From the graph to the left we can see that if the wage is set high, there will be a surplus which will mean many people will want to qualify for the job however there won’t be enough vacancies, thus there will be unemployment caused by this. In the other instance, when there is shortage, the company’s output will fall producing less profit which will make the wage rise.
This clearly shows that it is essential to adjust the wage carefully so that these consequences will be avoided, which is at the equilibrium However it is very hard for a company to determine where the equilibrium is, which is why we do not have a perfect economy.
Once the wage is set wages can change if demand or supply changes. An increase in demand for workers can occur because e.g. demand for the firms goods has increased, causing their price to rise which will encourage the firm to employ more workers at the same time. The exact opposite can happen when the company is not gaining enough profits, or if taxes rise, it will have to reduce the employment of workers so it doesn’t fall into larger debts.
Elasticity must be considered. A rise in demand has caused a much bigger rise in wages, than the increase in labour because supply is inelastic. What this means is that in a job in where supply is inelastic a high level of qualifications is required, as well as skill.
So even if the wage rises by a lot, supply will not change as much.
When looking at wages, elasticity of supply and demand must be considered. This is a measure of responsiveness of changes in quantity demanded or supplied to changes in prices- in this particular case the wage rate. This can be seen as for example, how much profit the worker helps to make to the company, so the company benefits on that particular worker. If the worker is valuable to the company, then the company is most likely to pay him a high wage and the same goes vice versa- if he is worth not as much then a lower wage would be demanded.
If we take an example of 2 workers, one being an accountant and the other is a shop assistant, we can clearly see the difference in their wage. The explanation for this can be found below:
On the graph to the left, we can see that demand is inelastic. The worker’s job is important and people are willing to pay a high amount of money for his services (W). At a higher W1 demand for accountants will not fall by very much, Q1, because all businesses will need accountants to look after their financial situation.
In this case the demand for cleaners is elastic, this is due to the fact that at a low wage many people would like to hire a cleaner, however, if the cleaner would have increased their charging fees then people would look for alternatives, such as cleaning the house themselves etc.
The elasticity of supply is determined solely on the wage rate that is set for a particular job. The higher the wage rate for a job, the more workers will be willing to come into that occupation, since they would like to earn high reward for the labour they produce. However there are barriers in getting to a certain job. These could be for example qualifications, which are mostly needed for the majority of jobs that are inelastic, cost as well as the length of training, status of the job etc. The barriers also decrease the supply of labour as some are not willing to go through this process.
The diagram to the left shows how supply is inelastic for an accountant; this is mainly due to the barriers which I have listed above. Even if there is a high wage given, not many extra people will go for the job as they have to consider the barriers. If wages rise from W to W1, the supply of labour will only rise from Q to Q1.
When we look at supply which is elastic, we can see that at W, Q will be supplied. Jobs like this usually don’t have any barriers such as qualifications or cost of training for example. If the wage rises from W to W1, the quantity of labour will increase substantially from Q to Q1.
The wage rate in a particular industry
The wage rate in a particular industry is determined by the supply and demand for labour in the industry. The diagram below shows the wages of highly skilled workers in a expanding economy. High demand coupled with limited and therefore inelastic supply leads to high wages.
The graph below shows the wages of unskilled workers in a declining industry. Low demand coupled with a potentially large, elastic supply of labour leads to a low wage rate.
In the “real world”, wages are not always determined by demand and supply. The government, trade unions and employers associations can interfere with how the price system works.
The government supplies wages for the public sector workers and in its fight to keep inflation and taxes down it will try to keep wages low for teachers, nurses etc. In doing so it often sets a wage below the equilibrium.
An example of this is with nurses:
If the government set the wage at W demand would equal supply, and there would be no shortage of nurses. Their wage has been set at W1 and this has created a shortage of L2-L1, which is currently covered by encouraging nurses to come here from overseas.
The government can also influence wages through the minimum wage.
The government’s policy that it uses is to determine the minimum wage. At present this is £4.15 per hour for a typical worker. This does not affect many individuals in large cities such as London, however, in areas that are less wealthier, such as Yorkshire, the minimum wage helps a lot of people. Lets take an example of a cleaner:
→Salary per hour: £3.80
→Salary after introduction of minimum wage: £4.15
From the graph above, we can clearly see that the equilibrium wage for cleaners is £3.80, and an equal amount of labour is supplied. However when the minimum wage is introduced, people tend to earn more and are better off. But this has also its downsides:
- People will refuse to employ as many cleaners as they used to since they will have to pay a higher price for the work they produce, which will lead to many cleaners ‘out of job’. This can be seen at L1, the demand for workers after introducing the minimum wage is lower than at L.
- The supply of workers will increase to L2, however many will not be employed.
- This creates a problem of unemployment, L2-L1 = surplus.
This is a problem since the government doesn’t exactly know at what to set the minimum wage to. It does give chance for many people to earn a higher standard of living; however, it also causes unemployment.
Trade Unions help their members by protecting their rights, they are concerned with factors such as job security, level of wages and other rewards for labour provided, health and safety, working conditions as well as benefits.
Before trade unions existed, workers had to negotiate their pension as well as the working conditions on their own, without any support, and this usually meant they were in the less advantaged side. After the introduction of trade unions, workers can be confident whilst the unions negotiate and put pressure on employers to get the maximum best benefit for their member. They can even push up wages above the equilibrium wage if they are powerful enough.
To support this coursework and to help me answer the question “Does economics theory always determine the wage of workers?”, I decided to choose 4 workers and investigate their areas of work. It will show me whether their wages are determined solely by demand and supply or if other factors have to be considered.
I have carried out interviews with an accountant, a doctor, and a shop assistant. It wasn’t possible to carry one out with a footballer, since it would be very hard to arrange one. However I have researched about David Beckham and from this information I will analyse his wage as well as his working conditions. The results of my interviews are located on the backup of my coursework project.
Footballer
David Beckham plays for Manchester United and is the captain of the English football team. He works about 5-10 hours a week depending on the number of matches plus training which makes it around 20 hours. The demand for top footballers is very inelastic. The company for which David Beckham works for is Manchester United. In terms of attracting large crowds, winning cups and selling merchandise, he creates a lot of profit for his company.
Wage: £90,000 a week, plus additional money via sponsorship, advertising etc.
Qualifications: none
Accountant
Mariah Lane is an accountant at the Abbey National bank. She works 5 days a week from 9.30am to 5pm. Demand for accountants is fairly inelastic. From the survey I carried out clearly accountancy requires a long period of training, as well as high qualifications such as A levels plus a degree.
Wage: £26,500 a year
Qualifications: A levels, degree
Shop Assistant
Nand Raja is an assistant in a ‘corner shop’. He finds his work very boring and works long hours from 7am to 11pm. The demand for shop assistants is very elastic because it requires basic skills. His wage is affected by the minimum wage and helps him improve his standard of living. He does not belong to any trade unions.
Wage: £12,000 a year
Qualifications: none
Doctor
Jonathan Stewart is a doctor at Middlesex Hospital. His work requires a lot of physical and mental strength and can be very tiring. He works for long hours and quite often his working day is extended because of certain emergencies. The supply of doctors is low because it requires long training which not many people choose to do, thus demand is high and the wage is high also. This job is surely inelastic, however, it is classed as being part of the public sector. This means that if the government experiences financial shortage, it will either raise taxes or interfere with public sector workers’ wages and keep it down, thus not spending that much money on doctors.
Wage: £32,500 a year
Qualifications: A levels, degree, 7 year course
After looking carefully at what factors determine wages, I have come up to a conclusion. I am fairly confident in saying that the two main factors that affect wages are demand and supply; however there are also other factors, such as inelasticity. If demand for a particular worker is inelastic, this means he is highly skilled and not many people achieve this level. Whatever way we look at wages, workers who have higher qualifications will always be entitled to the highest wage.
The survey that I have carried out helped me in understanding the factors that affect each of the worker’s supply and demand. In David Beckham’s case, wages are set at a high rate mainly due to high demand. It is very hard to find top class footballers, that’s why he can charge high fees for his service.
In Mariah Lane’s case, who is an accountant, wages are also influenced by demand and supply however up to a certain limit, since the job is inelastic. Whenever a job appears to be inelastic, there are other factors that affect it, for example like in this case long training for accountancy qualifications, as well as the cost of training that lies behind it, which are the barriers that I have discussed.
The shop assistant, Nand Raja doesn’t require any qualifications as it is his own private-run business that hardly requires any skills, apart from basic mathematics. This job is very elastic, which means that there won’t be many factors other than demand and supply that will interfere.
Lastly, Jonathan Stewart, a doctor at the Middlesex hospital, plays an important role. Apart from demand and supply, which are both inelastic, Dr Stewart required an extensively long training course which lasted up to 7 years. It is a job which requires extreme skill and precision, and as I have discussed not many people tend to go for such long training schemes. Dr Stewart tends to stay behind in the hospital for long hours which also boosts his income, however as I said, this job requires a lot of time and effort.
After I have looked at the workers that I have interviewed, I have clearly understood that wages are not solely determined by demand and supply. This also brings in the elasticity for the demand and supply of labour which I have covered in this coursework. From this coursework it is also understandable how trade unions influence companies in the wage they set for their members.
I have successfully explained how wages are determined and what are the factors that influence this. This coursework has also helped me understand wages even better and expand my knowledge.
