Workers

Ch 3.3
 By the end of this chapter students will be able to:
• analyse the wage and non-wage factors that
influence an individual’s choice of occupation
• analyse how wages are determined
Learning • discuss the influences on wage determination
• draw demand and supply diagrams to analyse labour
Objectives markets
• discuss the reasons for diff erences in earnings
• discuss the advantages and disadvantages of
division of labour/specialisation for workers, firms
and the economy
Occupational Choices
The occupational choices of workers are influenced by a range
of wage & non-wage factors, which are often held in balance
when making decisions about where to work
a.Wage factors are financial payments that workers receive for
their labour

b.Non-wage factors incorporate a range of influences that are

meaningful to a worker
 Wage Factors
Wages:An agreed amount of money/hour & is calculated directly from the number of
hours worked.These are paid on daily or weekly basis.Wage Rate is the amount of money
paid to a worker per unit of time on exchange for their labour.

Salary –It is an annual sum of money paid to a worker in exchange for their labour-
usually paid in twelve equal monthly amounts.

Commission- Often used as payment to sales people.It is typically a percentage of the

value of the transaction involved. This can motivate employees to maximise sales.

Bonus : Money paid in addition to a salary & is usually single annual payment.Often
paid when the company earns high levels of profits, or as a reward for exceptional
worker performance
• Piece rate pay: A fixed amount paid to the employee for each completed
item produced.
• Performance Related Pay: Payment based on how well the worker performs.
Workers doing exactly the same job may receive different compensation based
on different outcomes they achieve.
• Share options:Payment through the issuing of shares in the company the employee
works for.This is usually in addition to a monthly salaryThe monetary value of the
shares provided to the employee can be calculated on any given day as:
number of shares x share price
 1.Length of training or level of education
required: The longer the time period required to
study/train for a job, the fewer the number of people
who seek employment in that occupation e.g. it
usually takes seven years to become a lawyer

2.Job security: Employment contracts in different

Non- Wage industries have different time periods attached to
factors them. Some contracts are one to four years in length,
so provide high security e.g financial sector
contracts.
3.Job satisfaction: Finding fulfilment in a job role &
enjoying work is a significant part of generating job
satisfaction. Workers will often change their
jobs/careers so as to improve their job satisfaction
4.Fringe benefits:Benefits provided in addition to the normal
salary.They can be significant in influencing occupational
choices.Includes benefits such as such as childcare, free
lunches, gym membership, company car.
5. Career prospects: Jobs with a defined pathway for
promotion (& salary increases) are often more desirable.
6.Level of challenge: Many workers step into an occupation
due to the challenge of the role e.g. firefighters.
7.Status: Some jobs carry a higher recognition in society
which workers find appealing, for example doctors, surgeons &
lawyers.
8. Working conditions Working conditions are an important
determining factor. People like to work in pleasant
surroundings, with friendly colleagues and enjoying regular
breaks.
9. Working hours :Occupations vary in terms of the number of
hours expected from workers and the timing of those hours.
10. Type of work Most people would rather do non-manual than
manual work. This is because it is physically less tiring and
generally offers more mental stimulation. Non-manual work also
tends to be better paid.
11. Holidays :In a number of countries, the law sets down a
minimum length of holiday entitlement for full-time workers.
Even in these countries, however, the length of holidays varies.
12. Pensions: With people living longer in most countries,
occupational pensions are becoming an important influence.
13. Size of the firms: People are often attracted to jobs in large
firms and organisations. This is because such firms and
organisations often pay more and offer better career prospects, job
security and fringe benefits than smaller ones.
14. Location People may choose an occupation which is close to
their home. This will mean that they do not have to spend much
money or time on travelling to and from work.
 • The labour market is composed of sellers of
labour (households) & buyers of
labour (firms)
- Workers supply their labour & firms
demand labour
The • The demand for labour slopes downwards
Demand because an employer will demand a greater
number of workers at lower wage rates.
for Labour • Demand for labour curve shifts due to change
in economic activity or economic growth.It
results in right or leftward shift of Demand
curve.
 • The supply curve is upward slope
curve because workers usually willing
to give up more of their leisure time in
return for a higher pay.
• Supply curve shifts due to various
factors such as wage rate,size in
working population,number of
qualified people and non wage
factors.

The Supply of
Labour
 • The labour market is a type of factor
market.
• Labour market equilibrium occurs
where the demand for labour (DL) is
equal to the supply of labour (SL)
• The DL is the demand by firms for
workers - firms demand more labour
as the wage rate decreases which
results in a downward sloping
demand curve
• The SL is the supply of labour by
workers - workers supply
more labour as the wage rate
increases which results in an upward
Labour Market sloping supply curve

Equilibrium
• Individual firms are price takers in the
labour market as they have to accept
the wage rate that workers are being paid
in the industry
-If they offer a lower wage, they will likely
struggle to recruit workers
-If they offer a higher wage there will be a
large number of workers applying to work
there.
• Diagram Analysis
• The market for graphic designers is
in equilibrium where DL = SL
• The equilibrium wage is W and
the quantity of labour is Q
• There is no excess supply of labour
• There is no excess demand for labour
 A. Price Inelastic Demand & Supply
-Consider the labour market for NBA basketball
players
-In 2022, LeBron James received a salary of
Analyzing $45m
-The demand for highly skilled players is
the PED & very price inelastic
PES of • Clubs want the very best players, almost
irrespective of what they cost
Labour -The supply of highly skilled players is also
very price inelastic
• A significant increase in price will have little
impact on the quantity of labour supplied in
the market as it takes years to
develop LeBron James type skills
 Diagram Analysis
• DL is the demand for
labour from the basketball
clubs
• SL is the supply of labour by the
basketball players
• The market equilibrium is
found at W1Q1 - a high price &
relatively low quantity.
B. Price Elastic Demand & Supply

. Consider the labour market for labourers on a building site.

The demand for workers is very price elastic

• If wages dropped a little, then firms would respond quickly by employing more
workers

The supply of workers is also very price elastic

• Due to it being an unskilled job, there would quickly be an increase in the supply
of labour if wages were to increase
Diagram Analysis
• DL is the demand for labour from
the building company for
labourers
• SL is the supply of labour by
people willing to work on a
building site
• The market equilibrium is found
at W1Q1 - a low price &
relatively high quantity
 a.The demand for labour is a derived demand:This
means that it depends on the demand for
Factors goods/services
-If demand for goods/services increases then the demand
That for labour will increase - and vice versa.

Influence b. The productivity of labour:If the productivity of labour

increases (possibly through training) this will lower average
The costs & firms will likely demand more labour.
c. The ability to substitute capital (machinery) for
Changes in labour:Firms will constantly evaluate if it will be possible
& more cost effective to switch production from using
Demand for labour to capital (machinery).

Labour d. The productivity of labour:If the productivity of labour

increases (possibly through training) this will lower average
(shifts in D) costs & firms will likely demand more labour.
e.The profits of the firms:Firms with higher profits are
likely to expand and demand more labour.
 The factors that influence change in supply curve

a. Wage rate and other monetary payments relative to those offered in other industries
b. The size of the working population as there would be fewer people available to work and vice
versa
c. The number of qualified people,due to an increase in the level of qualification required to do a
particular job ,for example doctors or an increase in the time needed for training and vice
versa.
d. Non-wage factors, for example a deterioration in working conditions or job security and vice
versa.
e. Trade union power:Trade unions can increase the supply of labour to certain industries
as workers consider the benefits of belonging to the union e.g higher wages & a safer working
environment.
f. Income tax levels:The assumption is that as income tax increases, labour supply decreases -
and vice versa.
g. Social trends: Social trends include any major changes within society & can influence the
supply of labour to certain industries e.g. work from home during Covid.
Relative Bargaining Power and Wage Determination

Workers have different degrees of bargaining power when it

comes to negotiating wage increases with their employers.

The level of wages will depend upon the relative bargaining power
of the both sides.

The following factors influence their bargaining power

• Membership of a trade union: trade unions represent the interests of the workers
in negotiations with employers & members frequently enjoy higher wages than
non-union members.
• Employer Power: If the employers are in a stronger position, then the wages level
on offer is likely to be low.
c. Age & experience:Young, inexperienced workers
have less bargaining power then older, more
experienced workers. As workers grow older their
age often begins to count against them & this
reduces bargaining power.
d. Level of education: education provides higher
levels of skill & specialisation to a worker. This
increases their bargaining power relative
to unskilled workers.
e. Current supply conditions: the supply of labour
in many industries can change due to socio-
political conditions e.g prior to Brexit, workers in
the hotel industry had very little bargaining
power. Brexit created a shortage of labour willing
to work in hotels.
How can government policy help determine wages?
Minimum wages are the lowest wage level that an employer may
legally pay their workers.
Living wages :A wage set at a level to enable workers to reach a
minimum acceptable living standards.
They do this in order to improve equity & avoid the exploitation of
worker
It is set above the market rate

The minimum wage/hour often varies based on age

 Diagram Analysis
• The market equilibrium wage & quantity for truck drivers in
the UK is seen at WeQe
• The government imposes a national minimum
wage (NMW) at W1
• Incentivised by higher wages, the supply of labour
increases from Qe to Qs
• Facing higher production costs, the demand for labour by
firms decreases from Qe to Qd
• This means that at a wage rate of W1 there is excess
supply of labour & the potential for unemployment equal
to QdQs.
• NMW can raise both the wage rate and employment. They
think that paying a higher wage to workers will raise their
motivation and hence their productivity.
• This, combined with higher demand for products arising
from higher wages, can increase demand for labour.
 • It means differences in wages.
Reasons for Differences in Pay
• Workers are paid different amounts (wage
differentials) due to a number of factors,
including
Wage a.Gender pay differences
Differentials b.Industrial sector pay differences
c.Private & public sector pay differences
d.Differences in pay between skilled &
unskilled workers
e.Government Policies
f. Changes in public opinion
A.Gender pay differences
1.Men usually work full-time whereas women often work part-time in
order to meet the demands of motherhood/childcare
2.Men usually have an uninterrupted career journey whereas women
often take time away from work (motherhood/family) & so miss
opportunities for advancement
3.Women are more likely to accept a job below their skill or
quantification level if it fits in with the needs of looking after their
children
4.The gender pay gap is a form of discrimination & occurs when a
women is paid less than a man who is doing exactly the same job
b. Reasons for Wage Differentials Between Skilled & Unskilled Workers

Many economies have a high supply of unskilled labour. This means that
employers can push wages down as there is always someone willing to
work for less (take it or leave it approach to wages)

To become skilled takes time & money which means that there is a more
limited supply of specific skillsets. In recognition of these factors, wages
for skilled workers are higher.
 • Primary sector workers are usually paid low wages
due to the unskilled nature of the job & the fact that
C.Reasons for raw materials often generate the lowest profits in the
production chain
Wage
• Secondary sector workers add value to the raw
Differentials in materials & these products sell for higher profits.
the Primary, Therefore wages tend to be higher than primary
Secondary & sector wages
Tertiary • Tertiary sector workers are paid the highest. Their
jobs often require highly valued skills that take years
Sectors to acquire & the products they sell or services they
provide can be complex & expensive e.g. artificial
intelligence coders
D. Reasons for Wage Differentials Between Private & Public Sector Workers

• Public sector organisations are owned & controlled by the Government

• Private sector organisations are owned & controlled by private
individuals & firms
Private sector Workers Public Sector workers
-Salaries can be extremely high, -Wages will reach a maximum ceiling that is
often below what the private sector may offer
-Some salaries can also be very low as firms seek to -Wages often do not fall as low as some private
cut costs & maximise profits sector jobs as many public sector workers belong
to trade unions

-Many wage benefits tend to be better than those -Job security is high resulting in long careers
provided by the public sector with defined pathways for promotion
-Pensions are often very good, but are limited in
comparison to private sector pensions
e. Government Policies
• The ways a governments can change wage rates are:
a. Raising the national minimum wage will increase the pay of low-paid workers.
b. The rise in supply, improved education may actually raise the wages of skilled
workers, as it may increase their demand more than the supply.This is because
employing more skilled workers should reduce costs of production and increase
international competitiveness
c. Government policies on immigration can also affect wages. Making it easier for
foreign people to live and work in the country should increase the supply of
labour
d. The introduction of government anti-discrimination laws may help to increase
the career prospects and wages of disadvantaged groups.
e. Advances in technology can alter wage rates. In some cases, it can put
downward pressure on wage rates by reducing demand for workers.
 • Over time, how occupations and those who
undertake them are viewed can change.
- For instance, one possible reason why the
Changes in relative pay of journalists has fallen in the
USA in recent years is a decline in the regard
public the occupation is held in.
opinion -In contrast, the pay and job opportunities for
women is increasing in Saudi Arabia where
social attitudes about women working are
changing
Specialisation and division of labour

Specialisation: The Process by

which individuals/workers,
firms,regions whole economies
concentrate on producing those
products in which they have an
advantage
Division of Work:The process
by which workers specialize
in ,or concentrate on ,one
particular task.
 Benefits
-Increase in skills as they focus on one task.
They also earn more money.
The Costs and -Workers only need to focus on task in which
Benefits of they are best at.
Specializations -As they involve in doing task in which they
for Workers are good at.It will improve their motivation
and increase job satisfaction
-As they earn more it will improve their
standard of living
Costs

-Repeated involving in same task may result in

boredom

-As focus is on only specialized task.Workers may be

lose other skills(Deskilling)

-If demand for particular product decrease it may led

fall in demand for the skills and create threat to job
security.
 • Benefits
-Increases output
The cost and -Higher Productivity as workers specialize
which improves their skills
Benefis of -Higher quality
specialization -Higher Economies of scale (Higher the
for Producers production Per unit cost decreases)
-Time saving-efficient use of time
Costs

-Increased cost as need to pay higher salary and more

input costs as production increase

- Dependency –Any technical problem in one task,entire

production will be stand still

-Movement of workers-As workers get bored by doing

repeated tasks.It may lead high labour turnover.
The costs and Benefits of
Specialization for Economy
• Benefits
-Increased exports can result in economic growth for
the nation
- Economic growth usually leads to higher
income and a better standard of living
- Income gained from exports can be used
to purchase other goods from around the
world (imports). This increases the variety of
goods available in a country
• Cost
-Specialisation may create over-
dependency on other countries' resources.
This may cause problems if conflict arises
(E.g, Europe's reliance on Russian natural
gas during the Ukraine crisis)
• Specialisation using a country's own
resources will lead to resource depletion.
Specialisation increases the rate of
resource depletion