Wage Determination | Economics for GCSE/IGCSE - Year 11 PDF Download

Factors That Influence The Demand for Labour

• The labor market consists of households selling labor and firms buying labor. Workers offer their labor, and firms seek to employ it.
• Demand for labor is a derived demand, meaning it hinges on the demand for goods and services. When demand for goods and services rises, so does the demand for labor, and conversely, it decreases when demand for goods and services falls.

Factors Influencing the Supply of Labour

• Various factors affect the amount of labor supplied to a specific industry.

Diagrammatic Analysis of the Labour Market

• The labor market functions as a type of factor market.
• Factor markets operate under the same principles as product markets:
  • They are influenced by changes in price, demand, and supply.
  • Price elasticity of demand and supply affects them.
• Labor market equilibrium occurs when the demand for labor (D_L) equals the supply of labor (S_L):
  • D_L represents firms' demand for workers, which decreases as the wage rate rises, leading to a downward-sloping demand curve.
  • S_L represents workers' supply of labor, which increases as the wage rate rises, resulting in an upward-sloping supply curve.
• Individual firms are price takers in the labor market, as they must accept the prevailing wage rate:
  • Offering a lower wage may make it challenging to attract workers.
  • Offering a higher wage typically results in a large pool of applicants.

Diagram Analysis:

• Equilibrium prevails in the market for graphic designers, with demand (D_L) equaling supply (S_L).
• At this equilibrium, the wage stands at W, and the quantity of labor is Q.
• There exists neither an excess supply of labor nor an excess demand for it.

Analysing the PED & PES of Labour

Price Inelastic Demand & Supply

• When we examine the labor market for NBA basketball players
• In the year 2022, LeBron James was paid a substantial salary of $45 million

Diagram Analysis:

• D_L represents the demand for labor from basketball clubs
• S_L signifies the supply of labor by basketball players
• The demand for highly skilled players exhibits significant price inelasticity
• Clubs prioritize acquiring the best players, often regardless of cost
• The supply of highly skilled players also displays substantial price inelasticity
• A substantial price increase has minimal impact on the labor supply quantity due to the time required to develop skills akin to LeBron James
• Market equilibrium is achieved at W₁ Q₁, characterized by a high price and relatively low quantity

Price Elastic Demand & Supply

Let's examine the labor market for construction workers at a building site.

Diagram Analysis:

• D_L represents the labor demand from the construction company for laborers.
• S_L signifies the labor supply from individuals willing to work at a building site.
• Worker demand exhibits high price elasticity, meaning firms would promptly hire more workers if wages slightly decreased.
• Worker supply is also highly price elastic; the unskilled nature of the job would lead to a swift increase in labor supply with wage hikes.
• Market equilibrium occurs at W₁Q₁, featuring a low price and a relatively high quantity.

Relative Bargaining Power

• Workers possess varying levels of bargaining power when negotiating for wage increases from their employers.
• Factors Influencing Bargaining Power:
  • Membership in a trade union: Trade unions advocate for workers during negotiations, leading to higher wages for union members compared to non-union counterparts.
  • Age and experience: Young and inexperienced workers typically have less bargaining power than older, more seasoned workers. As workers age, their bargaining power may diminish.
  • Level of education: Education enhances a worker's skills and expertise, elevating their bargaining power in comparison to unskilled laborers.
  • Current supply conditions: Labor supply in various industries can fluctuate due to factors like socio-political events. For instance, prior to Brexit, the hotel industry faced low bargaining power among workers. However, post-Brexit, labor shortages in hotels increased worker bargaining power, resulting in higher wages within the industry.

Government Policy: Minimum Wages

• Government intervention in the labor market through the establishment of minimum wages aims to promote fairness and prevent worker exploitation.
• Minimum wage signifies the legally mandated minimum pay that employers must provide their employees, typically exceeding the prevailing market rate.
• The minimum wage can vary based on factors such as the worker's age, ensuring different age groups receive appropriate compensation.

Diagram Analysis:

• The equilibrium wage and quantity for truck drivers in the UK are denoted as W _e and Q _e respectively.
• The government enforces a national minimum wage (NMW) at W ₁.
• An increase in wages leads to a rise in the supply of labor from Q _e to Q _s.
• Due to increased production costs, the demand for labor decreases from Q _e to Q _d.
• At wage rate W ₁, there is a surplus of labor, potentially resulting in unemployment equivalent to Q _d Q _s.