IGCSE Economics 0455 – Workers and Wage DeterminationMicroeconomic Decision‑makers: Workers
Learning Objective
Explain how the main reasons that affect workers’ wages operate differently for low‑skill and high‑skill workers.
Key Reasons that Influence Wages
- Productivity of the worker
- Supply of labour (availability of workers with particular skills)
- Demand for the output that the worker helps produce
- Human capital investment (training, education)
- Institutional factors (minimum wage, trade unions, employment law)
- Geographical mobility and migration
How Each Reason Affects Wages by Skill Level
| Reason | Low‑skill Workers | High‑skill Workers |
|---|
| Productivity | Generally lower marginal product; wages close to the market‑clearing level. | Higher marginal product; wages rise with productivity gains. |
| Supply of Labour | Large pool of unskilled workers → downward pressure on wages. | Scarce pool of qualified workers → upward pressure on wages. |
| Demand for Output | If the goods/services produced are low‑priced, demand for labour is weak. | High‑value output (e.g., tech, finance) creates strong demand for skilled labour. |
| Human Capital Investment | Limited returns to additional training; wage increase modest. | Significant returns; each additional qualification can shift the wage curve upward. |
| Institutional Factors | Minimum‑wage laws can raise the floor for low‑skill wages. | Trade‑union bargaining can secure premium wages for skilled groups. |
| Geographical Mobility | Low mobility → wages stay low in regions with excess labour. | High mobility → skilled workers can move to higher‑pay areas, raising average wages. |
Illustrative Economic Model
The relationship between wage (\$w\$) and marginal product of labour (\$MPL\$) can be expressed as:
\$ w = P \times MPL \$
where \$P\$ is the price of the output produced. For high‑skill workers, \$MPL\$ is larger, so \$w\$ is higher, assuming \$P\$ is constant.
Case Study: The Impact of a Minimum Wage
- Identify the current equilibrium wage for low‑skill workers (\$w_e\$).
- Government introduces a minimum wage \$w{min} > we\$.
- Resulting effects:
- Potential increase in real income for employed low‑skill workers.
- Possible unemployment if \$w_{min}\$ exceeds the marginal revenue product of some workers.
- High‑skill workers are largely unaffected because \$w_{min}\$ is below their market wage.
Suggested Diagram
Suggested diagram: Labour supply and demand curves for low‑skill vs. high‑skill workers, showing the effect of a minimum wage on the low‑skill market.
Summary Points
- Wages are closely linked to the productivity and scarcity of the skill set.
- Institutional interventions (minimum wage, unions) have a larger relative impact on low‑skill wages.
- Human capital development is a key driver of wage growth for high‑skill workers.
- Geographical mobility can mitigate regional wage disparities, especially for skilled labour.
Exam‑style 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:
- Higher product price raises \$P\$ in \$w = P \times MPL\$.
- High‑skill workers have a larger \$MPL\$ for high‑tech products.
- Demand for the product rises, shifting the demand curve for skilled labour to the right.
- Low‑skill workers’ \$MPL\$ changes little, so their wage increase is limited.