Workers – Government Policy and Wage Differentials (Cambridge IGCSE 0455)
Objective
To understand how wages are set, why they differ between workers, and how government policy can influence those differences. The notes follow the full syllabus order for 3.3 Workers.
1. Factors that Influence a Person’s Choice of Occupation
When deciding which occupation to pursue, individuals weigh wage‑related and non‑wage considerations.
- Wage‑related factors
- Expected earnings (basic pay, overtime, bonuses, commissions)
- National Minimum Wage (NMW) – the legal pay floor
- Job security and prospects for future pay rises
- Non‑wage factors
- Working conditions (hours, health & safety, stress levels)
- Location (proximity to home, urban vs. rural)
- Age, gender, culture and family expectations
- Personal interests, skills and qualifications
- Opportunities for training, promotion and career progression
2. How Wages are Determined
2.1 The Labour‑Market Model (Demand & Supply)
Wages are set where the quantity of labour demanded by firms equals the quantity supplied by workers – the market equilibrium.
- Demand for labour – derived from the marginal revenue product of labour (MRP). A higher MRP (more productive workers) shifts the demand curve right, raising the equilibrium wage.
- Supply of labour – reflects workers’ willingness to work at different wage rates. Higher wages attract more workers, shifting the supply curve right.
Diagram suggestion: Standard labour‑market graph (W on the vertical axis, Q of labour on the horizontal axis). Show the equilibrium point (E) where DL meets SL. Use arrows to illustrate a right‑hand shift in demand (e.g., productivity increase) and a right‑hand shift in supply (e.g., migration).
2.2 National Minimum Wage (NMW) – A Price‑Floor
The government can set a legal minimum wage. If the NMW is above the market‑determined equilibrium wage, it functions as a price‑floor.
- Effect on wages: Workers who would have earned less now receive the NMW, reducing wage inequality at the bottom of the pay scale.
- Potential side‑effects: Employers may hire fewer workers, creating a surplus of labour (unemployment) among low‑skill workers.
Diagram suggestion: Same labour‑market graph with a horizontal line at the NMW above equilibrium. Shade the excess‑supply (unemployment) area.
2.3 Trade‑Union Influence
Trade‑union legislation can give workers collective bargaining power.
- How it works: Unions negotiate higher wages and better conditions for their members.
- Market impact: A successful wage claim can be shown as an upward shift of the labour‑demand curve (higher marginal labour cost) or as a right‑hand shift of the labour‑supply curve (more workers willing to work at the higher wage).
- Result: Higher wages for unionised workers; possible wage differentials between union and non‑union occupations.
3. Reasons for Wage Differentials
Wage differentials are the variations in pay between workers. The syllabus recognises six principal causes.
| Cause |
Explanation (link to wage) |
Typical Example |
| Productivity differences |
Higher productivity → higher marginal revenue product → higher wage. |
Skilled engineer vs. unskilled assembler. |
| Bargaining power |
Stronger negotiation position enables workers to secure higher pay. |
Union‑represented nurses vs. non‑union retail staff. |
| Discrimination |
Pay differences not explained by productivity or bargaining power (e.g., gender, ethnicity). |
Women earning less than men for the same role. |
| Government policy |
Minimum wage, tax/subsidy regimes, training grants, regional wage policies. |
National Minimum Wage raising pay for low‑paid workers. |
| Sector/industry |
Different industries pay different rates because of profit margins, skill intensity or market conditions. |
Finance sector vs. agriculture. |
| Location (geographic differentials) |
Cost of living and labour‑market conditions vary by region. |
Higher wages in London compared with a rural town. |
4. Labour Mobility
4.1 Geographic Mobility
Workers may move from one region to another in search of higher wages or better conditions.
- Push factors: Low local wages, unemployment, poor working conditions.
- Pull factors: Higher wages, more vacancies, better living standards.
4.2 Occupational Mobility
Workers can change occupations by acquiring new skills or qualifications.
- Facilitated by training programmes, apprenticeships and further education.
- Higher mobility can narrow wage differentials over time as workers move into higher‑paid occupations.
5. Division of Labour
The division of labour separates production processes into distinct tasks performed by different workers.
- Advantages
- Increases productivity through specialisation.
- Encourages skill development and innovation.
- Reduces production time and costs.
- Disadvantages
- Can lead to monotony and lower job satisfaction.
- Creates dependence on a narrow set of skills.
- Vulnerability if a specialised worker is absent.
6. Government Policy – Instruments that Influence Wages
| Policy Instrument |
Syllabus Purpose |
Typical Effect on Gross/Net Wages |
Possible Unintended Consequences |
| Minimum Wage Legislation |
Protect low‑paid workers; reduce poverty. |
Raises gross (and usually net) wages for workers previously below the floor; compresses wage differentials. |
Unemployment or reduced hours for low‑skill workers; growth of the informal sector. |
| Payroll Taxes (e.g., National Insurance, Social Security) |
Finance public benefits and pensions. |
Increases the cost of labour to employers; may reduce net wages if firms pass the cost onto employees. |
Discourages hiring, especially of marginal workers; may encourage tax avoidance. |
| Employer Subsidies (e.g., hiring subsidies for youth, disabled) |
Encourage employment of specific groups. |
Raises net wages for targeted workers without raising employer costs. |
Risk of dependence on subsidies; possible misallocation of labour. |
| Training & Education Grants |
Improve skill levels and productivity. |
Higher skills → higher marginal product → higher wages; may narrow skill‑based differentials. |
Better‑off individuals may capture most of the benefit; regional imbalances. |
| Trade‑Union Legislation (collective‑bargaining rights) |
Strengthen workers’ negotiating power. |
Can raise wages in unionised sectors; may widen differentials between union and non‑union jobs. |
Potential wage rigidity; possible impact on competitiveness. |
| Regional Wage Policies (e.g., higher minimums in high‑cost areas) |
Align pay with local cost of living. |
Reduces regional wage gaps; raises net wages where living costs are high. |
May trigger migration to higher‑wage regions, affecting local labour supply. |
7. Illustrative Example – Minimum Wage Set Above Equilibrium
Assume the following linear labour‑market equations:
Supply of labour: QS = 2W
Demand for labour: QD = 20 – W
Without intervention
- Equilibrium where QS = QD → 2W = 20 – W → W* = 20/3 ≈ $6.67 per hour.
If the government sets a minimum wage of $10 per hour
- QS = 2 × 10 = 20 (workers willing to work)
- QD = 20 – 10 = 10 (jobs firms are willing to offer)
- Surplus of labour = 20 – 10 = 10 workers (unemployment).
Key take‑aways
- Low‑paid workers earn more – an equity gain.
- Unemployment may rise among low‑skill workers – an efficiency loss.
- Overall wage inequality narrows, but the labour market becomes less efficient.
Diagram suggestion: Plot the two lines, mark the market equilibrium, draw a horizontal line at W = 10 (NMW), and shade the excess‑supply area.
8. Evaluation of Government Intervention in the Labour Market
When judging any policy, weigh equity (fairness) against efficiency (overall economic welfare).
- Equity benefits
- Higher wages for low‑paid groups.
- Reduced poverty and improved living standards.
- Greater gender or regional income equality.
- Efficiency costs
- Unemployment or reduced hours.
- Higher production costs passed to consumers (inflationary pressure).
- Distortion of labour allocation (e.g., over‑reliance on subsidies).
- Distributional effects
- Policies may favour certain groups (union members, young workers) more than others.
- Resulting wage differentials can widen or narrow depending on the instrument.
- Long‑run considerations
- Investment in training can raise productivity, offsetting short‑run wage distortions.
- Phased‑in minimum wages or gradual tax changes reduce market shock.
9. Summary Checklist for Exam Revision
- List the five sub‑areas of 3.3 Workers and give a one‑sentence definition of each.
- Explain how the labour‑market model determines the equilibrium wage.
- Describe two government instruments (e.g., NMW, training grants) and state how each affects gross and net wages.
- Identify at least three reasons for wage differentials and give a real‑world example for each.
- Discuss geographic and occupational mobility and their impact on wage gaps.
- Outline the advantages and disadvantages of the division of labour.
- When evaluating a policy, compare equity gains with efficiency losses and mention possible long‑run effects.
10. Typical Exam Question & Suggested Answer Structure
“Explain two ways in which government policy can affect wage differentials between skilled and unskilled workers. Use diagrams where appropriate.”
- Define wage differentials.
- Policy 1 – Minimum Wage (National Minimum Wage)
- Explain that the NMW raises the pay floor, mainly benefiting low‑paid (often unskilled) workers.
- Show a labour‑market diagram with the NMW above equilibrium, highlighting the rise in gross (and net) wages and the surplus of labour.
- Evaluate: equity gain (higher pay for unskilled) vs. efficiency cost (possible unemployment).
- Policy 2 – Training & Education Grants
- Describe how subsidies for skill acquisition increase the productivity of previously unskilled workers, shifting their labour‑demand curve right.
- Use a diagram to show the right‑hand shift of the demand curve and the resulting higher equilibrium wage for the newly‑skilled group.
- Evaluate: reduces skill‑based differentials (equity) and can raise overall productivity (efficiency).
- Conclude by comparing the short‑run (NMW) and long‑run (training) impacts and stating which policy is more desirable overall.