Chapter 19: Changes in earning

Changes in the earnings of individuals over time

·         For most people, the wages increase as they grow older

o   This is because the longer people work, the more skilled and productive they become

o   Their productivity increases because they gain experience in their work and in some cases undertake training

·         Some workers may change employers to earn a higher wage whereas others may accept more responsibility

·         However in some cases, the workers may decide to give up working overtime and some may switch to less demanding work- This could cause a decrease in their may

·         Over time the firm may be in financial difficulties, so it may cut wages and bonuses.

Changes in earnings of occupations

Mainly due to a change in demand or supply of labour

Other factors- Changes in bargaining powers, changes is government policies and changes in public opinion.

Changes in demand for labour

Increase in demand for labour (Sorry for not mentioning the equilibrium)

Demand for labour will increase if

·         Demand for the product increases. Demand for the labour is derived demand. So if demand for the product increases then the number of workers employed will also increase.

·         A rise in labour productivity. Higher productivity increases the return from hiring workers.

·         Increase in the price of capital: In some jobs it is possible to replace labour with capital

If demand for labour increases then:

·         If demand for labour increases, wages will rise and bonuses will increase and more overtime hours will be available and they would be paid at a higher rate too.

Changes in supply of labour

The factors that could cause a decrease in the supply of labour are:

·         A fall in the labour force. Fewer workers would make it harder for the businesses to recruit workers

·         A rise in qualifications or training required to do that certain job. This will reduce the number of people eligible for that job.

·         A reduction in non-wage benefits of the job as well as an increase in the number of risks involved in doing a job.

·         A rise in the wage or non-wage-benefits in other jobs. People would then choose the other job instead.

          A decrease in the supply of labour would increase the wage rate. This is because there are less

                Workers capable of doing that job. So, if a company does not pay them high wages, then the

                Workers will leave and the company won’t be able to find a replacement.

               

                The extent to which Earnings change

The magnitude of change in demand for, or supply of labour is influenced by the size of the change and the price elasticity of demand and supply for labour. In inelastic demand and supply, there is a bigger impact on the wage rate causing it to increase drastically. This, however does not happen to elastic demand and supply, where the increase is not so drastic.

The determinant of elasticity of demand for labour is:

·         The proportion of labour costs to total costs: If this proportion is high, then a change in wages would have a significant impact on costs causing the demand to be elastic

·         The ease with which labour can be substituted by capital. If it is easy to do this, then demand will be elastic

·         The elasticity of demand for the product produced. A rise in wages increases costs of production which then increases the price of the product. This causes the demand for the product to contract and causes demand for labour to fall. The more elastic the demand for the product is, the greater the fall for the product and the demand for labour- making demand for labour elastic

·         Time period- Demand for labour is usually more elastic in the long run as there is more time for the firms to change their methods of production

The determinant for elasticity of supply of labour

·         The qualifications and skills required. The more of these needed, the more inelastic the supply of labour will be.

·         The length of the training period. A long training period will cause some workers to not do the job. This would also increase the time over which those training will join the labour force, causing supply of labour to be inelastic.

·         The level of employment- If most workers doing that specific job are already employed. The supply will be inelastic, as the employer will have to increase the wage by a lot to attract some employees.

·         The mobility of labour: The easier it is to change jobs and the easier it is to move from place to place the easier it will be for the employer to recruit more labour by raising wage rates. High mobility = Elastic supply

·         The degree of vocation: Higher the attatchment of workers to the job; the more inelastic the supply will be.

·         The time period: The supply of labour tends to become elastic over time. This is because it gives workers more time to notice wage changes and to gain any qualifications or undertake any training needed for a new job.

Definitions

Elasticity of demand for labour- A measure of the responsiveness of demand for labour to a change in the wage rate.

Elasticity of supply for labour- A measure of the responsiveness of supply for labour to a change in the wage rate.

Other influencing factors’

·         A change in the trade union’s power. If trade unions are allowed then the wages will increase

Governments can change wage rates by:

·         Raising the national minimum wage, thus increasing the pay of low paid workers

·         Improved education may raise the wages of skilled workers as it may increase their demand more than supply. So, employing skilled workers à lower costs of production and increase international competitiveness. Demand for products made by country’s firms should increase and more MNCs may be attracted to set up their franchises in the country

·         Govt. Policies on immigration- If it makes it easier for foreign people to live and work in the country, supply of labour will increase causing wages to fall

·         Introduction of government anti-discrimination laws will change public opinion and increase career prospects and wages of disadvantaged groups. For example: Decreasing sexism will increase the wage rates for women.

·         Advances in technology can alter wage rates. In some cases it can decrease demand for workers and so reduce demand for workers. For example: Technology in the banking industry has reduced the number of banking staff and decreases wage rates as the staff are now easily replacable and because the staff is not in high demand anymore. However, in cases such as production of DVDs, advances in technology has increases supply of labour and wage rates.

In the test write both sides of the answer