How these reasons influence the wages of workers, depending on economic sector workers operate in: primary/secondary/tertiary

Micro‑economic Decision‑Makers: Workers

Learning objective

Explain how the main reasons that influence workers’ wages vary according to the economic sector in which they are employed – primary, secondary or tertiary – and relate these reasons to the wider IGCSE 0455 syllabus (factors influencing occupation choice, labour‑market demand & supply, marginal‑productivity theory, government policy, trade‑union power, monopsony, mobility of labour, division of labour, market failure, mixed‑economy arguments, supply‑side policy and macro‑economic aims).

1. Factors that influence an individual’s choice of occupation

• Wage‑related factors

  • Level of pay (including overtime, bonuses)
  • Potential for wage growth
  • Job security (risk of redundancy)

• Non‑wage factors

  • Working conditions (health & safety, hours, physical effort)
  • Location (urban vs rural, distance from home)
  • Career prospects and promotion opportunities
  • Personal interests, skills and qualifications
  • Job status and social prestige

2. Wage determination in the labour market

2.1 Demand and supply of labour

The labour market works like any other market.

• Demand for labour is derived from the demand for the goods and services that workers help produce. An increase in product demand raises the marginal revenue product of labour (MRPL) and shifts the labour‑demand curve to the right, pushing wages up.
• Supply of labour depends on the number of workers willing and able to work at a given wage. Population growth, education, immigration and the perceived attractiveness of a sector all shift the labour‑supply curve.

Diagram (to be drawn in class): Downward‑sloping D_L and upward‑sloping S_L. Their intersection gives the equilibrium wage W* and employment E*. Shifts illustrate the impact of productivity changes, technology or changes in worker preferences.

2.2 Marginal‑productivity theory of wages

In a perfectly competitive market a firm pays a worker a wage equal to the value of the worker’s marginal product of labour (MPL):

Wage = MPL × P where P is the price of the output produced.

Assumptions

• Many firms and many workers (perfect competition)
• Free entry and exit from the market
• Full information on productivity and prices
• No monopsony or oligopsony power

Limitations (syllabus requirement)

• Imperfect information – workers and firms may not know true productivity.
• Discrimination – wages can differ for the same MPL on the basis of gender, ethnicity, etc.
• Monopsony power – a single (or few) employer(s) can set wages below the competitive level.

Monopsony definition: a market in which there is only one (or a very few) buyer of labour. The employer faces the whole labour‑supply curve and can set a wage lower than the competitive equilibrium, creating a dead‑weight loss.

Diagram (optional): Single‑buyer labour‑demand curve intersecting the upward‑sloping labour‑supply curve; the monopsonist chooses a lower wage W_M and employs fewer workers E_M than in perfect competition.

2.3 Trade‑union bargaining power

• Unions negotiate collective agreements that can set wages above the market‑determined level.
• Higher union density typically leads to higher average wages in the sector (e.g., strong manufacturing unions in the secondary sector).

2.4 Government policy – minimum‑wage and other interventions

• National Minimum Wage (NMW) – a statutory price floor. It guarantees a minimum hourly pay for workers.
• Price‑floor diagram: a horizontal line at the NMW above the equilibrium wage creates a surplus of labour (unemployment or under‑employment of low‑skill workers).
• Other interventions that affect wages:

  • Tax credits or welfare benefits that raise the effective wage for low‑paid workers.
  • Training subsidies that increase the supply of skilled labour, shifting the supply curve rightwards.

2.5 Link to market failure

• Low wages can be regarded as a demerit good (poverty, poor health) that generates negative externalities for society.
• The government may intervene (minimum wage, tax‑free allowances, training programmes) to correct this market failure.
• Monopsony is itself a form of market failure because it prevents the labour market from reaching the competitive equilibrium.

3. Mobility of labour

Mobility explains how workers respond to wage differentials and skill mismatches.

• Occupational mobility – moving between occupations or industries, usually to obtain higher wages, better conditions or to use newly acquired skills.
• Geographical mobility – relocating to regions where wages are higher or where more jobs are available (e.g., moving from a rural mining area to an urban finance centre).
• Causes of mobility

  • Wage differentials between sectors or regions.
  • Skill shortages or surpluses.
  • Migration policies, transport costs and housing availability.

• Consequences of mobility

  • Reduces regional wage differentials over time (convergence).
  • Allows the economy to adjust more quickly to shocks (e.g., a fall in commodity prices).
  • Can create short‑term “brain‑drain” in less‑developed areas.

Diagram (optional): Two labour‑supply curves for two regions; a shift of workers from the low‑wage region to the high‑wage region equalises the wages.

4. Division of labour

Definition: The breaking down of a production process into a series of specialised tasks, each performed by different workers.

• Advantages

  • Higher productivity – workers become faster and more skilled at a narrow task.
  • Lower training costs – less time needed to learn a specialised routine.
  • Facilitates the use of machinery and technology.

• Disadvantages

  • Monotony can reduce motivation and increase turnover.
  • Vulnerability to disruption – absence of a single specialised worker can stall the whole line.
  • Reduced flexibility – difficult to switch production quickly to new products.

5. How wage‑determining factors operate in different sectors

6. Sector‑specific illustrative examples

1. Primary – Underground drill operator (mining): Requires specialised training, few qualified workers and expensive machinery. The MPL is high because a single drill can extract large quantities of ore; wages are well above the NMW and can rival skilled secondary‑sector wages.
2. Secondary – Automotive assembly line: Unskilled line workers receive a base wage near the market equilibrium. Workers who can programme or maintain robotic arms have a higher MPL, are in short supply and command a premium wage.
3. Tertiary – Software developer: A single programmer can create a product that generates millions of dollars in revenue. High MPL, strong demand for digital services and a global shortage of qualified developers push wages to the top of the scale.

7. Links to macro‑economic aims

• Inflation – Rapid wage growth, especially in high‑productivity sectors, can lead to cost‑push inflation if firms raise prices to cover higher labour costs.
• Unemployment – If wages are set above the competitive equilibrium (through strong unions, a high minimum wage or monopsony power), firms may reduce hiring, increasing unemployment, particularly among low‑skill workers.
• Economic growth – Higher wages increase household disposable income, boosting consumption and stimulating growth, provided they are matched by corresponding productivity gains. Conversely, low wages can suppress demand and slow growth.

8. Mixed‑economy arguments and supply‑side policy

• Mixed‑economy justification: Government intervention (minimum wage, training subsidies, health & safety regulations) corrects market failures such as low‑wage externalities and monopsony power, while the market still determines most wage levels.
• Supply‑side policies that affect wages

  • Investment in infrastructure that improves access to high‑pay sectors.
  • Expansion of vocational training and higher‑education places to increase the supply of skilled labour.
  • Deregulation that encourages new firms to enter labour‑intensive industries, shifting the labour‑demand curve rightwards.

9. Suggested classroom diagrams

• Labour‑demand and labour‑supply curves showing equilibrium wage and the effect of a shift in MPL (e.g., introduction of new technology).
• Minimum‑wage price‑floor diagram illustrating a wage floor above equilibrium and the resulting labour surplus.
• Monopsony diagram showing a single employer setting a wage below the competitive level.
• Mobility diagram with two regional labour‑supply curves converging after worker migration.
• Division‑of‑labour flow‑chart showing a production process broken into specialised tasks, with notes on productivity gains and vulnerability to disruption.

10. Implications for policy and career planning

• Governments can target training programmes at sectors where skill shortages keep wages low (e.g., technical skills in agriculture or construction).
• Students aiming for higher future earnings should acquire qualifications that are scarce in high‑value sectors such as ICT, finance, health and engineering.
• Understanding the drivers of sectoral wages helps workers negotiate better contracts and informs long‑term career decisions.
• Policy‑makers should balance wage‑raising measures (minimum wage, union support) with supply‑side actions to avoid creating excess unemployment.