A final reason may due to the use of monopsony power by firms which is where a firm has power in an industry as it is a single dominant buyer of labour. This can be due to geographic reasons for example, in rural areas, if there is one main firm, then this may cause it to have monopsonic power and therefore they can influence the wage rate, thus, this is not a perfectly competitive labour market. The monpsonsits are price makers and in order to employ more workers, they have to increase the wage rate so that the marginal cost of labour will be greater than the average cost of labour (which is the wage rate). In rural towns for example, people do not have any choice but to be employed by the main, individual firm, and so they cannot try to push up the wage rate and have to accept what the firm is willing to pay – (this is assuming they are not members of trade unions).
Assess the view that wide wage differentials are good for the economy and that governments should therefore play no part in deciding wage rates.
Plan:
Yes – Free market etc., best allocated where needed, no need to G intervention as may disorientate market forces, leading to inefficiency and G failure, leads people to train more, incentive to earn more, higher productivity (EVAL: is money always the need, for example industries may need non-mon incentives and the argument about labour/leisure time sub)
No – Income inequality in the UK, male and female discrimination, G should be able to reduce these wage difference such as through legislation. Also, G should help the poor people, enforcing minimum wage (ev point, may lead to G failure, min wage on monopsony firm, lead to greater unemployment, Pizza hut, unintended consequences)
Wage differentials are firstly defined as the differences in wages between individual, occupations, industries, firms and regions. Wage differentials do play an important part in the economy due to the vast differences in occupations available for people in the UK, and therefore wage differentials act as incentives for people to train in a particular industry with a higher wage. However, this can be done without government intervention, but the key to this, is to ensure that the lowest paid workers can still earn a living wage and this is where government invention may be required in the market in order to decide wage rates through enforcing minimum wages only in certain industries.
Wage rates are usually decided through the use of the labour market, and wages are therefore payments by firms to their workers in order for a job to be completed. Wages therefore act as a necessity for markets in order to respond to changes in market demand for a particular product. For example, if the demand for a product rises, as labour is an example of derived demand (where the demand for workers is derived from the demand of the final output), then this will cause an outward shift in demand for this. Therefore, as shown below, the wage rate will increase from W1 to W2, as in order to attract more workers into this industry, the higher wage rates act as an incentive for workers leading to an increased quantity of employment shown from Q1 to Q2.
Wage differentials are therefore important in the economy as the difference in wages allow people to choose what education path they want to go down into in their career. Not everyone is homogenous, and some people may not be suited for a particular industry where there is high pressure and a high education level is required. Therefore, it is usually the case where jobs which do not need specialist skills (such as working as a cashier) earn less than accountants, the accountants have had to undergo exams and as a result, there are less people able to work in this industry and so due to the elasticity of supply of labour will be relativity inelastic and so will the demand (as there are no close substitutes to qualified accountants). Therefore, for low skilled jobs such as cashiers, due to now qualifications needed, supply will be relativity elastic and especially as the marginal revenue productivity would be lower for cashiers compared to accountants, their wages would also be lower too.
However, when making the assumption that wage rates causes changes in supply and demand of labour, we are excluding jobs that are not desirable such as dustbin collectors which earn £15,000 more than certain hospital workers from statistical 2 years ago. This also shows that dustbin people do not have a job that people want and have to work anti-social hours, non-monetary factors also play an important role as well as pay, such as due to their longer holiday’s times to compensate.
It can also be argued that higher wagers for workers (especially those that work in high end industries) this acts as an incentive to work harder and improve productivity, which may reduce costs for firms and allow firms to benefit from lower costs of production and they may be able to pass these savings onto consumers in the form of a lower price, thus boosting supply.
Yet, one evaluative point of this, is that if wages increase for certain people, then there is the theory that as workers can now earn the same amount as they did before by working less hours (as their hourly wage rate has increased), they may actually have lower productivity as they may substitute leisure time and so productivity may fall for the firm.
However, the underpinning issue with wage differentials, is due to income inequality. This can be measured with the gini coefficient and especially in NICs such as China, they have seen income inequality rise in the last 30 years when average growth has been 9% during this period. Therefore, in the UK economy, the issue of fairness arises and for low income jobs, such as cashiers, it may be necessary for that in order for people to ‘live’, the government needs to enforce a minimum wage. The wage rate in the UK for over 21s is around £6.50 and enforcing the minimum wage ensures that people can have a greater wage rate in order to have a positive multiplier effect on the economy. If the minimum wage increases average wages, then this may increase the demand for goods and services which may increase the demand for labour, thus boosting the demand and increasing wages which may lead to higher productivity from staff moral earning more money
However, some free market economists could argue that setting the wage rate above the equilibrium price would lead to higher unemployment as firms’ costs of production would increase and in order for them to make a profit, they would need to make some workers redundant. Therefore, this may distort market forces and may lead to a misallocation of resources, and can be argued to be a form of government failure. This can be shown below:
Also, the argument about how higher average wages may improve staff moral and if the workers are earning higher wages, employees may seek to gain higher returns so they may invest in training thus improving productivity, there is the key element of how likely this is going to occur, especially in the UK economy. For example, most manufacturing has moved offshore to China, where wages are up to 4% lower than in the UK and so perhaps we will not see as higher shift in the marginal revenue productivity as we would have hoped, simply due to low manufacturing in the UK.
In conclusion, it is important to ensure there are wage differentials between different occupations to reward those who are required to train for difficult jobs. Yet, as we have seen, perhaps non-monetary factors are also needed in addition to monetary factors. However, even if the minimum wage is supposed to reduce inequality, we still see there to be over a £1 difference between the living wage and the minimum wage, as the minimum wage has not increased as much as inflation and other increased costs (especially in London where living is much more expensive than in the North). Perhaps, one also needs to consider the type of wage differentials, as we have discussed mainly occupational differences, but gender inequality also occurs and this has resulted in government legislation to reduce the gender pay gap that is seen in the UK. Therefore, in the case of gender wage differentials, it can be argued that government do have a role to play to reduce this negative discrimination seen.
by
alexdarcy3gmailcom (student)
