‘The marginal cost curve for labour (MC) bg the average cost curve for labour (AC, gt plained by the use ofa simple example, At gn °®& of £100, 50 workers may be employed. If hays rmonopsonist wishes to employ one more yore is forced to offer £101, the increase being pig workers. The average cost is now £101 but the ma toa cost is £151, comprising oF £101 paid tothe Sigg plus £1 paid to each of the 50 original worker ‘The monopsonist, being a profit maximise, Willen where the MC, is equal to the MRPL, ie. poin Ae L, workers willbe employed. The wage rts, how, is given by the average cost curve S (AC) and ip will be W,, The overall wage bill to the monopcaig will, therefore, be OW, BL,. In a perfectly compete non-monopsony market the wage and numbers big employed would have been W and Ly respect, ‘Thus monopsony power in a labour market will result in a lower level of employment and lower wages tin would exist in a competitive labour market. However, this comparative lower wage rate and en- ployment can be corrected by incorporating trade unions or government, Trade unions seek to increase the wage rate of thet members by cither restricting the supply of labour (et plained in part a) or by direct negotiation. Colestie bargaining involves wage negotiation between tide unions, acting on behalf of their members, and the en ployers. Successful bargaining could raise the w23* rate, for instance, from W, to W, as shown inthe fig ure below: there Wageics (Essays) y economics (ESSAYS) novel EeonOmne pt facing# Tage nner of etnployees popsotit gre the wae rates down to OW, say ent Ly. The enty of a eae union ee 7 LLG Labour We can see how shifts in demand curve will affect the equilibrium wage and labour employed. The initial equilibrium is wage W, and employment L If, for example, there were an improvement in the productivity levels of the workers in an industry say due to a more efficient use of labour through shift, then the labour demand curve (MRP curve) would shift to the right, causing a rise in the real wage rate to W, and a rise in numbers ‘employed to L. Likewise a fallin the price of the good say due to fall in real incomes would make the value of MRP to fall for all wage levels, and so the labour demand curve would shift to the left, giving wage W, and labour employed L. Just like the demand for labour, changes in supply of Jabour can also lead to a change in equilibrium wage rate and employment. An increase, for instance, in the number of people in the economy available to work in the given industry will increase supply. This could be because of an increase in net immigration or a change the demographics of the economy. These increases in numbers will shift the supply of labour curve to the right. A less obvious cause is the situation in other indus tries. If, in relative terms, the wage rate becomes less attractive in a similar industry, or the working conditions deteriorate, then the industry in question will experience an increase in the number of workers offering their labour services. This will shift the supply of labour curve to the right. 4 s, Wage rate Si, s, Ws Ww W; Dy > o Kok LabourAS Lev Economics (Essays) In the diagram above, we ean see what happens to the equilibrium when the supply curve shitls, A shift to the Fight causes the wage rate to fall (from W to W,) and the numbers employed to rise (from 1. 10 Ls). shifl to the Ie causes the real wage rate to rise (from W, to W,) and the numbers employed to fall (from L., {0 1). Referring to the question the theory better explains the market for hospital nurses rather than the entertainment workers. In case of public sector hospital nurses, low wage rate can be explained by the monoposony model Where government is the biggest, if not the sole, employer of nurses and relatively high and elastic supply of workers. The market demand for such workers would be low and relatively elastic. It is low because the soci- ty places relatively lower value on their services therefore their MRP, and wage rate is relativly is lower. It is clastic because their role in providing. ‘ealth care is not particularly considered essential. On the other hand supply of nurses would be large and relatively slastic. The supply would be abundant because low entry requirements short training period and low cost. In addition the lower wages of public sector nurses are more likely to result from the weaker bargaining strength of trade union due to the low and elastic demand and abundant supply. Also the government might have exercised its monopsony powers to main- tain the wage rate at a lower level. In the case of entertainment workers the economic theory does not explain high wage rate adequately. None of the assumption of the theory fits in the entertainment industry. There is no situation of many buy- ers and many workers because there are few employers and few workers. The entertainment industry is an oli- gopoly; where a few large entertainment firms dominate the industry. There are not many professional workers available and they are not homogeneous thus making it difficult to plot a market demand and supply curve rather each worker has his own demand and supply. Workers are not mobile at least in the short run. Over all supply is relatively inelastic because it requires talent and a long training period to become an accom plished actor or a singer. Thus the workers in entertainment industry can command high wages due to a higher MRP and demand and restricted supply. Their demand is inelastic because their role cannot be sub- stituted with other inputs and it is high because people place a high value for their services. Supply on the other hand is restricted due to the particular natural talent required and cost on training. Thus, the lower wages of nurses compared to the ‘wages received by the workers in entertainment industry is the result of different market conditions, weaker bargaining position of trade union and the government control, Whether it is unfair is y therefore depends on who is being Asked, Een, tor mses anit fee tha they ae pn wages while workers in entertainment feel i is fur for them to receive high. iy 9! duc to the nature of work and the longer 2885 mee! ing. On the other hand government sty? according to the economic situation . tions they are paying fair wages to and mar durses, ng Question 10 Some workers producing non-essential laggy ~~ services are paid very highly, The wage rate 2 lated to the economic value of a good or sai % more to social factors or fashion. The evonomie nt of ges i therefore, fie wen era differentials. Assess this argument. IN2o9y Essay Wages are the price paid for labour, Ina perfectly om. petitive labour market, so the economic theory gos wage rate is determined by the market forces of demand and supply of labour. Many firms competing with ore another in hiring a specific type of labour characterize this type of market. Also, there are numerous qualified workers with identical skills independently supply labour. There exist perfect knowledge, perfect mobility and freedom of entry and exit. Consequently, both firms and individual workers are wage takers. The total, or market, labor demand curve is found b summing horizontally the labor de-mand curves (the marginal revenue product curves) of the individ! firms. The marginal revenue product, MRP,, is thei. crease in revenue due to employing one more unit labour, MRPL is determined by the MPP, (msst physical product of labour) multiplied by the MRi* MRP, = MPP, x MR. On the supply sie of the labor market, we sume He is no union; workers compete individually for ane - jobs. The supply curve for each type of ln Upward, indicating that employers as group MPT, higher wage rates to obtain mote workers. Tae et because firms must bid these work-ers away from industries, aFirm Q both equilibrium wage rate and ied by the intersection supply curves as depicted cf the market der ah nd ‘idual firm will inthelet - to hire this type of labor up to the find it pO marginal revenue product (MRP, )is st ie cost of labour (MC,) as shown in the ofthe graph. At a wage rate above OW the orkers available to work is in excess than pots, Wile a wage ae ists a shortage of workers. Thus a tae teet Qpand Qs ineithe situation forees enege ate to equilibrium position, The theory futher assumes that changes in the market fresof demand and supply will eventually restore a sable equilibrium at a new wage level. anand for labour curve shifts if one of the conditions of demand changes, As mentioned above that the de- tun for nbour curve is derived from the MRP curve, sich, in tum, is calculated by MPP x MR. Therefore if thee is an improvement in labour productivity then ‘kswill mean thatthe workers will produce more at any sive wage rate and the MPP curve will shift to the ‘ig shitng the MRP curve to the right. Similarly, if fez ofthe good being produced changes, say due ‘othe change in fashion or preference, then this will shange the MR and hence the MRP at all wage levels zadthe MRP curve will shift leading to a change in “ee mt a shown in the graph below. re aboves yment are detern he fi a of employ’ itt ul sgt panel suber the employment OP] Wage Rate 5 ¥, W, y, D, D, D, ° o> Yeeaseeg uy Labour "Rly OY Shifts in demand il nag ‘and curve will affect the "hii labour em Ployed. The initial equi equi: UM employment LIF, for example, Topie 2.3 © p: the were nervenent in the productivity tevels of use of Inbour thro si then te eee ee curve (MRP cur ae shift, then the labour demand surve ve) would shift to the right, causing a tise in the real ‘Wage rate to W, and a rise in numbers cmployed to 1. Likewise a fall in the price of the good, say duc to a change in trend or fashion would make aay feeea for all wage levels, and so the de /e would shift to the left, giving wage W, and labour employed Ly. Thus the demand for labour is greatly affected by the value of its MRP. The higher the MRP of labour the reater the demand for labour and the higher will be Wages going to labour and the wage and vice versa Hence wage differentials between different occupations could be linked with differences in their values of MRP,, Just like the demand for labour, changes in supply of labour can also lead to a change in equilibrium wage rate and employment. An increase, for instance, in the number of people in the economy available to work in the given industry will increase supply. This could be because of an_ increase in net immigration or a change in the demographics of the economy. These increases in numbers will shift the supply of labour curve to the right. A less obvious cause is the situation in other in- dlustries. If, in relative terms, the wage rate becomes less attractive in a similar industry, or the working conditions deteriorate, then the industry in question will experience an increase in the number of workers offering their labour services. This will shift the supply of labour curve to the right. 4 Wage ;, Rate s w,-—— Ww W. D, ° by Ly Labour In the diagram above, we can see what happete 7 tte equilibrium wien the supply curve sis, ASH right eauses the wage rate to fall fom 1 Na) the numbers employed to rise (fom Ly 10 ba) ASU the left causes the real wage rate mae aie W,) and the numbers employed t0 fall (ror be “Thus some wage differentials arse Peewee Ye rman characteristics cause the supply of some te Tabour to remain low relative to the demin the long run, where relatively requires specif ons training then labour will be reduced and wages higher; For instance, barristers and doctors nced good qualifications and a Jong period training which limits the number of people who are able to do these job. However differences in wages between different occu pations could result from some other factors not ac- counted by the economic theory. If trade unions and professional bodies, for instance, can limit entry into certain occupations by apprenticeships and the need to pass exams then supply will be limited and wage higher, Thus industries with a strong trade union are likely to pay more than those with a weak trade union. Likewise some forms of social factors such as discrimi nation makes it difficult, or impossible, for certain groups to take certain jobs, even if they are equipped by skill and education for these jobs. Thus due to the discriminatory practices the supply in certain occupations remains low and hence results in higher wages ‘compared to the occupation not really affected by social discrimination. ‘Sometimes the supply of labour to a particular occupation may be limited because the job is dangerous or dirty. Such occupations may command higher wages, as for miners. Other jobs, such as teaching or the "Civil Service", have pleasant working conditions, job security and good pension schemes. Consequently, such jobs may eam lower wages. Similarly some jobs may hhave a great many perks and fringe benefits and the money wages may be lower because of these advantage. Many wage inequalities result from several types of market im-perfections which impede workers from mov- ing from their current jobs to take higher-paying jobs. For instance workers may simply not be aware of job opportunities and wage rates in other geographic areas and in other jobs for which they qualify. Conse- quently, the flow of qualified labor from lower-paying to higher-paying jobs —and thus the ad-justments in labor supply —may not be sufficient to equalize wages within occupations. It can thus be concluded that the economic theory gives only a limited account of wage differences be~ tween occupations. In real world, however, these differences could arise due to many other factors not explained by the theory. Question 11 In 2011, 28a result ofa recession, the gage some countries reduced the wages tay 2 public sector workers. Trade unions ay? demonstrations in protest nied Discuss how the economic theory of wa tion in perfect competition can be adapt in oh such a situation, . by = Essay ‘Wages are the price paid for labour, In a perf pe i ive labour market, so the economia” fn wage rat is determined bythe market forces of and supply of labour In such a market many fame pete with one another in hiring a specific ype ake Moreover, there are numerous qualified workers nag identical skill independently supply labour. Thee op ist perfect knowledge, perfect mobility and feedonst entry and exit, Consequently, both firms and individ, workers are wage takers, ‘The market demand for labor curve is found by sume ming horizontally the labor de-mand curves (MRP, curves) of the individual firms. The marginal revenue product (MRP, ) is the increase in revenve that results from employing one more worker. MRP, is obtained by multiplying marginal physical produ: of abour (MPP,) and the firm's marginal revenue (MR), ‘Thus MRP, = MPP, x MR. MPP, is the increase in total output when one more worker is employed andis subject to the law of diminishing returns while MRis determined by the price of the finished product. On the supply side of labor market, we assume thers no union; workers compete individually for availble jobs. The supply curve for each type of labour slopes upward, indicating that employers as a group must Pa) higher wage rates to obtain more workers, This is © because firms must bid these workers away from ate industries. Market Firm wage, wage S rate rate oT wot a ination and exis ; sy ot perfectly cof hows thatthe Wo C Workers ‘The graph sums up wage determi for a profit maximising firm facing a tive labour market. The left panel s et rate is determined in the market by demand nl forces and the firm is a wage taker, On the 8 oo eeever Economics (Essays) as loping portion of the fitm’s MRP, curve waver Tapas Te frm tacos w partly sla wwe of labour that also represents firm's Fe yc implies that addtional Iabour ean be se eeame wage rate, therefore ato the MRP theory the fim wil | $0,200 hire ON workers where its MRP, equals a im would not employ more than On work- NG, The each addtional worker would add less to mse than its costs thus leading to a fallin its fr silaly, Onl workers employed indicates that oro pea increase its profit by employing more be- tn fr additional worker hired up to On would add a fa the firm’s revenue than its costs. though economic theory of wage determination as- fumes a perfectly competitive market, however, the theory could be extended to allow various real world Mrrket imperfections. There may be, for instance, a tingle buyer of labour — a ‘monopsonist’ — where a tage factory isthe main source of employment ina focal. If this isthe case, then the wage rate, (AC,) is to longer represented by a horizontal straight line. In- stead the wage rate increases as more labour is employed. Hence, monopsonist will be facing upward sloping market supply curve and in order to recruit additional workers it has to offer a higher wage rate. In such a case, the size of an employer's demand for labour will affect the wage rate. This is illustrated in the jeed at ihe revenue tl figure below: 4 wage rate MC, a (acys w, é wy 6 MRP ° LL The higher MC, than AC, can be explained by the use of simple example. At a wage rate of £100, 50 workers tay be employed. If, however, the monopsonist wishes ‘0 employ one more worker he is forced to offer £101, the increase being paid to all workers. The average cost ‘snow £101 but the marginal cost is £151, comprising F101 paid to the 51st worker plus £1 paid to each of ‘he 50 original workers, Similar to the erfect ist, bei prof megs Petest market a monopsonist, being a . iser, will employ where its MC, equals | key ated by point A in the graph, hence Ly isgven ee Played. The wage rate W1, however, | ive Towa ie S curve (AC,). In a perfectly competi- | being mmc nopsonY market the wage and numbers 4 iloyed would have been W, and L, respec- — Topic 2.3% page 22 ‘Thus monopsony power in a fabour market will result in a lower level of employment and lower wages than Would exist in a competitive labour market. How- ever, this comparative lower wage rate and employment can be corrected by incorporating trade unions or gov- In the context of question statement if government enjoys monopsony power then trade unions could seek to resist the wage decrease of their members by either restricting the supply of labour or by direct negotiation, ‘They can restrict the supply of labour through the use of a closed shop or by lengthening the time it takes to complete an apprenticeship. Over a period of time th could reduce the supply of labour to an industry, shift- ing the supply curve from SL, to SL, shown in the figure below, 4 SL sly D, c pay . ‘The result would be an increase in the wage rate from W, to W,, but with a reduced number employed, ie. Ly instead of L,. Alternatively, trade unions can influence the market through collective bargaining, It involves the direct negotiation between a trade union, bargaining collectively on behalf of its members, and the employer(s). If they are operating in a perfectly competitive labour market a successful collective bargaining could raise the wage rate from W, to W, as illustrated in the figure below. wage 4 = Se w, Ba Ww, , o, ot No. of workers employed The trade union may be unwilling to supply labour below the wage rate of W,; therefore, the supply curve becomes W,AS;, being perfectly elastic over the sec~ tion W,A. At the equilibrium wage of W,, with no trade union involvement, L, workers would be employed. However, with a wage of W,, only L, are demanded and therefore L;~ Ly are unable to find employment.

2.3labour Market and Govt Intervention

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