Wage Determination

A2 Economics

Aims and Objectives

Aim: To understand wage determination

Objectives: Define economic rent and transfer

earnings Explain wage determination in

perfectly competitive market Analyse the football labour market

Starter

Who should be paid more, MPs or news readers?

Wage Determination in Perfectly Competitive Market

Real Wage Rate

Quantity of Labour

Q

W1

S

D1=MRP

Real Wage Rate

Quantity of Labour

Q

W1

D1=MRP

One Employer in the Market

The Whole Labour Market

Wage Determination in Perfectly Competitive Market

Each employer passively accepts the ruling market wage rate.

Each firm can hire as many workers as it wishes at the ruling wage rate, but cannot influence it itself.

Provides a yardstick for judging the extent to which real world markets perform efficiently or inefficiently.

Economic Rent and Transfer Earnings

Economic Rent: the payment received by a factor of production over and above that which is needed to keep it in its present occupation.

Transfer Earnings: the minimum payment needed to keep a factor of production in its present use.

Transfer Earnings

What a factor of production can earn in its next best alternative use. I.e. the opportunity cost of a factor performing its current role.

Economic Rent

Surplus payment over and above transfer earnings.

Total earnings minus transfer earnings.

Economic Rent and Transfer Earnings

E.g. If a footballers’ weekly pay is £10,000 per week, and the next best job he can do is a plumber which pays £500 per week, his economic rent is £9,500 and his transfer earnings are £500.

Economic Rent and Transfer Earnings

Real Wage Rate/MRP

Quantity of Labour

Q

W

S

D=MRP

A

B

Total Earnings = OWQA

O

Economic Rent = WAB

Transfer Earnings = OABQ

Economic Rent and Transfer Earnings

The amount of economic rent earned by individual workers will differ.

First worker would have been prepared to work for much less than the wage rate actually paid, so a high proportion of his earnings will be economic rent.

The last worker to be employed would have been prepared to work only for the given wage rate and so earns no economic rent.

Case Study: Premiership Footballers

The proportion of earnings made up of economic rent depends on the elasticity of supply.

Economic rent will be a large proportion of earnings when supply is inelastic.

Case Study: Premiership Footballers

Premiership footballers earn large economic rents.

Imagine what the next best job for Rio Ferdinand would be….

£110,000 pw

Transfer Earnings£250 pw

Rent=£109,750

pw

Case Study: Premiership Footballers

Supply will be inelastic as if the changed the wage rate most footballers would continue to supply themselves.

Real Wage Rate/MRP

Quantity of Premiership Footballers

Q1

W1

S

D=MRP

O

Trade Unions

http://www.youtube.com/watch?v=0vUDrUYTsHQ&feature=results_video&playnext=1&list=PL4CEC04390392C406

http://www.youtube.com/watch?v=nDvGxNkX4AU

http://www.youtube.com/watch?v=wbT5q1Jrfhs&feature=related

3.29 2.00

Trade Unions

Discuss how Trade Unions may influence wage rates and the labour supply?

Do you feel as though the power of trade unions was lessened by Margaret Thatcher?