How these reasons influence the wages of workers, depending on level of skills of workers

Micro‑economic Decision‑makers: Workers

Learning Objective

Explain how the main reasons that affect workers’ wages operate differently for low‑skill and high‑skill workers, and evaluate the impact of institutional and mobility factors on wage differentials.

1. Factors that Influence an Individual’s Choice of Occupation

Cambridge IGCSE (0455) lists six key factors. The notes now include the syllabus‑specified wording and the additional factor on government policy.

• Pay (wage earnings) – higher pay attracts workers to a particular occupation.
• Job security – permanent contracts, strong union protection, or tenure.
• Working conditions – hours, health & safety, physical effort, environment.
• Career progression – opportunities for promotion, further training and advancement.
• Personal interests and abilities – suitability to the tasks involved.
• Location – proximity to home, urban vs. rural setting, regional labour market.
• Government policy – licensing requirements, immigration rules, and other regulations that can open or close occupational pathways.

Typical pattern: low‑skill workers tend to give more weight to pay and location, whereas high‑skill workers place greater emphasis on career progression, job security and working conditions.

2. Wage Determination

2.1 Basic labour‑market model (Supply & Demand)

In a competitive labour market the equilibrium wage (w) equals the marginal revenue product of labour (MRPL):

$$ w = P \times MPL $$

• Demand for labour = MRPL, derived from the demand for the product the worker helps produce.
• Supply of labour = number of workers willing to work at each wage.

2.2 Diagrammatic illustration (description)

• Two side‑by‑side labour‑market diagrams:
  • Low‑skill workers – relatively flat labour‑supply curve (large pool) and a lower labour‑demand curve.
  • High‑skill workers – steeper supply curve (scarcity) and a higher demand curve (higher MRPL).
• Both diagrams show the equilibrium wage where the supply and demand curves intersect.

2.3 Institutional and macro‑economic influences

National Minimum Wage (NMW)

• Sets a legal floor for pay. For low‑skill workers it shifts the effective supply curve upward (or creates a horizontal wage‑floor line). If the floor exceeds MRPL, a surplus of labour (unemployment) can arise.

Trade‑union influence

• Unions negotiate a wage‑setting curve that lies above the market‑determined wage. In diagrams this is shown as a flat “union‑determined wage” line intersecting the labour‑supply curve at a higher wage.
• The effect is strongest where union density is high (e.g., skilled manufacturing, public‑sector professions).

Employment legislation

• Statutory sick pay, paid holiday, pension contributions and health‑and‑safety regulations increase the cost of employing labour.
• Higher labour costs shift the labour‑demand curve leftwards, reducing the equilibrium wage (or employment) at each skill level.

Fiscal and monetary policy (syllabus requirement)

• Fiscal policy – Government tax cuts or increased public spending raise aggregate demand for goods and services. Higher product demand raises P in w = P × MPL, shifting the labour‑demand curve rightwards for both skill groups, but the shift is larger for high‑skill labour when the output is technology‑intensive.
• Monetary policy – Lower interest rates reduce borrowing costs for firms, encouraging investment in capital and expansion. This raises the marginal product of labour (MPL) and therefore shifts the demand curve outward.

3. Reasons for Differences in Wages

4. Mobility of Labour

4.1 Geographical mobility

• Movement between regions or countries in response to wage differentials.
• Low‑skill workers often constrained by housing costs, family ties, or immigration rules.
• High‑skill workers are more likely to relocate for better pay or career opportunities.

4.2 Occupational mobility

• Up‑skilling or retraining that enables a shift from a low‑skill to a higher‑skill occupation.
• Investment in education, apprenticeships, or on‑the‑job training.
• Higher occupational mobility tends to compress wage differentials over time.

5. Division of Labour (Specialisation)

Division of labour breaks production into specialised tasks, raising overall productivity. Workers performing specialised (often higher‑skill) tasks earn higher wages than those doing routine tasks.

Example: an assembly‑line operative (low‑skill) earns less than the design engineer who creates the product specifications.

6. Illustrative Economic Model

The relationship between wage (w) and marginal product of labour (MPL) is:

$$ w = P \times MPL $$

• For high‑skill workers, MPL is larger, so w is higher, ceteris paribus.
• If the price of a high‑tech product rises, P increases, shifting the demand curve for high‑skill labour rightwards and raising the equilibrium wage more than for low‑skill labour.

7. Case Study: The Impact of a National Minimum Wage

1. Identify the equilibrium wage for low‑skill workers (w_e) where labour demand = labour supply.
2. Government sets a minimum wage w_min such that w_min > w_e.
3. Effects on the low‑skill market:
   • Wage floor rises → real income of those who remain employed increases.
   • If w_min exceeds the marginal revenue product of some workers, a surplus of labour (unemployment) appears.
   • Employers may substitute labour with labour‑saving technology.
4. High‑skill workers are largely unaffected because their market wage is already above w_min.

8. Suggested Diagrams (for exam practice)

• Labour‑market diagram for low‑skill workers showing a horizontal minimum‑wage line at w_min and the resulting surplus (unemployment).
• Labour‑market diagram for high‑skill workers illustrating a right‑ward shift in labour‑demand when the price of a high‑tech product rises.
• Diagram of the union‑determined wage: a flat line above the market wage intersecting the labour‑supply curve.
• Supply‑and‑demand diagram for geographical mobility – outward shift of the high‑skill labour‑supply curve reduces regional wage differentials.

9. Summary Points

• Wages are set by the interaction of labour demand (productivity, product price, fiscal/monetary policy) and labour supply (skill scarcity, mobility).
• High‑skill workers earn more because they have a higher MPL and are scarcer.
• Institutional factors (NMW, trade‑union bargaining, employment legislation) have a proportionally larger impact on low‑skill wages.
• Human‑capital investment, occupational mobility and experience drive wage growth for high‑skill workers.
• Discrimination, sectoral differences and public‑vs‑private pay structures also explain wage differentials.
• Geographical and occupational mobility can either widen or narrow wage gaps depending on the direction of movement.

10. Exam‑style Question

Question: “Explain why a rise in the price of a high‑tech product is likely to increase the wages of high‑skill workers more than those of low‑skill workers.”

Key points to address:

1. Higher product price raises P in the equation w = P × MPL.
2. High‑skill workers have a larger MPL for high‑tech products, so the increase in P translates into a larger rise in their MRPL and therefore their wage.
3. Demand for the high‑tech product shifts the labour‑demand curve for skilled labour to the right, raising equilibrium wage and employment.
4. Low‑skill workers’ MPL is relatively unchanged; the demand curve for their labour shifts little, so their wage rise is modest.
5. Optional extensions: spill‑over effects on ancillary low‑skill services, the role of union bargaining or minimum‑wage floors, and how geographical mobility might amplify or dampen the effect.