3.5.2 Wage rates



    There are many factors which affect demand of labour which can be remembered using the acronym PET WASP:

                Firm’s profits – if firms are more profitable, they employ more workers

                Economic cycle – in a recession demand for labour falls whilst in a boom it rises

                Technological change – wages rise as jobs become more technology jobs become            more technology based (knowledge economy)

                Wage rate – as wages rises, demand for labour fall (profits fall) employers look for           substitutes to worker i.e. machines

                Aggregate demand – if AD is rising, demand for products and labour to make       products rises (derived demand)

                Substitutes – if substitutes e.g. machinery become cheaper labour demand falls

                Labour productivity – output per workers à if workers are more productive,                   demand for them rises. Skills level, education, training and use of technology all           affect productivity.



    The supply of labour is calculated by the number of worker willing and able to work at the current wage rate, multiplied by the number of hours they can work. It can be remembered by the acronym PPM WEB:

                Working-age population – the number of people of working-age , influenced by the        retirement age and school leaving age.

    Preferences for work and leisure – if more people prefer work, the supply of labour        increases, if more people prefer leisure supply falls. Work and leisure are substitutes   for each other

                Migration – migrants increase the number of workers available in the economy   which and are often from low wage economies

                Women’s participation – if childcare is subsidised it is cheaper so more women   enter the workforce

                Education and training – if subsidised by the government supply of (skilled) labour          will rise but if training is time-consuming supply may take a long time

                Benefits and tax – higher tax and higher state benefits are disincentives for          employees to supply themselves for work

    Impact of global competition, recession and redundancies


    An increase in global competition, recessions and redundancies are all contributors towards falling wage rates.


    During a recession demand for labour falls due to falling demand for goods and services. Firms make less profit due to decreased demand and fewer workers are needed. They have to make workers redundant and wages fall for others. Many workers can be made redundant as their skills are no longer needed. Global competition has led to cheap imports e.g. from China. Firms need to cut prices in order to compete and may have to cut costs as a result e.g. wages. This will lead to reduced demand in many industries and output will fall as a result which will cause redundancies as they need less workers.


    Impact of trade unions and professional bodies

    The aim of trade unions is to protect workers by improving working standards and trying to achieve higher wages. They use collective bargaining which involves negotiations between employers and the union with the aim of improving conditions and wages for workers.




    Benefits of unionisation:

    • Increased job security for employees
    • Improved working conditions and higher wages by limiting the supply of labour e.g. strike action
    • Backing of a skilled union rep if there is an issue at work
    • An employer with monopsony power (single buyer of labour) e.g. police can be moderated by a union.

    Drawbacks of unionisation:

    • If trade unions increase wage rates too much, firms can’t afford to hire as many workers causing real wage unemployment
    • Non-union members may feel excluded or disadvantaged in their jobs
    • It is more difficult for an employer to fire employees who are under-performing
    • Cost of union subscriptions (payments) for employees


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