Powered by Leeds Metropolitan University
Economics Resources Economics revision notesEconomics revision quizzes Popular resources on the Economics blog Resource tags for the blog RSS Feed for the blog Twitter feed for the Economics blog Teacher Email Resource Newsletter Category listing for this blog AS / A2 Economics Blog Home Page

Buy tutor2u Economics Revision Guides |  Economics Blog  |  Economics Revision Workshops | tutor2u App | Economics Revision Quizzes | Follow tutor2u and tutor2u_econ on Twitter | Join our FREE Economics Revision Classes on Zondle

Determination of wages in the labour market

Author: Geoff Riley  Last updated: Sunday 23 September, 2012

Equilibrium wages and wage differentials

There is a wide gulf in pay and earnings rates between different occupations in the UK labour market. Even in local labour markets there will be variations in pay levels – for example, in London bus drivers working for different companies can see differences in pay of up to £6,000 a year?

In 2010, chief executives of FTSE-100 companies were paid on average 145 times the average salary. Back in 1999 the multiple was 69. On current trends it will be 214 by 2020, or around £8m a year.

In the 30 years to 1979, the share of income going to the top 0.1 per cent of earners dropped from 3.5 per cent to 1.3 per cent. Today, the top 0.1 per cent takes home as big a share as it did in the 1940s.

Wage Differentials

No one factor explains the gulf in pay that persists between occupations:

  1. Compensating wage differentials - higher pay can often be reward for risk-taking in certain jobs, working in poor conditions and having to work unsocial hours.
  2. Equalising difference and human capital - in a competitive labour market, wage differentials compensate workers for the opportunity costs and direct costs of human capital acquisition.
  3. Different skill levels - the gap between poorly skilled and highly skilled workers gets wider each year. Market demand for skilled labour grows more quickly than for semi-skilled workers. This pushes up pay levels. Highly skilled workers are often in inelastic supply and rising demand forces up the "going wage rate" in an industry.
  4. Differences in labour productivity and revenue creation - workers whose efficiency is highest and ability to generate revenue for a firm should be rewarded with higher pay. E.g. sports stars can command top wages because of their potential to generate extra revenue from ticket sales and merchandising.
  5. Trade unions and their collective bargaining power - unions might exercise their bargaining power to offset the power of an employer in a particular occupation and in doing so achieve a mark-up on wages compared to those on offer to non-union members
  6. Employer discrimination is a factor that cannot be ignored despite equal pay legislation

Sticky wages in the labour market

Economists often refer to the existence of “sticky wages.” In a fully flexible labour market, a decrease in the demand for labour should cause a fall in wages and a contraction in employment - just like any demand curve shifting down.

However, sticky wages refers to a situation in which the real wage level doesn't fall immediately, partly because many employees have wages specified in employment contracts that cannot be re-negotiated immediately, and because workers (perhaps protected by their trade unions) are resistant to cuts in nominal wages.

If the wage level cannot fall when demand falls, it leads to a much bigger drop in employment and, more importantly, involuntary unemployment because of a failure of the labour market to clear.

The evidence for sticky wages is a good counter-argument to neo-classical models of the labour market that suggest that real wage levels respond flexibly to any changes in labour demand and supply conditions.

Will wages become less sticky during the recession? There are signs that workers, fearful for their jobs at such a difficult time, have become more willing to consider and perhaps accept pay freezes or wage cuts traded off against improved job security.




Add your comments and share this study note:

blog comments powered by Disqus

 

Search tutor2u






Order by 


Related study notes

Buy your personal copy of our Economics revision guides

tutor2u Economics Revision Guides

Agriculture
Behavioural Economics
Network Economics
Game Theory
Business Economics
Economics of Utilities
Contestable Markets
Competitive Markets
Economies of Scale
Management Issues
Monopolistic Competition
Monopoly
Oligopoly
Price Discrimination
Competition Policy
Commodities Markets
Emerging Economies
Human Development
African Economy
South African Economy
Kenyan Economy
Development Economics
Brazil Economy
China Economy
Indian economy
Russia Economy
Cost Benefit Analysis
Cycles and Shocks
Aggregate Demand
Capital Investment
Consumer Spending
Saving
Aggregate Supply
Demography
Economic History
Economic Growth
Competitiveness
Innovation
Economics of Technology
Environmental Economics
European Economy
EU Enlargement
EU Farming and Fishing
Single Market
The Euro
Exchange Rates
Money and Finance
Monetarism
Global Economy
IMF
Balance of Payments
Credit Crunch
International Trade
Housing Economics
Government Intervention
Buffer Stocks
Government Failure
Indirect Taxes
Maximum Prices
Minimum Prices
Regulation
Subsidies
Health Economics
Inflation and Deflation
Labour Market
Trade Unions
Introductory Economics
Macroeconomic Policies
Fiscal Policy
Monetary Policy
Supply-side policies
Trade Policies
Keynesian Economics
Market Failure
Externalities
Factor Immobility
Information Failure
Merit & De-Merit Goods
Public Goods
Manufacturing Industry
Oil and Gas
OECD Economies
Australia Economy
French Economy
German Economy
Greece Economy
Ireland Economy
Japan Economy
Poland
Spain Economy
US Economy
Poverty and Inequality
Market Equilibrium and Price
Elasticity of Demand
Elasticity of Supply
Nature of Demand
Nature of Supply
Price Mechanism in Action
Price Volatility
Inter-related Markets
Standard of Living
Transport Economics
UK Economy
Regional Economics
London Economy
Recession Watch
Unemployment

 


tutor2u

Tutor2u support for students
Teaching support and resources
Search for resources on tutor2u

Law



Refine Search by Subject
A Level Economics
Business Studies
Geography Give It A Go!
History Law
IB Diploma Politics
Religious Studies Sociology

Order Search Results By


Follow tutor2u on Twitter
   
   

tutor2u Home Page | Online Store | About tutor2u | Copyright Info | Your Privacy | Terms of Use

tutor2u

Working with Our Partners

 Zondle - Games for LearningVue Cinemas | Moneypenny | Nexcess | Really Simple Systems 

Boston House | 214 High Street | Boston Spa | West Yorkshire | LS23 6AD | Tel +44 0844 800 0085 | Fax +44 01937 529236

Company Registration Number: 04489574 | VAT Reg No 816865400

tutor2u is proud to sponsor TABS Cricket Club and the Wetherby Cricket League as part of its commitment to invest in local junior sport