Workshop 5
Wages and the
Distribution of income
1.
The assumptions of perfect labour markets are similar to those of perfect goods markets. There are
four main assumptions. What are they?
................................................................
2.
......................................................................
3.
................................................................
4.
......................................................................
The diagrams below show a local market for plasterers. It is assumed that it is a perfect market.
(a) Delete the wrong words (in italics) in the following passage:
The assumption of perfect competition means that the price of plaster / the wage rate of
plasterers / the profitability of employers of plasterers cannot be affected by individual
employers / workers / employers or workers. This means that the supply of labour to / the
demand for labour by an individual employer is perfectly elastic, and the supply of labour
by / the demand for labour for an individual worker is perfectly elastic too.
Smarket
Hourly wage rate
2.
1.
Wm
Wm
Sindividual worker
Wm
D individual
employer
O
Q1
Labour hours
(a) Individual
employer
Dmarket
Labour hours
Q2
Labour hours
(b) Whole
market
(c) Individual
worker
O
O
(b) In diagram (b), which of the two curves would shift and in which direction as a result of each
of the following changes? There may be no shift in either curve. If so, delete all options.
(i)
(ii)
(iii)
(iv)
A deterioration in the working conditions for plasterers. ........... demand/supply left/right
A decrease in the price of plaster. ............................................... demand/supply left/right
A decrease in the demand for new houses. ............................... demand/supply left/right
An increased demand for plasterers in other parts of the country.
demand/supply left/right
(v) Increased wages in other parts of the building trade (as a result of union activity).
demand/supply left/right
(vi) Increased costs associated with employing plasterers (e.g. employers having to pay
higher insurance premiums for accidents to plasterers). ............ demand/supply left/right
(vii) A reduction in the wage rate of plasterers. ................................. demand/supply left/right
Wages and the
Distribution of Income
Workshop
5
3. The following table shows how a firm’s weekly output of a good increases as it employs more
workers. It is assumed that all other factors of production are fixed. The firm operates under perfect
competition in both the goods and labour markets. The market price of the good is £2.
.
Number of
workers
Total physical
product (units)
1
100
2
220
3
340
4
440
5
520
6
……
7
……
8
……
Marginal physical
product (units)
Marginal revenue
product (£)
……
……
120
……
……
……
……
……
……
……
60
……
……
80
30
……
(a) Fill in the missing figures in the above table (enter the figure for MPP and MRP in the spaces
between the rows).
(b) How many workers will the firm employ (to maximise profits), if the wage rate were:
(i) £100 per week? .....................................................................................................................
(ii) £220 per week? .....................................................................................................................
(iii) £200 per week? .....................................................................................................................
(c) The demand curve for labour under perfect competition is given by the MRP (of labour)
curve.
........................................................................................................................ True / False
(d) Will a change in each of the following lead to a shift in or a movement along the demand
curve for labour?
(i) A change in the productivity of labour (MPP). .............................. shift / movement along
(ii) A change in the wage rate (W). ....................................................... shift / movement along
(iii) A change in the price of the good (= MR). ..................................... shift / movement along
2
Wages and the
Distribution of Income
Workshop
5
4.
The following diagram shows a monopsony employer of labour. The vertical axis shows costs and
revenue per hour. Assume that there is no trade union and initially that there is no minimum
hourly wage rate.
£6.00
MCL
£5.80
£5.60
£5.40
£5.20
£5.00
MC
£4.80
£4.60
£4.40
£4.20
£4.00
ACL
£3.80
£3.60
£3.40
£3.20
£3.00
£2.80
£2.60
£2.40
MRPL
£2.20
£2.00
0
1
2
3
4
5
6
7
8
9
10
Number of workers
(a) How many workers will the monopsonist employ if it wishes to maximise profit? ...................
(b) What hourly wage rate will the monopsonist pay? ......................................................................
(c) Assuming instead that this is an industry under perfect competition, and that the horizontal
axis is now measured in thousands, how many workers would be employed?
...............................................................................................................................................
(d) What would be the hourly wage rate now? ..................................................................................
(e) Returning to the monopsonist, with the horizontal axis once more measured in individual
workers, assume that the government imposes a minimum hourly wage rate. What will be
the average and marginal costs of labour at each of the following minimum wage rates?
(f)
(i) £2.80
ACL . . . . . . . . . . . . .
MCL . . . . . . . . . . . . . .
(ii) £4.00
ACL . . . . . . . . . . . . .
MCL . . . . . . . . . . . . . .
How many workers would be employed by the monopsonist at each of the following
minimum wage rates?
(i) £3.00 . . . . . .
(ii) £3.40 . . . . . .
3
(iii) £3.80 . . . . . .
(iv) £4.20 . . . . . .
Wages and the
Distribution of Income
Workshop
5
5.
The extent to which a union will be able to secure higher wages from an employer will depend on
its bargaining power. Will the following tend to increase or decrease a union’s bargaining power?
(a) New figures showing that the firm’s profits for the last year were less than anticipated.
Increase/Decrease the union’s power.
(b) A rise in unemployment. ................................................. Increase/Decrease the union’s power.
(c) New figures showing that inflation has risen. ................ Increase/Decrease the union’s power.
(d) A successful recruiting drive for union membership. .... Increase/Decrease the union’s power.
(e) Increased competition for the firm’s product from imports.
Increase/Decrease the union’s power.
(f)
A rapidly growing demand for the firm’s product. ........ Increase/Decrease the union’s power.
(g) A closed shop agreement. ............................................... Increase/Decrease the union’s power.
(h) The firm gains substantial monopoly power in the goods market.
Increase/Decrease the union’s power.
6.
The following table shows the sources of UK household income by quintile groups. (Note that not
all rows add to 100 because of rounding errors.)
Sources of UK household income as a percentage of total household income by quintile groups: 2000/1
Gross household
weekly incomes
(quintiles)
Lowest 20%
Next 20%
Middle 20%
Next 20%
Highest 20%
All households
Wages and Income from selfsalaries
employment
(1)
(2)
6
1
31
5
62
6
75
7
77
12
67
Income from
investments
(3)
3
4
4
3
4
Pensions and
annuities
(4)
8
15
11
8
3
Social security
benefits
(5)
80
43
15
6
2
Other
Total
(6)
2
2
1
2
1
(7)
100
100
100
100
100
4
7
12
1
100
9
(a) How would you explain the relatively high figures in columns (3) and (4) for the second
poorest quintile?
............................................................................................................................
.......................................................................................................................................................
(b) What do the figures suggest are the major sources of inequality in incomes?
.......................................................................................................................................................
.......................................................................................................................................................
.......................................................................................................................................................
4