Chapter 4: Wage and Compensating Wage Differential

Question 1

refers to the payment that workers receive for their labor.

Answer 1

“wage”

Question 2

This payment
may be in the form of an hourly rate, a salary, or some other form of compensation, such as commissions or
bonuses.

Answer 2

wage

Question 3

The___________ is typically determined by supply and demand in the labor market, with workers
generally receiving higher wages in industries or occupations where there is high demand for their labor,
and lower wages in industries or occupations where there is less demand.

Answer 3

wage rate

Question 4

________ explains the determination of how wages are set in the labor market or in the economy.

Answer 4

Wage theory

Question 5

Advanced by David Ricardo

Answer 5

Subsistence Theory of Wages

Question 6

Also known as Iron Law of Wages

Answer 6

Subsistence Theory of Wages

Question 7

This suggests that wage rates would always tend toward the minimum required for subsistence.

Answer 7

Subsistence theory of wage.

Question 8

If there were more workers available, wages would ultimately decline and there would be less labor
available. The population would expand until the greater labor force forced wages back down if the
pay increased over the subsistence level.

Answer 8

Subsistence Theory of Wages

Question 9

Developed by Adam Smith

Answer 9

Wage Fund Theory

Question 10

The theory suggests that wages are determined by the amount of capital available for investment

Answer 10

Wage Fund Theory

Question 11

The more capital there is, the higher wages can be because there will be more investment
opportunities and therefore more demand for labor.

Answer 11

Wage Fund Theory

Question 12

Advocated by Karl Marx (Marxian Theory)

Answer 12

Surplus Value Theory of Wages

Question 13

The exchange value of any product was determined by the hours of labor necessary to produce it

Answer 13

Surplus Value Theory of Wages

Question 14

The price of a product is determined by the amount of time; a labor devotes for its production. And
the proportion of time spent by the labor on work is much less and, therefore, paid a minimum price
and the surplus amount is utilized for the other expenses.

Answer 14

Surplus Value Theory of Wages

Question 15

Developed by John Davidson

Answer 15

Bargaining Theory of Wages

Question 16

If workers are stronger in bargaining process, then wages tend to be high. In case, employer plays
a stronger role, then wages tend to be low.

Answer 16

Bargaining Theory of Wages

Question 17

Wages are determined by the relative bargaining power of workers of their union and of employers.

Answer 17

Bargaining Theory of Wages

Question 18

Developed by Francis A. Walker

Answer 18

Residual-claimant Theory of Wages

Question 19

He views that once all other three factors are rewarded what remains left is paid as wages to
workers.

Answer 19

Residual-claimant Theory of Wages

Question 20

The wage is the amount given in return for the amount of production and thus is paid after the
payment of all other factors. Thus, the wage is considered to be a residual claimant, and is
computed as:
𝑊𝑎𝑔𝑒 = 𝑊ℎ𝑜𝑙𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 − (𝑅𝑒𝑛𝑡 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝑃𝑟𝑜𝑓𝑖𝑡)

Answer 20

Residual-claimant Theory of Wages

Question 21

Propounded by Phillips Henry Wicksteed and John Bates Clark

Answer 21

Marginal Productivity of Wages

Question 22

This theory is based on the assumption that wage is determined on the basis of last worker’s
contribution in the production i.e. the marginal production

Answer 22

Marginal Productivity of Wages

Question 23

Employers pay workers based on how much they contribute to production.
The more productive a worker is, the higher his wages will be.

Answer 23

Marginal Productivity of Wages

Question 24

Developed by some behavioral scientists (viz. March and Simon, Robert Dubin, Eliot Jacques)

Answer 24

Behavioral Theory

Question 25

According to them, the amount of wage to be disbursed among the workers is determined by various factors such as employer’s concern for the workers, size of company, prestige attached to certain jobs in terms of social status, etc. that determine the amount of wage to be disbursed among the workers

Answer 25

Behavioral Theory

Question 26

is the lowest wage rate that employers are legally allowed to pay their workers.

Answer 26

The minimum wage

Question 27

is typically set by the government, and it is intended to ensure that workers are able to earn a fair wage for their labor.

Answer 27

The minimum wage

Question 28

have been defined by International Labor Organization (ILO) as “the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract”.

Answer 28

Minimum wages

Question 29

Minimum wages have been defined by _________ as “the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract”.

Answer 29

International Labor Organization (ILO)

Question 30

is typically set at a level that is intended to cover the basic needs of workers, such as food, shelter, and clothing. It is also intended to protect workers from being exploited by employers, who may be tempted to pay very low wages in order to increase their profits.

Answer 30

minimum wage

Question 31

century, most nations had implemented minimum wage legislation.

Answer 31

By the end of the 20th century,

Question 32

was the first country to implement a minimum wage in 1894, followed by the_____ in 1896, and the _______ in 19

Answer 32

New Zealand Australian state of Victoria United Kingdom

Question 33

Over _____of 186 ILO member States have one or more minimum wages set through legislation or binding collective agreements

Answer 33

90%

Question 34

The purpose of minimum wages is to protect workers against unduly low pay.

Answer 34

Rationale of Minimum Wage Laws

Question 35

▪ They help ensure a just and equitable share of the fruits of progress to all, and a minimum living wage to all who are employed and in need of such protection.

Answer 35

Rationale of Minimum Wage Laws

Question 36

▪ Minimum wages can also be one element of a policy to overcome poverty and reduce inequality, including those between men and women, by promoting the right to equal remuneration for work of equal value.

Answer 36

Rationale of Minimum Wage Laws

Question 37

When the minimum wage is set above the market equilibrium wage rate, some employers may not be able to afford to pay their workers the higher wage, and may choose to reduce their workforce or not hire additional workers. This can lead to higher

Answer 37

Unemployment

Question 38

Factors that Determine Minimum Wage

Answer 38

The cost of living and changes or increases therein. The minimum wage is typically set at a level that is considered to be sufficient to meet the basic needs of workers, such as food, shelter, and clothing. As the cost of living increases, the minimum wage may also need to be adjusted to ensure that it remains adequate for workers to meet their basic needs. ▪ Demand for living wages ▪ Wage adjustment vis-a-vis the consumer price index ▪ The needs of workers and their families ▪ The need to induce induces industries to invest in the countryside ▪ Prevailing wage levels ▪ Fair returns of the capital invested and employers’ capacity to pay ▪ Effects on employment generation and family income; and ▪ Equitable distribution of income and wealth along the imperatives of economic and social developmen

Question 39

Positive Effects of Minimum Wage

Answer 39

Increased job growth and creation. ▪ Encourages efficiency and automation of industry ▪ Encourages education, resulting in better paying jobs. ▪ Improves functioning of the low-wage labor market which may be characterized by employer-side market power (monopsony). ▪ Raises family incomes at the bottom of the income distribution, and lowers poverty. ▪ Removes low paying jobs, forcing workers to train for, and move to, higher paying jobs. ▪ Increases technological development. Costly technology that increases business efficiency is more appealing as the price of labor increases

Question 40

Negative Effects of Minimum Wage

Answer 40

Results in higher long-term unemployment ▪ Slows growth in the creation of low-skilled jobs ▪ Results in jobs moving to other areas or countries which allow lower-cost labor. ▪ Reduces quantity demanded of workers, either through a reduction in the number of hours worked by individuals, or through a reduction in the number of jobs. ▪ Encourages employers to replace low-skilled workers with computers, such as self-checkout machines ▪ Higher prices for consumers, where products and services are produced by minimum-wage worker

Question 41

is a major determinant of standard of living that affects the quality of life.

Answer 41

Income from labor

Question 42

determines that extent of disparity in the distribution of income between individuals, group of people, or countries.

Answer 42

Income inequality

Question 43

can be examined by looking at the size distribution of income, the functional distribution of income, the distribution of income by recipient, the distribution of wealth, or the extent and nature of poverty.

Answer 43

Inequality

Question 44

refers to the uneven distribution of income across various segments of a population. In simpler terms, it means that a small percentage of the population earns a disproportionately large share of the total wealth, while the rest earn significantly less.

Answer 44

Income inequality

Question 45

The ____ two commonly used tools for measuring inequality in an economy.

Answer 45

Lorenz curve and Gini coefficient

Question 46

The_______ is a graphical representation of the distribution of income or wealth in an economy.

Answer 46

Lorenz curve

Question 47

Lorenz Curve plots the percentage of total income or wealth on the _________ against the percentage of the population on the ___________.

Answer 47

vertical axis, horizontal axis

Question 48

The curve shows how much of the total income or wealth is held by different segments of the population, from the poorest to the wealthiest.

Answer 48

Lorenz curve

Question 49

The _________is a measure of inequality that is calculated based on the Lorenz curve.

Answer 49

Gini coefficient

Question 50

It is a number between 0 and 1, with 0 representing _________ (where everyone has the same income or wealth) and 1 representing _________ (where one person holds all of the income or wealth).

Answer 50

perfect equality perfect inequality

Question 51

A higher________ indicates greater inequality in the distribution of income or wealth.

Answer 51

Gini coefficient

Question 52

provide a useful tool for measuring inequality in an economy, and can help policymakers and researchers to identify trends and patterns in the distribution of income and wealth

Answer 52

Lorenz curve and Gini coefficient

Question 53

a graphical representation of the distribution of income or wealth within a population or economy. It plots the percentage of total income or wealth on the y or vertical axis, against the percentage of the household population on the horizontal or x-axis.

Answer 53

A Lorenz curve is

Question 54

is demonstrated by a 45-degree, upward-sloping line. In the graph above, it is denoted as the dashed line.

Answer 54

The line of equality

Question 55

is demonstrated often by an upward sloping but often exponentially rising curve. In the graph above, it is denoted as a solid line.

Answer 55

The Lorenz curve

Question 56

the gap between the line of equality and the Lorenz curve.

Answer 56

The Gini coefficient

Question 57

Factors Affecting Income Inequality

Answer 57

Ability and Attributes ▪ Education and Training ▪ Work and Leisure ▪ Risk Taking ▪ Wage Discrimination ▪ Unequal Distribution of Wealth

Question 57

calculated as the ratio of the area between the perfect equality line and the Lorenz curve (A) divided by the total area under the perfect equality line (A + B).

Answer 57

The Gini index is

Question 58

refers to one's ability to complete a task or job, and it can be affected by hard work and perseverance.

Answer 58

Ability

Question 59

are things like personality traits or physical characteristics that make someone more capable of earning money than others around them

Answer 59

Attributes

Question 60

These are two very important factors that can influence how much money someone makes

Answer 60

Education and training.

Question 61

Workers who work more hours have higher incomes, and thus can afford to buy more goods. This means that they're able to afford a larger share of the overall wealth of society. Conversely, leisure time impacts income inequality by reducing or increasing one's ability to earn money.

Answer 61

Work and Leisure

Question 62

if people are more _______ they will be less likely to start a business and work their way up the income ladder.

Answer 62

risk-averse,

Question 63

is when an employer pays one employee less than another for the same job. It can be based on race, gender, age, or other factors. This can happen because employers may have something against those groups of people, or they might just not want to pay more to an employee who's better at their job or has more experience or education.

Answer 63

Wage discrimination

Question 64

Income inequality is when there are large gaps between the incomes of different groups within a country or society. For example, a small group of people controls a large amount of money and resources, while most people have very little

Answer 64

Unequal distribution of wealth

Question 65

is an amount of money that is paid directly to an employee for their work.

Answer 65

A wage

Question 66

are often paid weekly or biweekly in cash or check form, but some employers may offer direct deposit as an option for wage payment.

Answer 66

Wages

Question 67

can be based on a standard hourly rate, piece rate (the number of products produced), or commission (the number of sales made).

Answer 67

Wages

Question 68

is a fixed amount of money paid on a regular basis to an employee.

Answer 68

A salary

Question 69

are typically paid monthly or annually in the form of a check or direct deposit into the employee's bank account. Because they are fixed amounts, do not change based on productivity or sales figures like wages do.

Answer 69

Salaries

Question 70

Factors/Reasons why Wages Vary

Answer 70

Credentials, Experience and skill, Industry or employer, Job tasks, Geographic location, Success and performance.

Question 71

is characterized by a small number of persons dominating their and earning tremendous sums of money.

Answer 71

Superstar Phenomenon

Question 72

they bring in more revenue than the average worker.

Answer 72

superstars

Question 73

Example of superstar phenomenon

Answer 73

For example, professional basketball players like Lebron James and Stephen Curry For example, musicians like Taylor Swift and Justin Bieber

Question 74

proposed the idea that job characteristics influence labor market equilibrium

Answer 74

Adam Smith

Question 75

arise to compensate workers for non-wage characteristics of the job (i.e. how ‘pleasant’ or ‘unpleasant’ a job is).

Answer 75

Compensating wage differentials

Question 76

Indifference curves reveal the worker’s preferences between wages and risk.

Answer 76

Utility = f(wage, risk of injury).

Question 77

The supply of labor to risky jobs ______ because as the wage gap between the risky job and the safe job increases, more and more workers are willing to work in the risky job.

Answer 77

slopes up

Question 78

The demand curve __________because fewer firms will offer risky working conditions if risky firms have to offer high wages to attract workers. The market compensation differential equates supply and demand, and gives the “bribe” required to attract the last worker hired by risky firms.

Answer 78

slopes down