Study Notes: Microeconomic Decision Makers – Workers (Syllabus Section 3.3)

Welcome to the chapter on Workers! This section is all about understanding the most important resource in any economy: people! Since workers make choices about jobs, and their earnings affect their spending, they are crucial Microeconomic Decision Makers.
Don't worry if the labour market diagrams seem tricky—we will break them down step-by-step.

1. Factors Affecting an Individual's Choice of Occupation (3.3.1)

When you choose a career, you don't just look at the salary. Economists divide the influences on your job choice into two main categories: Wage Factors (money) and Non-Wage Factors (everything else).

Wage Factors (Money Matters)

These are the direct financial rewards you get from a job:

  • Basic Pay/Salary: The core income received.
  • Overtime Pay: Extra money for working beyond normal hours.
  • Bonuses and Commission: Payments based on performance or sales achieved.
  • Promotion Opportunities: Potential for future pay increases and higher responsibility.
Non-Wage Factors (The Perks and Environment)

These factors relate to the job's conditions and benefits that are *not* cash in hand. Often, people accept lower wages for better non-wage factors.

  • Job Satisfaction: How much you enjoy the work itself. (e.g., A wildlife photographer might earn less than a lawyer but have higher satisfaction.)
  • Working Conditions: Whether the workplace is safe, pleasant, and clean (or dangerous and stressful).
  • Hours of Work: The flexibility, length, and regularity of the shifts.
  • Location: Is the job near home? Does it involve travelling?
  • Job Security: The likelihood of keeping the job long-term.
  • Fringe Benefits: Additional non-cash benefits like free healthcare, company car, or paid holidays.

Quick Review: Think of a job you'd hate. It probably has bad non-wage factors (long hours, low security) even if the pay is decent!

2. Wage Determination (3.3.2)

In a market economy, the wage rate (the price of labour) is determined by the interaction of the Demand for Labour and the Supply of Labour.

Demand and Supply in the Labour Market

The labour market works just like the market for any good (like bread or phones):

  • Demand for Labour: This comes from firms (employers). Firms need workers to produce goods and services. Demand is usually inversely related to the wage rate: if wages are very high, firms demand fewer workers.
  • Supply of Labour: This comes from workers (households). Supply is usually positively related to the wage rate: if the wage for a specific job is high, more people want to do it.

The point where the demand for labour equals the supply of labour is the Equilibrium Wage Rate and Equilibrium Level of Employment.

Other Key Influences on Wage Determination

The equilibrium wage can be influenced by other factors beyond simple market forces:

  1. Relative Bargaining Power: This refers to the ability of workers (often grouped in a Trade Union) or employers to negotiate wages. If a strong union bargains collectively, they can force wages higher than the equilibrium.
  2. Government Policy (Minimum Wage): The government can set a National Minimum Wage (NMW). This is the lowest amount per hour that employers are legally allowed to pay their workers.
    Why use NMW? To protect low-skilled workers from exploitation and reduce income inequality.
    Economic Impact: If the NMW is set above the equilibrium wage, it can lead to higher incomes for some, but may also cause a reduction in the quantity of labour demanded (unemployment) as firms cut costs.

Key Takeaway: Wages are primarily a price set by D&S, but government laws (NMW) and institutional power (Trade Unions) also play a critical role.

3. Reasons for Differences in Earnings (3.3.3)

Have you ever wondered why a doctor earns much more than a cashier? It's not just luck! Earnings differ widely based on several distinct factors, all related to the underlying demand and supply conditions for specific types of labour.

A. Skill and Training (Skilled vs. Unskilled)

Skilled Workers (e.g., engineers, surgeons) generally earn higher wages than Unskilled Workers (e.g., cleaners, basic factory workers).

  • Demand: Demand for skilled labour is often high because their contribution (productivity) is high.
  • Supply: Supply of skilled labour is low, as it requires long, expensive education and training. This restricted supply drives the wage up.
  • Analogy: Think of a limited edition video game (skilled labour). Few are available (low supply) but many people want them (high demand), so the price (wage) is high.
B. Sectoral Differences (Primary, Secondary, Tertiary)

Wages differ based on the sector of activity:

  • Primary Sector: (Extraction, e.g., farming, mining). Historically, these wages can be lower, though highly skilled resource extraction engineers earn significant wages.
  • Secondary Sector: (Manufacturing, e.g., factory work). Wages depend heavily on the level of automation and required skill.
  • Tertiary Sector: (Services, e.g., finance, IT, healthcare). As economies develop, the demand for high-skilled tertiary jobs rises, driving up these wages significantly.
C. Public Sector vs. Private Sector
  • Private Sector: (Firms aiming for profit maximisation). Wages are often determined strictly by market demand and productivity. High performers are often highly rewarded.
  • Public Sector: (Government services, e.g., teachers, police). Wages may be slightly lower for certain professional roles compared to the private sector, but often offer better job security and pension benefits (strong non-wage factors).
D. Gender Differences (Male vs. Female)

Despite laws promoting equal pay, differences persist due to:

  • Discrimination: Some employers still unfairly pay women less for the same job.
  • Social Attitudes: Women are still more likely to take career breaks for family or childcare, impacting their long-term experience and promotion trajectory.
  • Occupational Segregation: Women are often concentrated in lower-paid, traditionally female jobs (e.g., care work).
E. The Effect of Labour Market Changes (Using Diagrams)

Changes in demand or supply for specific types of labour cause the wage rate to change.

Diagram Reminder: The vertical axis is the Wage Rate (W), and the horizontal axis is the Quantity of Labour (Q). The Demand curve (D) slopes down, and the Supply curve (S) slopes up.

Scenario 1: Increase in Demand (e.g., demand for software developers)
If a new technology means firms need more software developers:

  • The Demand for labour curve shifts right (from \(D_1\) to \(D_2\)).
  • This causes the equilibrium wage rate to rise (from \(W_1\) to \(W_2\)) and the quantity of employment to rise.

Scenario 2: Increase in Supply (e.g., increased immigration of unskilled workers)
If more unskilled workers enter the labour market:

  • The Supply of labour curve shifts right (from \(S_1\) to \(S_2\)).
  • This causes the equilibrium wage rate to fall (from \(W_1\) to \(W_2\)) and the quantity of employment to rise.

Common Mistake: Remember, wages fall when supply increases, but rise when demand increases.

4. Division of Labour and Specialisation (3.3.4)

One of the major decisions firms make about workers is how to organise them. Specialisation is key to modern production.

Definition of Division of Labour

Division of Labour is when the production process is broken down into a sequence of separate, small tasks, and each worker performs only one task. This leads to Specialisation, where workers become highly skilled in that single task.

Example: Instead of one worker building an entire car, one worker installs the steering wheel, another tightens the tyres, and another paints the body.

Advantages of Division of Labour (The Benefits)
Benefits for Workers
  • Workers become highly skilled and proficient (more productive) at their specific task.
  • Training is often quicker and cheaper since the required skill is narrow.
Benefits for Firms
  • Increased Productivity: Workers produce more output per hour, lowering the firm's costs.
  • Reduced Waste: Fewer mistakes are made when workers are expert in their task.
  • Time Saving: Less time is wasted switching between tasks and tools.
  • Mass Production: It makes large-scale, automated production methods possible.
Benefits for the Economy
  • Increased productivity leads to higher total output (economic growth).
  • Lower production costs can lead to lower prices for consumers.
Disadvantages of Division of Labour (The Drawbacks)
Drawbacks for Workers
  • Boredom and Monotony: Repeating the same task constantly can lead to low morale and demotivation.
  • Loss of Craftsmanship: Workers lose the holistic skill of making a whole product.
  • Worker Immobility: If demand for their specific task falls, they may suffer structural unemployment as their skills are not transferable.
Drawbacks for Firms and the Economy
  • Interdependence: If one stage of production breaks down (a worker is sick or machine fails), the entire production line stops.
  • Quality Issues: If workers are bored, quality control may decline.

Did you know? The concept of the Division of Labour was famously introduced by economist Adam Smith in 1776, who described a pin factory where 10 workers, using specialisation, could produce 48,000 pins per day, compared to perhaps just 200 pins if they worked individually.

Final Key Takeaway: While specialisation dramatically increases output and lowers costs, it comes at the expense of variety and worker satisfaction.