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Salaries. Usually salaries are paid monthly to non-manual workers such as managers irrespective of the number of hours worked.
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Wages. Wages are weekly payments for work done and are paid by:
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Piece rate or piecework: an amount for every item made.
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Time rate: an amount for every hour worked.
Deductions
The gross wage is made up of basic wages plus overtime and bonus payments. Deducting income tax and national insurance contributions leaves net wages or take-home pay.
Money and Real Wages
Money wages refers to pay without any adjustment for inflation. Real Wages are the amount of goods and services money wages can buy; this is given by the equation:
Real wages = Money wages/Retail price index x 100
Wages are determined by prices, which in turn are controlled by demand and supply.
Demand Refers to people’s willingness to own a good. Demand is the amount of a good that consumers are willing and able to buy at a given price.
Factors influencing Demand
The amount of a good demanded depends on:
- The price of the good
- The income of the consumer
- The demand for alternative goods which could be used (substitutes)
- The demand for goods used at the same time (complementary)
- Whether people like the good (consumers taste)
The following graph shows the relationship between price and quantity demanded
Price
Demand
Quantity demand
As the price of a good increases then the demand for the product will decrease as not enough people will be able to afford to purchase it.
Firms need workers to produce goods. The demand curve for labour shows how many workers will be hired at any given rate over a particular time period. If the wage rate is high the company will be unable to afford to employ many workers however if the wage rate is low there can be many people employed. So the demand curve for labour is a down ward sloping due to the law of diminishing returns. This is explained using the following example.
A factory is designed to hold 500 workers for instance is unlikely to be very productive if only one worker is employed. But there will come a point when output per worker will start to fall. There is an optimum level of production, which is most productively efficient. Eventually, if enough workers are employed, total output will start to fall. Imagine 10 000 workers trying to work in a factory designed for 500. The workers will get in each other’s way and result in less output than with a smaller number of workers. This general pattern is known as the law of diminishing returns.
The law of diminishing returns can be explained more formally using the concepts of total. average and marginal products.
The total product is the quantity of output produced by a given number of inputs over a period of time e.g. The total product of 1000 workers in the car industry over a year might be 30 000 cars.
Average product is the quantity of output per unit output. Using the same example output per worker would be 30 cars per year. (The total product divided by the quantity of inputs)
Marginal product is the addition to output produced by an extra unit of input. If the addition of an extra car worker raised the output to 30004 cars in our example the marginal product would be 4.
Marginal revenue is the receipt from selling an extra unit of output. In this example it would be the money produced from the extra cars. However this money would be of no benefit if the wage paid to the additional worker was higher than the money received by selling the four cars.
Supply is the amount of a good producers are willing and able to sell at a given price. Supply depends on:
- The price of the good
- The cost of making the good
- The supply of alternative goods the producer could make with the same resources
- The supply of goods actually produced at the same time
- Unexpected events that affect supply
The graph below shows as price increases the quantity of supply increases.
Price
Supply
Quantity supplied
Revenue is found by multiplying the price of the product by the amount sold. A change in price changes revenues, and hence profits, so it is a major determination of the amount sellers will want to sell. Because a higher price leads to higher profit, and a higher profit to a larger amount that sellers will want to sell, one expects that a greater quantity should be supplied when the price is higher. Thus, the relationship between quantity that sellers will sell and price should be direct or positive.
Supply can also be sub grouped in to Inelastic Supply and Elastic Supply. Price elasticity of supply measures the responsiveness of supply to a given change in price.
Supply and demand
When demand and supply are put together we can determine the equilibrium price of a good or service i.e. (the wage of a person)
Price
Supply
Equilibrium Price
Demand
Quantity Demand/Supply
The above method is how wages are determine in simple terms the is a better-suited graph to explain the demand for labour. It also matters what type of supply is being taken in to account for examples doctors would have high demand and low supply said to be inelastic in supply compared to teachers who are said to have relatively low demand in N.Ireland and supply is high they are said to have elastic supply these can be represented in graphs below.
E.g. Doctor
E.g. Teacher
Why the wage rates differ.
Each worker is a unique factor of production, processing a unique set of employment characteristics such as
- Age- whether young, middle aged or old
- Sex- whether male or female
- Ethnic Background
- Education, training and work experience
- Ability to perform tasks- including how hard they are prepared to work, their strengths and their manual or mental dexterity.
A job where labour is in high demand but in short supply will pay higher wages.