Reasons for differences in wages: relative bargaining strengths

Cambridge IGCSE Economics (0455) – Microeconomic Decision‑makers: Workers

Objective

Explain why wages differ between workers by analysing the relative bargaining strengths of employers and employees and by examining the demand‑ and supply‑side determinants of wage rates. Also evaluate the role of labour mobility, division of labour and government policy.

Key Concepts

• Wage: Monetary compensation paid to a worker for a unit of labour (usually expressed as hourly or weekly pay).
• Bargaining strength: The ability of a party (employer or employee) to influence the terms of employment, especially the wage rate.
• Labour market equilibrium: The point where the quantity of labour supplied equals the quantity of labour demanded.
• Monopsony: A market structure in which a single (or few) employer(s) dominate the labour market, giving them greater power to set wages.

3.3.1 Factors Affecting an Individual’s Choice of Occupation

When deciding which occupation to pursue, individuals weigh both wage‑related and non‑wage‑related factors.

Wage‑related factors

• Level of pay (real wages) – higher pay attracts workers.
• Job security – certainty of continued employment.
• Opportunities for overtime, bonuses or profit‑sharing.

Non‑wage factors

• Personal interests, career aspirations and job satisfaction.
• Required education, training and skill development.
• Family responsibilities (e.g., childcare) and cultural expectations.
• Geographic location and willingness to relocate.
• Working conditions (hours, health & safety, flexibility).
• Social status or prestige attached to the occupation.
• Age and culture – certain ages or cultural groups may prefer or be steered towards particular jobs.

These considerations explain why a worker may accept a lower‑paid job that offers better non‑wage benefits, or why a highly skilled worker may move into a higher‑paid occupation despite longer training.

3.3.2 Wage Determination – Influence of Demand and Supply of Labour

The wage rate is set where the labour demand curve (D_L) meets the labour supply curve (S_L). Shifts in either curve change the equilibrium wage.

Determinants of Labour Demand (D_L)

Determinants of Labour Supply (S_L)

Diagrammatic Illustration

National Minimum‑Wage Diagram (placeholder)

3.3.3 Reasons for Differences in Wages

Wage differentials arise from four broad groups of factors:

1. Differences in Demand and Supply

• High‑skill, low‑substitute occupations → high demand, low supply → higher wages.
• Low‑skill, abundant occupations → low demand, high supply → lower wages.
• Geographic shortages or surpluses create local wage variations.

2. Relative Bargaining Strengths of Employers and Employees

When one side becomes stronger, the relevant curve shifts, moving the equilibrium wage.

• Workers stronger – labour supply shifts left (workers will only accept higher pay) → wage rises.
• Employers stronger (e.g., monopsony) – labour demand shifts left (employers hire fewer workers at each wage) → wage falls.

Factors that Influence Bargaining Strength

1. Skill level and specialisation

   • Scarce specialised skills give workers leverage.
   • Training costs create a barrier to entry for others.

2. Unionisation

   • Collective bargaining amplifies employee voice.
   • Higher union density → stronger employee position.

3. Availability of substitutes

   • Many workers can perform the same task → employer power rises.
   • Automation or outsourcing reduces employee power.

4. Geographic mobility

   • Willingness to relocate lets workers move to higher‑wage areas.
   • Regional shortages increase employee power.

5. Employer concentration (monopsony)

   • Few large firms → employers can set wages below competitive levels.
   • Many competing firms → workers gain bargaining strength.

6. Legal framework

   • Minimum‑wage laws set a wage floor, limiting employer power.
   • Employment‑protection legislation (notice periods, unfair dismissal rules) strengthens employee position.

Illustrative Table: Bargaining Strength and Expected Wage Outcome

3. Discrimination

• Wages may differ for workers of equal productivity because of gender, ethnicity, age or other forms of discrimination.
• Discrimination reduces the effective bargaining power of the disadvantaged group, shifting their labour‑supply curve left and resulting in lower wages.

4. Government Policy

Beyond the minimum‑wage law, other policies influence wages and bargaining power.

• Minimum‑wage legislation – sets a legal floor; can raise wages for low‑paid workers but may create unemployment if set above equilibrium.
• Employment‑protection legislation – notice periods, unfair dismissal rules, and redundancy payments increase employee security and bargaining strength.
• Taxation – Higher income tax on high earners reduces net wages, potentially affecting labour‑supply decisions.
• Subsidies for training and apprenticeships – Raise skill levels, shifting supply of skilled labour left (higher wages for those skills).
• Immigration controls – Limit the supply of foreign labour, which can raise wages for domestic workers in affected occupations.

3.3.4 Mobility of Labour

Labour mobility refers to the ability of workers to move between occupations (occupational mobility) or locations (geographic mobility).

Causes of Mobility

• Differences in wages and working conditions across regions or sectors.
• Changes in technology that create new occupations.
• Education and training that enable workers to acquire new skills.
• Migration policies, family reasons, or lifestyle preferences.

Consequences of Mobility

• Equalising effect on wages – Workers move from low‑wage to high‑wage areas/occupations, reducing regional or sectoral wage gaps.
• Adjustment costs – Relocation expenses, loss of local knowledge, or temporary unemployment.
• Impact on bargaining power – High mobility weakens employee power (easier for employers to replace workers); low mobility strengthens it.

3.3.5 Division of Labour

The division of labour is the splitting of production processes into specialised tasks performed by different workers.

Advantages

• Increases productivity – workers become faster and more skilled at a narrow task.
• Facilitates the use of specialised equipment and technology.
• Reduces training time and costs for each worker.
• Encourages innovation through task‑specific improvements.

Disadvantages

• Workers may become bored or demotivated by repetitive tasks, reducing morale.
• Over‑specialisation can make the workforce inflexible to changes in demand.
• Increases dependence on other workers; a breakdown in one task can halt the whole production line.
• Potential for lower wages for low‑skill, highly repetitive tasks.

Case Study (Brief)

UK construction sector – electricians: Skilled electricians are scarce, unions are strong, and few firms can easily replace them. These factors give electricians high bargaining power, resulting in average hourly wages that are well above the sector’s overall average. The combination of high skill, low substitutes and strong collective bargaining exemplifies how relative bargaining strength raises wages.

Key Take‑aways

• Wage differences arise from (a) differing demand and supply conditions, (b) relative bargaining strengths, (c) discrimination, and (d) government policy.
• Factors such as skill level, unionisation, availability of substitutes, geographic mobility, employer concentration and the legal framework shift the balance of power between employers and employees.
• Labour mobility and the division of labour further influence wage levels and the distribution of earnings across occupations and regions.
• Understanding these determinants helps explain why workers in the same industry can earn very different wages and prepares candidates for typical IGCSE exam questions.

Potential Exam Questions

1. Explain two non‑wage factors that influence an individual’s choice of occupation.
2. Using a diagram, show how an increase in the price of the output produced by a firm affects the equilibrium wage.
3. Discuss how a strong trade union can influence the wage rate in a particular industry.
4. Explain two reasons why a monopsonistic employer can pay lower wages than a competitive market.
5. Analyse how government legislation (minimum wage and employment‑protection laws) can affect the relative bargaining strengths of employers and employees.
6. Evaluate the impact of high geographic mobility on wage differentials between regions.
7. Outline the advantages and disadvantages of the division of labour and explain how it can affect wage levels.