3.5.3 - Wage Determination In Competitive & Non-competitive Markets

Question 1

Describe The Labour Market Equilibrium
(3 Points)

Answer 1

~ Occurs where D = S.

~ Wage Below Equilibrium -> QDL > QSL, leading to excess demand, firms have to offer higher wages to get workers.

~ Wage Above Equilibrium -> QSL > QDL, leading to excess supply (Unemployment), unemployed workers
have to accept lower wages to get a job.

Question 2

What Is A Trade Union?
(2 Points)

Answer 2

~ Organisation, that bargain for higher wages and better working conditions.

~ They bargain collectively.

Question 3

Draw The Graph For Trade Unions Operating In A Labour Market & Explain It
(6 Points)

Answer 3

Diagram Steps:
~ Draw TU wage rate.

~ Draw Stu.

Theory:
~ They fight for wage rate Wtu, due to the competitive wage rate being too low.

~ Individuals below the wage rate Wtu, are happy with the new wage rate.

~ Beyond the Wtu individuals require higher rates, to be incentivised to work, generating Stu.

~ The QDL > QSL, so the TU is generating unemployment

Question 4

What Do Trade Unions Do With Regards To Employment & Wages Within A Labour Market?
(2 Points)

Answer 4

~ Increase wages.

~ Reducing employment, compared to competitive outcomes.

Question 5

Draw The Graph For Minimum Wages & Explain It
(4 Points)

Answer 5

~ Creates excess supply and unemployment.

~ Reduce QD, as workers are more expensive to hire.

~ Increases QS, workers are incentivised by higher wages.

~ Market is stuck in a disequilibrium, wages can’t go below the minimum wage.

Question 6

What Do Minimum Wages Do With Regards To Employment & Wages Within A Labour Market?
(2 Points)

Answer 6

~ Higher wages.

~ Decreased employment.

Question 7

Draw The Graph For Maximum Wages & Explain It
(4 Points)

Answer 7

~ Creates excess demand and a shortage.

~ Increases QD, as workers are cheaper to hire.

~ Decreases QS, workers are disincentivised by lower wages.

~ Market is stuck in a disequilibrium, wages can’t go above the maximum wage.

Question 8

What Do Maximum Wages Do With Regards To Wages Within A Labour Market?

Answer 8

Reduce wages and inequality.

Question 9

What Is The Role Of Trade Unions?
(2 Points)

Answer 9

~ Collectively bargain, to better pay and conditions for employees.

~ If firms deny, workers will go on strike.

Question 10

What Are Current Labour Market Issues In The UK?
(4 Points)

Answer 10

~ Skill shortages.

~ Youth unemployment.

~ Changes to retirement ages.

~ Earlier school leaving age.

Question 11

Describe Public Sector Wage Setting
(4 Points)

Answer 11

~ Trade unions are weak in the UK, so in the SR, the government could do whatever to improve its budget.

~ In the LR, if private sector pay rises and public sector doesn’t, people will leave the private sector.

~ Forcing the government to increase its wages.

~ So wages in the private and public sector tend to rise the same.