Workers | IGCSE Class 10 Economics Notes

This note covers the factors affecting a worker's choice of occupation, how wages are determined in the labour market, the reasons for differences in earnings between skilled and unskilled workers, between the primary, secondary and tertiary sectors, between men and women, and between the private and public sector, how to draw and interpret labour market diagrams, and the advantages and disadvantages of division of labour and specialisation for workers, firms and the economy.

What factors affect an individual's choice of occupation?

When a person chooses which job to do, they weigh up wage factors and non-wage factors. A higher wage, other things being equal, makes an occupation more attractive to a worker deciding between jobs, but pay is rarely the only consideration.

Wage factors

Wage factors are the pay offered for the job: the basic wage or salary, overtime pay, bonuses, commission and fringe benefits such as a pension contribution or health insurance. These are the monetary parts of the job offer that a worker can compare directly between different occupations.

Non-wage factors

Non-wage factors are all the other features of a job that influence how satisfying or convenient it is.

These include job security, working hours, the length of holidays, working conditions (safety, comfort, the physical environment), the status or prestige attached to the job, opportunities for promotion and training, the location of the workplace relative to home, and the degree of job satisfaction the work provides.

A person may accept a lower-paid job because it is close to home, offers flexible hours, or is a job they find personally rewarding, rather than take a higher-paid job that is dangerous, insecure or inconvenient.

In practice, people rarely choose an occupation on pay alone. A nurse may accept lower pay than in some private-sector jobs because of job satisfaction and security; a worker on an oil rig may accept isolation and risk because the wage is high enough to compensate.

Definition: Wage and non-wage factors. Wage factors are the pay and monetary benefits attached to a job (basic pay, overtime, bonuses, benefits). Non-wage factors are the non-monetary features of a job (security, hours, conditions, status, promotion prospects, location, satisfaction) that influence a worker's choice of occupation.

How are wages determined in a labour market?

A wage is the price of labour, and like any price in a market economy it is determined by the interaction of demand and supply.

Demand for labour

The demand for labour comes from firms wanting to employ workers to produce goods and services.

Because firms do not want labour for its own sake but for what it can produce, the demand for labour is a derived demand: it depends on the demand for the good or service that the labour produces.

If demand for a product rises, firms need more workers to produce it, so the demand for that type of labour rises, pushing the wage up.

Supply of labour

The labour supply for an occupation is the number of workers willing and able to work in it at each wage rate.

Supply tends to rise as the wage offered rises, because a higher wage attracts workers from other occupations, from unemployment, or persuades existing workers to work more hours.

Supply in a particular occupation is also affected by the number of people with the necessary qualifications, skills or training, and by how long training takes.

In a competitive labour market, the equilibrium wage is found where the demand for labour equals the supply of labour.

At this wage, the number of workers firms want to employ exactly matches the number of workers willing to work, so there is no excess demand or excess supply of labour.

This is written as Equilibrium condition = Qd = Qs, where Qd is the quantity of labour demanded and Qs is the quantity of labour supplied at a given wage rate.

Where a wage lies above or below this level, the gap between quantity demanded and quantity supplied can be measured directly: Excess demand for labour = Qd − Qs when the wage is below equilibrium, and Excess supply of labour = Qs − Qd when the wage is above equilibrium.

Both gaps push the wage back towards equilibrium: excess demand bids the wage up as firms compete for scarce workers, and excess supply pushes the wage down as workers compete for scarce jobs.

The vertical axis shows the wage rate; the horizontal axis shows the quantity of labour employed.

The demand for labour curve slopes downward from left to right, because firms are willing to employ more workers only at a lower wage.

The supply of labour curve slopes upward from left to right, because more workers are willing to supply their labour at a higher wage. The two curves intersect at the equilibrium wage and the equilibrium quantity of labour employed.

An increase in demand for labour (the curve shifting right, for example because demand for the product made by that labour has risen) raises the equilibrium wage and the quantity employed; an increase in supply of labour (the curve shifting right, for example because more workers become qualified) lowers the equilibrium wage and raises the quantity employed.

Drawing and interpreting labour market diagrams

Every labour market diagram is drawn on the same two axes: the wage rate on the vertical axis and the quantity of labour on the horizontal axis. The demand for labour curve slopes downward and the supply of labour curve slopes upward, and their intersection gives the equilibrium wage and the equilibrium quantity of labour employed.

To show a change, shift the curve that the change affects and read off the new intersection. A rise in demand for the product shifts the demand for labour curve to the right: both the equilibrium wage and the quantity of labour employed rise. A fall in demand shifts it to the left, lowering both.

A rise in the supply of labour, for example because more workers gain the necessary qualification, shifts the supply curve to the right: the equilibrium wage falls and the quantity of labour employed rises. A fall in supply shifts it to the left, raising the wage and reducing the quantity employed.

When a diagram is interpreted, three things should be stated: which curve has shifted, in which direction, and the resulting change in the equilibrium wage and quantity of labour. A diagram that shows only a movement along a curve, rather than a shift, shows a change in the quantity of labour demanded or supplied caused by a change in the wage itself.

Draw one set of axes with the wage rate on the vertical axis and quantity of labour on the horizontal axis. Draw the downward-sloping demand for labour curve and the upward-sloping supply of labour curve, labelling their intersection W1 and Q1. Then draw a second demand curve to the right of the first, label the new intersection W2 and Q2, and mark with arrows that the wage and the quantity of labour employed have both risen. On a second copy of the axes, shift the supply curve to the right instead and label the new intersection to show a lower wage and a larger quantity of labour employed.

Worked example 1. In a local labour market for café workers, at a wage of $8 an hour, firms want to employ 400 workers but only 250 workers are willing to work.

At a wage of $11 an hour, firms want to employ 300 workers and 300 workers are willing to work.

Answer: At $8 an hour there is excess demand for labour (400 − 250 = 150 workers short), which pushes the wage up. At $11 an hour, quantity demanded (300) equals quantity supplied (300), so $11 an hour is the equilibrium wage for this market, with 300 workers employed.

How do bargaining power and government policy affect wages?

Relative bargaining power is the strength of workers and employers in negotiating pay. If workers are organised into a trade union, which negotiates wages and conditions on behalf of its members, their bargaining power rises because the employer cannot easily replace a whole unionised workforce and risks a strike (a withdrawal of labour) if demands are not met.

Workers with scarce, hard-to-replace skills also have strong individual bargaining power, since a firm may lose a great deal if they leave.

By contrast, unskilled workers who are easy to replace, or workers in occupations with weak or no unions, have little bargaining power and may be paid closer to the minimum the market will accept.

Employers also have bargaining power, which is greater where there are few employers for a type of labour in an area (so workers have few alternative employers to go to) and where unemployment is high (so there are many workers available to replace anyone who leaves or is dismissed).

Government policy can also set or influence wages directly, rather than leaving them entirely to demand and supply.

Governments may set a minimum wage, which is the lowest wage rate that employers are legally allowed to pay; they may also set public-sector pay scales directly, pass equal pay legislation, or use incomes policies that limit wage rises across the economy.

These policies can raise some workers' pay above what demand and supply alone would produce, or restrict pay rises that market forces would otherwise allow.

Why do minimum wages affect the labour market?

A minimum wage is a floor set by government below which employers cannot legally pay workers.

If the minimum wage is set above the market equilibrium wage, it raises the pay of low-paid workers who keep their jobs, but it can also create unemployment in that labour market, because at the higher, legally fixed wage, the quantity of labour supplied (workers willing to work) exceeds the quantity of labour demanded (jobs firms are willing to offer).

This gap is called excess supply of labour, calculated as Excess supply = Qs − Qd at the minimum wage.

If the minimum wage is set at or below the equilibrium wage, it has no effect on employment, because firms were already willing to pay that wage or more.

The size of any unemployment effect also depends on how responsive firms' demand for labour is to a change in the wage: if firms can easily cut the number of workers they employ when wages rise, the unemployment effect is larger; if firms need a fairly fixed number of workers regardless of the wage, the effect is smaller.

The axes are the same as the equilibrium wage diagram: wage rate on the vertical axis, quantity of labour on the horizontal axis, with the usual downward-sloping demand for labour curve and upward-sloping supply of labour curve crossing at the equilibrium wage.

A horizontal line is drawn at the minimum wage, above the equilibrium wage. Where this line crosses the demand curve shows the (lower) quantity of labour firms are willing to employ at the minimum wage; where it crosses the supply curve shows the (higher) quantity of labour willing to work at that wage.

The horizontal distance between these two points is the excess supply of labour, that is, the unemployment created by setting the minimum wage above equilibrium.

Worked example 2. In a labour market, the equilibrium wage is $9 an hour with 500 workers employed. The government sets a minimum wage of $12 an hour. At $12 an hour, firms are willing to employ only 420 workers, while 560 workers are willing to work at that wage.

Answer: At the minimum wage of $12, quantity demanded is 420 and quantity supplied is 560, so there is excess supply of 560 − 420 = 140 workers.

These 140 workers would like to work at $12 an hour but cannot find a job, so the minimum wage has created unemployment of 140 workers in this market, even though the 420 who remain employed are better paid than before.

Why do earnings differ between skilled and unskilled workers?

Skilled workers generally earn more than unskilled workers for several linked reasons on both the demand and supply side of the labour market.

On the demand side, skilled workers tend to be more productive: they can produce more output, or output of higher value, per hour worked, so firms are willing to pay more to employ them, which raises the demand for skilled labour relative to unskilled labour.

On the supply side, fewer people have the qualifications, training or experience needed for skilled work, because training takes time and costs money, so the supply of skilled labour is more limited relative to demand than the supply of unskilled labour, for which almost anyone can be trained quickly.

Relative bargaining power reinforces this gap: skilled workers are harder and more costly for firms to replace, so they can bargain for higher pay, while unskilled workers, who can usually be replaced easily from a large pool of available labour, have weaker bargaining power.

Government policy, such as funding more training places or apprenticeships, can narrow the gap over time by increasing the supply of skilled labour, which reduces the scarcity that keeps skilled wages high.

The size of the gap between any two groups of workers can be expressed as a Wage differential = WageA − WageB, where WageA and WageB are the average wages of the two groups being compared; a larger differential indicates a bigger gap in scarcity, productivity or bargaining power between them.

Worked example 3. In a manufacturing town, skilled machine technicians earn an average of $28 an hour and are in short supply relative to the number of vacancies. Unskilled assembly-line workers earn an average of $11 an hour and there are more applicants than vacancies for these jobs.

Answer: The technicians' wage is higher because demand for their skills exceeds the limited supply (training takes years), giving them strong bargaining power.

The assembly workers' wage is lower because supply (480 applicants, say) exceeds demand (vacancies), so firms do not need to raise pay to fill the posts.

The wage differential of $28 − $11 = $17 an hour reflects this gap in relative scarcity and bargaining power.

Why do earnings differ between the primary, secondary and tertiary sectors?

Average earnings also differ between the primary sector (extraction of raw materials such as farming, fishing and mining), the secondary sector (manufacturing and construction) and the tertiary sector (services). These differences arise from the same demand and supply forces.

Primary sector output in many countries is produced with relatively unskilled, often seasonal, labour; demand for primary sector products can be price-inelastic and subject to large swings with weather and world commodity prices, so firms in this sector are often unable or unwilling to pay high wages, and the large supply of workers available for basic farm or extraction work keeps wages low.

The secondary and tertiary sectors in many economies have grown as economies develop, drawing workers away from the primary sector; this shift in demand toward these sectors raises wages there relative to the primary sector.

Within the tertiary sector, some highly skilled professional services (finance, law, specialist medicine) pay very high wages because of scarce qualifications and high derived demand, while many lower-skilled service jobs (retail, basic hospitality) pay close to the minimum wage because supply of workers able to do these jobs is large relative to demand.

Relative bargaining strength also matters. Many primary sector workers, such as farm labourers, work for small employers spread over a wide area and are rarely members of a trade union, so they have little power to push up wages; workers in large factories and in many services are more often organised and can bargain collectively for higher pay.

Discrimination can widen the gap where workers from particular groups are kept out of better-paid jobs and crowded into lower-paid sectors, which raises the supply of labour to those sectors and holds their wages down.

Government policy can narrow or widen the gap. A minimum wage raises pay at the bottom of the scale, which often includes farm work and low-skilled service jobs, while subsidies or guaranteed prices for farm output can raise incomes in the primary sector. A government that taxes or under-funds a sector has the opposite effect.

Why do earnings differ between men and women?

In many labour markets, average earnings for men are higher than for women, a gap often called the gender pay gap. Several of the same demand, supply, bargaining power and policy influences discussed above explain part of this gap.

The gap can be measured as Gender pay gap (%) = (WM − WF) ÷ WM × 100, where WM is average male earnings and WF is average female earnings.

Demand, supply and bargaining power

Differences in demand and supply can arise if men and women are, on average, concentrated in different occupations, with male-dominated occupations historically commanding higher wages because of scarcity of workers in those trades or stronger bargaining power through trade unions.

Differences in relative bargaining power can arise if women are, on average, less likely to be union members or to negotiate pay rises, which weakens their position relative to employers in wage bargaining.

This occupational concentration can be seen in the pattern of employment. In many countries women form a minority of the workforce in secure, better-paid jobs, with men forming the large majority; such a gap in which sectors and occupations men and women enter can, by itself, help explain part of a difference in average earnings between them, even before any discrimination is considered.

Career patterns can also affect supply over time: a worker who takes a career break, for instance for childcare, builds up less continuous experience and training than a worker who does not, and this can affect how quickly pay rises over a working lifetime, even where starting pay was equal.

Government policy and discrimination

Government policy, through equal pay legislation that makes it illegal to pay men and women differently for the same work, and through policies on parental leave and childcare, can narrow the gap by removing legal barriers and by making it easier for either parent to remain in employment.

Where the gap persists for workers doing identical jobs with identical qualifications and experience, economists attribute part of it to discrimination: employers paying one group less than another for reasons unrelated to productivity.

Discrimination can also affect who is offered interviews, training or promotion, which in turn affects supply into higher-paid roles over a working lifetime, so its effects can appear well before any difference in pay is actually negotiated.

Why do earnings differ between the private and public sector?

Private-sector pay is set by individual employers responding to the demand for their product, the profits they make, and the labour market for the skills they need; wages can rise quickly in a growing, profitable firm or sector, and can fall or stagnate in a declining one.

Public-sector pay, for workers employed by government such as in health, education and public administration, is typically set through negotiation between government and unions, or by pay scales and reviews, rather than adjusting continuously to market demand and supply.

This difference in how pay is set means the two sectors can diverge: during a period when private-sector demand for a particular skill rises sharply, private pay for that skill may rise faster than public-sector pay for similar skills, because the public sector's pay-setting process is slower to adjust.

Government policy decisions, for example a public-sector pay freeze to control government spending, directly affect public-sector earnings in a way that does not apply to the private sector, where pay is left to market forces and company decisions.

Relative bargaining power also differs: large public-sector unions can negotiate collectively across an entire workforce, while bargaining power in fragmented private-sector industries with many small employers may be weaker.

The scale of the public sector as an employer can itself be large: where government is the biggest single employer of workers in secure, better-paid jobs, public-sector pay-setting decisions can affect a very large share of a country's workforce.

Worked example 4. A government announces a public-sector pay freeze (no pay rise) for two years to control spending, while demand for workers with the same skills in the private sector rises, pushing private-sector pay for that skill up by 6% a year for the same two years.

Answer: Starting from an equal wage of $20 an hour in both sectors, after two years the public-sector wage remains $20 an hour (frozen by policy), while the private-sector wage rises to $20 × 1.06 × 1.06 ≈ $22.47 an hour.

A gap of about $2.47 an hour opens up between the two sectors, even though workers have identical skills, because public-sector pay is set by government policy rather than by the rise in market demand that raised private-sector pay.

Definition: Bargaining power. The relative strength of workers and employers in wage negotiations, which depends on factors such as union organisation, scarcity of skills, the number of alternative employers, and the level of unemployment.

What is division of labour and specialisation?

Division of labour is the breaking down of a production process into separate, smaller tasks, with different workers each performing one task repeatedly rather than one worker completing the whole process alone.

Specialisation is the related idea that a worker, firm, region or country concentrates on producing a narrow range of goods or services, or a narrow part of a production process, rather than trying to produce everything itself.

A classic illustration is a production line: instead of one worker making a whole product from start to finish, the process is split into stages, with one worker fitting a part, another checking quality, another packaging, and so on, each repeating their single task throughout the working day.

Specialisation also occurs between workers in an economy (a doctor specialises in medicine and buys food from a farmer who specialises in farming), between firms (one firm makes engines, another assembles cars), and between countries (a country specialises in producing the goods it can make most efficiently and trades for the rest).

Advantages of division of labour and specialisation

1. Workers who repeat a single task become faster and more skilled at it through practice, raising their individual productivity.
2. Less time is lost switching between different tasks and tools, since each worker stays at one workstation doing one job.
3. Training time and cost are reduced, because a worker only needs to learn one narrow task rather than an entire, complex production process.
4. Firms can use specialised, task-specific machinery for each stage of production, which would not be efficient if one worker did every stage.
5. Higher output per worker from these effects lowers the average cost of production for the firm, which can allow lower prices or higher profits.
6. For the economy as a whole, specialisation between firms, regions and countries allows resources to be used where they are most productive, raising total output from the same resources and enabling mutually beneficial trade.

Disadvantages of division of labour and specialisation

1. Workers performing the same narrow task all day can find the work repetitive and monotonous, reducing job satisfaction and motivation.
2. Repetitive tasks can lead to a loss of pride in a finished product, since no single worker completes or is responsible for the whole item.
3. Workers who learn only one narrow task become highly dependent on that particular job; if demand for it falls or it is automated, they may lack the broader skills needed to move easily into other work.
4. Production becomes highly interdependent: if one stage of a production line breaks down or one group of workers goes on strike, the whole process can be halted, even though only one task has stopped.
5. For firms, a large upfront investment is often needed in specialised machinery and in organising the production line, which raises risk if demand for the product falls.
6. For an economy that specialises heavily in producing a narrow range of goods, there is a risk of over-dependence on that sector; a fall in world demand or price for that good can damage the whole economy, with fewer alternative sources of income to fall back on.

Definition: Division of labour. The breaking down of a production process into separate tasks, with each worker specialising in and repeating one task rather than completing the whole process alone.

Going beyond the syllabus

These ideas extend the unit and are not needed for the questions on it.

How does the pin factory illustrate division of labour?

The idea that dividing a production process into small, repeated tasks raises output is often illustrated with a pin factory: one worker alone can make only a small number of pins a day, but if the task is split between several workers, each doing one step (drawing the wire, cutting it, sharpening the point, attaching the head), the same group of workers can produce vastly more pins per day between them than if each worker made whole pins separately.

This is the same underlying logic that explains why modern production lines, from car assembly to food processing, divide work into narrow, repeated tasks performed by different workers or machines.

How does specialisation apply to whole countries?

The same reasoning extends beyond a single factory to the structure of a whole economy.

Just as one worker specialising in one task becomes faster at it, a country that concentrates its resources on producing the goods it is relatively efficient at making can, in principle, produce more in total than if every country tried to make everything itself, with international trade allowing each to obtain the goods it does not produce directly from countries that specialise in them.

Glossary

• Wage factors: the monetary pay and benefits attached to a job, such as basic pay, overtime, bonuses and benefits.
• Non-wage factors: the non-monetary features of a job, such as security, hours, conditions, status and satisfaction, that influence occupational choice.
• Derived demand: demand for labour that depends on the demand for the good or service that labour produces.
• Labour supply: the number of workers willing and able to work in an occupation at a given wage rate.
• Bargaining power: the relative strength of workers and employers in negotiating wages and conditions.
• Trade union: an organisation of workers that negotiates pay and conditions with employers on behalf of its members.
• Minimum wage: the lowest wage rate that employers are legally permitted to pay workers.
• Wage differential: a difference in earnings between groups of workers, arising from differences in demand, supply, bargaining power, skill or discrimination.
• Skilled labour: workers with qualifications, training or experience that make them more productive in a specific task.
• Unskilled labour: workers without specific training or qualifications, able to be trained quickly for a task.
• Gender pay gap: the difference in average earnings between men and women, caused partly by occupational differences and partly by discrimination.
• Public sector: organisations and employment owned or funded by government, such as health and education services.
• Private sector: businesses owned and run by individuals or companies rather than by government.
• Division of labour: breaking a production process into separate tasks, with each worker repeating one task.
• Specialisation: concentrating on producing a narrow range of goods, services or tasks rather than everything.

Common errors and misconceptions

• Misconception: workers always choose the job with the highest wage. Correct: workers weigh both wage factors and non-wage factors, such as security, conditions and satisfaction, and may choose a lower-paid job that scores better on these.
• Misconception: a minimum wage always helps all low-paid workers. Correct: a minimum wage set above equilibrium raises pay for workers who keep their jobs but can create unemployment for others, since quantity of labour supplied then exceeds quantity demanded.
• Misconception: the demand for labour is like demand for a good that people want for its own sake. Correct: the demand for labour is a derived demand, depending on demand for the output that labour produces.
• Misconception: skilled workers earn more only because they work harder. Correct: higher pay for skilled workers mainly reflects higher productivity, scarcer supply relative to demand, and stronger bargaining power, not simply effort.
• Misconception: any gap between male and female earnings proves discrimination. Correct: part of the gap can reflect differences in occupation, hours worked or experience; only the part that remains for identical work and qualifications is attributed to discrimination.
• Misconception: division of labour only benefits firms, not workers or the economy. Correct: it can raise worker productivity and training efficiency, lower firms' costs, and raise total output for the economy, though it can also reduce job satisfaction for workers.
• Misconception: public-sector pay is always lower than private-sector pay. Correct: which sector pays more depends on the occupation and period; the key difference is how pay is set (market demand and supply in the private sector, negotiation or pay scales in the public sector), not that one sector always pays more.

Exam-style questions with model answers

Q1. Define 'division of labour'. [2 marks]

1. Division of labour is the breaking down of a production process into separate, smaller tasks.
2. Each worker specialises in and repeats one task rather than completing the whole process alone.

Q2. Identify two non-wage factors that might influence a worker's choice of occupation. [2 marks]

1. Job security, meaning how likely the worker is to keep the job over time.
2. Working conditions, such as safety, comfort and the physical environment of the workplace.

Q3. Explain two reasons why a skilled worker might earn more than an unskilled worker. [4 marks]

1. Skilled workers are usually more productive, producing more output or higher-value output per hour, so firms are willing to pay them more; this raises the demand for skilled labour relative to the wage firms will pay.
2. The supply of skilled labour is more limited than the supply of unskilled labour, because training takes time and money, so fewer people can supply skilled labour; this scarcity, combined with stronger bargaining power since skilled workers are harder to replace, pushes their wage above that of unskilled workers.

Q4. A labour market has an equilibrium wage of $10 an hour with 600 workers employed. The government sets a minimum wage of $14 an hour. At $14, firms want to employ 480 workers, and 700 workers are willing to work. Calculate the excess supply of labour at the minimum wage, and explain what this means for the market. [4 marks]

1. At the minimum wage of $14, quantity of labour demanded is 480 workers.
2. At the minimum wage of $14, quantity of labour supplied is 700 workers.
3. Excess supply = quantity supplied minus quantity demanded = 700 − 480 = 220 workers.
4. This means 220 workers who want to work at $14 an hour cannot find jobs, so the minimum wage has created unemployment of 220 workers in this market, even though the 480 who remain employed are better paid than at the equilibrium wage of $10.

Q5. A country's demand for software engineers rises sharply while the number of graduates in software engineering stays the same. Draw a labour market diagram to show the effect on the wage of software engineers, and explain what your diagram shows. [4 marks]

1. The vertical axis shows the wage rate and the horizontal axis shows the quantity of software engineers employed.
2. The demand for labour curve shifts to the right, from the original demand curve to a new one further right, because the derived demand for engineers has risen.
3. The supply of labour curve does not shift, because the number of qualified engineers is unchanged.
4. The new intersection is at a higher wage and a larger quantity of engineers employed, so the equilibrium wage of software engineers rises.

Q6. Analyse how relative bargaining power can cause differences in earnings between workers in the same economy. [6 marks]

1. Bargaining power is the relative strength of workers and employers in negotiating pay and conditions.
2. Workers organised into a trade union can negotiate collectively; because the employer cannot easily replace a whole unionised workforce and risks a strike, union workers can secure higher wages than non-unionised workers doing similar work.
3. Workers with scarce, hard-to-replace skills have strong individual bargaining power, since the firm stands to lose output or quality if they leave, allowing them to negotiate above the wage an easily replaced worker could demand.
4. By contrast, unskilled or easily replaced workers, and workers in industries with weak or no unions, have little bargaining power, because the employer can replace them quickly from a large pool of available labour, keeping their wages closer to the minimum the market will accept.
5. Employers' bargaining power is also higher where there are few alternative employers in an area or where unemployment is high, since workers then have fewer options and are less able to refuse low pay.
6. These differences in bargaining power, separately from differences in productivity, can therefore explain why similarly skilled workers in different industries or regions end up on different wages.

Q7. Discuss whether a government should set a minimum wage above the market equilibrium wage. [8 marks]

1. A minimum wage above equilibrium directly raises the pay of low-paid workers who keep their jobs, which can reduce poverty and raise living standards for those workers and their households.
2. It can also raise workers' morale and spending power, which may raise demand in the wider economy.
3. However, setting the minimum wage above equilibrium creates excess supply of labour in that market: the quantity of workers willing to work at that wage exceeds the quantity of jobs firms are willing to offer, causing unemployment among the workers who cannot find a job at the higher wage.
4. The size of this unemployment effect depends on how easily firms can reduce the number of workers they employ when the wage rises; in industries where firms can automate or cut staff easily, the unemployment effect will be larger than in industries where a fairly fixed number of workers is needed regardless of wage.
5. Firms may also respond by raising prices to cover higher wage costs, which could reduce the real benefit to low-paid workers as consumers.
6. On the other hand, without a legal floor, employers with strong bargaining power in markets with many jobseekers could push wages below the level needed for a decent living, so some minimum is widely seen as necessary.
7. Overall, whether a minimum wage above equilibrium is desirable depends on balancing the higher pay gained by those who keep their jobs against the unemployment risk for others, so a government should set it carefully rather than always setting it well above equilibrium.

Q8. Explain two disadvantages of division of labour for workers. [4 marks]

1. Repeating the same narrow task throughout the working day can make work monotonous and reduce job satisfaction, since the worker does not experience variety or see a finished product they made from start to finish.
2. Workers who learn only one narrow task become highly dependent on that particular job; if demand for that task falls, or the task is automated, these workers may lack the broader skills needed to move easily into other types of work.

Key takeaways

• Choice of occupation depends on both wage factors (pay and benefits) and non-wage factors (security, hours, conditions, status, satisfaction).
• Wages are determined where the demand for labour, which is a derived demand, equals the supply of labour at the equilibrium wage.
• Relative bargaining power, through unions and scarce or easily replaced skills, shifts wages above or below what demand and supply alone would set.
• A minimum wage set above equilibrium raises pay for workers who stay employed but can cause unemployment through excess supply of labour.
• Earnings differ between skilled and unskilled workers mainly because of differences in productivity, scarcity of supply and bargaining power.
• Earnings differ between primary, secondary and tertiary sectors because of shifts in demand and differences in the skills needed and available to supply each sector.
• The gender pay gap arises from differences in occupation, bargaining power and, where identical work is paid differently, discrimination.
• Private-sector pay adjusts to market demand and supply; public-sector pay is often set by government policy or negotiation, so the two can diverge.
• Division of labour and specialisation raise worker productivity and lower firms' costs, but can reduce job satisfaction and increase dependence on a narrow task.
• For the wider economy, specialisation raises total output but can create over-dependence on a narrow range of goods or sectors.

Test yourself

What is meant by a 'derived demand' for labour?

A demand that depends on the demand for the good or service the labour produces, rather than on labour being wanted for its own sake.

Name two wage factors and two non-wage factors affecting choice of occupation.

Wage factors: basic pay and bonuses. Non-wage factors: job security and working conditions.

What happens to the equilibrium wage if the supply of labour in an occupation increases?

The equilibrium wage falls, because more workers are willing to work at each wage rate, shifting the supply curve to the right.

Why might a trade union raise the wages of its members?

A union negotiates collectively, giving workers stronger bargaining power, because the employer cannot easily replace the whole unionised workforce and risks a strike.

What is excess supply of labour, and when does it occur under a minimum wage?

It is when the quantity of labour workers are willing to supply exceeds the quantity firms demand; it occurs when the minimum wage is set above the equilibrium wage.

Give one demand-side and one supply-side reason why skilled workers earn more than unskilled workers.

Demand-side: skilled workers are more productive, raising firms' willingness to pay. Supply-side: fewer workers have the training needed, limiting supply.

What is specialisation?

Concentrating on producing a narrow range of goods, services or tasks, rather than trying to produce everything, so as to use resources more efficiently.

State one advantage and one disadvantage of division of labour for a firm.

Advantage: higher output per worker lowers average costs. Disadvantage: production becomes interdependent, so a breakdown or strike at one stage can halt the whole process.