Wage Determination


    Wage Determination

    • In a competitive labour market, the demand for and the supply of labour play the key roles in determining wages.
    • Wages are likely to be high when demand is high and inelastic, and supply is low and inelastic
    • Conversely, wages are likely to be low where supply is high relative to demand and both demand and supply are elastic
      • g. brain surgeons are paid more than waiters, as the supply of brain surgeons is low relative to demand, and due to the high qualifications and long period of training required, supply is also highly inelastic
      • Demand is also inelastic in the short-run, as a rise in the wage rate won’t attract many new brain surgeons.
      • Also, brain surgeons have a very high MRP, and there is no substitute for brain surgeons in an operating team.
      • To contrast, the supply of waiters is high and elastic, as no qualifications are needed, and so there’s a large number of people capable of doing the job
      • Due to this, a rise in the wage rate will attract an extension in supply
      • MRP of waiters is low, so demand is low.

    Other Influences on Wage Determination

    • Demand and supply aren’t the only influences on the wage of many workers
      • Other influences include the relative bargaining power of employers and workers, government policy, and public opinion
    • Wages are likely to be higher when workers have strong bargaining power relative to their employers
      • g. most brain surgeons are members of the BMA, and if this takes industrial action, then the industry would face significant consequences, as brain surgeons cannot be replaced easily by capital
      • To contrast, waiters have low bargaining power, as few belong to a trade union, and they can be replaced easily
    • Government policy affects wages too
      • The government is a major employer, and passes legislation that affects the bargaining power of workers and employers (trade union reform), and directly affects wage rates (national minimum wage)
    • Public opinion has an influences on wages also
      • It values ‘sacrifice’ –undergoing long periods of training and study. The more respected a job is, the more wages are influenced by the amount workers ask for and employers offer.


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