The MRP curve for labour is an industry’s demand curve for labour. It is the interaction of demand for supply of labour shown by the SS curve; that will determine the final wage rate W and the level of employment O.
However the MRP curve for different types of labour is different. Firefighters will face a different MRP curve from pop-stars like Robbie William. This is because the physical product and the price people are willing to pay for the good differs. For example, fire-fighting service is a need that must be fulfilled in case of a fire outbreak but the people would fail to realize this importance at all times and hence would be willing to pay less for service. However, leisure activities such as enjoying music brings people satisfaction for which the people and are ready to pay a high price. Therefore the MRP of the two occupations differ. Moreover music is entertainment demand for entertainment increases as income increases so demand becomes inelastic.
More than the demand for the factor, it is the supply of the factor that determines the earnings of the firefighters and the pop-star.
Fire-fighting services need training and education levels which an average individual can attain given their respective intelligence and dexterity. Because of these fire-fighters are likely to be in greater supply as economic theory of wages will predict. As a result the labour of the industry faces an upward- sloping curve.
The supply curve for firefighters. At wage rate W1, Q1 of the labour is employed. To employ Q2 workers the firm must offer a higher wage rate W2 which suppose is the equilibrium level set due to force of demand.
Above this wage rate, a worker will not be hired. The shaded area below the supply curve shows the transfer earnings of the firefighters. This is the minimum amount that has to be paid to the workers to keep them in their current use. The shaded area above the supply curve shows the firefighters’ economic rent which is the income earned over and above their next best alternative job. Since the supply of firefighters is high and demand low, their economic rent is low which means even by switching to their apparently better job they still earn relatively little more than their next best job.
Pop-stars like Robbie Williams on the other hand have talents which others, no matter how much training given, cannot acquire. Therefore such kind of labour are fixed in supply. Assuming creating music is the stars chosen occupation and would be pursued no matter the wage rate, the supply curve would be perfectly inelastic.
The supply curve for a pop-star: Even at a low wage rate W, the pop-star would supply the services. But the price actually paid allocates the fixed supply to those who are most willing to pay for it. Hence it is the immense demand for such a labour that sets a high wage-rate for it to W2 despite fixed supply of Q.
The entire earning by the factor is its economic rent and transfer earning is zero because the pop-star would go on pursuing his career in music irrespective of the wage.
The difference in demand could also arise because of the ability of the factors to reach out to the markets. For example, the firefighters have their services restricted to certain locations in the UK because their physical presence in the necessary for the service is limited to only UK. However due to media and communication systems Robbie William’s music is being spread globally and so the demand for his services comes from the global market and hence drives his earnings to really high levels.
Even within the UK, people’s real wealth has increased. As a result cost for fire-services has become proportionately low part of people’s income. But moreover the rise in real wealth has meant that there is an increased demand for output from the sectors pop stars perform in because people have more time for leisure.
In the music and entertainment industry there is a premium to being the very best over what the merely competent can command. As Robbie Williams ‘signed the largest ever recording deal’ that year it means that consumers consider him as the ‘best’ and hence he is able to earn very high. This sort of competition is less likely to occur among firefighters and hence their wages are low.
Therefore economic theory of wages can explain why firefighters earn low whereas pop-stars earn high despite being in are relatively less vital industry
