Explain why wages differ between workers by analysing the relative bargaining strengths of employers and employees.
Key Concepts
Wage: The monetary compensation paid to a worker for a unit of labour.
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.
Factors that Influence Relative Bargaining Strength
Skill level and specialisation
Highly skilled or specialised workers are scarce → stronger bargaining position.
Training costs and time create a barrier to entry for other workers.
Unionisation
Collective bargaining gives workers a unified voice.
Union density (percentage of workers in a union) affects overall strength.
Availability of substitutes
If many workers can perform the same task, employer’s bargaining power rises.
Automation or outsourcing reduces employee power.
Geographic mobility
Workers willing to relocate can seek higher wages elsewhere, increasing their leverage.
Regional labour shortages boost employee power.
Employer concentration
Few large firms (monopsony) → employers have greater bargaining power.
Many competing firms → workers gain strength.
Legal framework
Minimum wage laws set a floor, limiting employer power.
Employment protection legislation can strengthen employee position.
How Bargaining Strength Affects Wage Determination
In a simple supply‑and‑demand diagram for labour, the equilibrium wage (\$W^*\$) is where the labour supply curve (\$SL\$) meets the labour demand curve (\$DL\$). When either side becomes stronger, the curve shifts:
If workers become stronger, the labour supply curve shifts leftward (workers are willing to work only at higher wages). This raises the equilibrium wage.
If employers become stronger, the labour demand curve shifts leftward (employers demand less labour at each wage). This lowers the equilibrium wage.
Suggested diagram: Labour market showing shifts in supply and demand curves due to changes in bargaining strength.
Illustrative Table: Relative Bargaining Strength and Expected Wage Outcome
Situation
Dominant Party
Typical Effect on Wage
Reasoning
High skill, low substitute availability
Workers
Higher than market average
Scarcity of skill gives workers leverage to demand premium wages.
Employer can set wages below competitive level because workers have few alternatives.
High minimum wage legislation
Employers (limited by law)
Floor wage – may be above equilibrium
Legal floor prevents employers from lowering wages.
High geographic mobility of workers
Workers
Potentially higher wages in shortage areas
Workers can move to where demand exceeds supply, strengthening their position.
Case Study Example (Brief)
In the UK construction sector, skilled electricians are in short supply while many firms operate. The combination of high skill level and limited substitutes gives electricians strong bargaining power. As a result, their average hourly wage is significantly above the sector’s average wage.
Key Take‑aways
Wage differences arise because the relative power of employers and employees is not equal.
Factors such as skill, unionisation, substitutes, mobility, employer concentration, and legal rules shift the balance of power.
Understanding these factors helps explain why some workers earn more than others even within the same industry.
Potential Exam Questions
Explain how the presence of a strong trade union can affect the wage rate in a particular industry.
Using a diagram, show the effect on the equilibrium wage if a new technology reduces the need for a specific type of skilled labour.
Discuss two reasons why a monopsonistic employer can pay lower wages than a competitive market.