Workers

Why wages differ

Wages are a price, the price of labour, so they are set by the demand for and supply of workers in each occupation.

High wages usually mean high demand for that type of labour combined with low supply of people able to do it. Low wages usually mean the opposite.

That single sentence explains most wage differences, and applying it beats listing factors.

Factors affecting the demand for labour

Demand for labour is derived demand, firms want workers for what they produce, not for their own sake.

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• Demand for the product. If demand for the good rises, firms need more workers.
• Productivity. More productive workers add more output, so firms will pay more for them.
• The price of the product. A higher selling price makes each worker more valuable to the firm.
• The cost of machinery. If machines become cheap, firms may replace workers with capital, lowering demand for labour.

Factors affecting the supply of labour

• Qualifications and training required. Long, difficult training reduces the number of people able to do the job, one reason surgeons and pilots are well paid.
• Skill level. Unskilled work has a very large supply of potential workers, which pushes wages down.
• Working conditions. Dangerous, dirty or unsociable work reduces supply, so wages must be higher to attract people. Economists call this a compensating differential.
• Population and migration. More working-age people raises supply.
• Non-wage benefits. Job security, holidays, pensions and status attract workers even at lower pay, which is why some rewarding jobs are relatively low paid.

Other reasons wages differ

• Trade unions can raise wages through collective bargaining (3.4).
• Government policy: a national minimum wage raises the lowest wages.
• Discrimination by gender, ethnicity or age can cause unequal pay for similar work.
• Public versus private sector pay may differ for similar jobs.
• Region: wages are often higher in cities, partly to offset higher living costs.
• Immobility of labour. If workers cannot move occupation or region (1.2), wage differences persist instead of being competed away.

How earnings change over a lifetime

Earnings usually follow a pattern:

• Young workers earn less. They have little experience, may still be training, and are often in junior roles.
• Middle-aged workers earn most. Experience, skills and promotion raise productivity, so demand for them is highest.
• Older workers may earn less again, through moving to part-time work, retiring, or skills becoming outdated.

Why it matters: this pattern explains why people borrow when young, save in middle age, and spend savings in retirement, which links directly to household behaviour (3.2).

Worked example

Why is a surgeon paid far more than a supermarket cashier?

1. Supply of surgeons is very low, the training takes many years, requires high qualifications, and few people can complete it
2. demand is high, because the work is highly valued and productivity per surgeon is high
3. high demand plus low supply gives a high wage.

1. Supply of cashiers is very high, little training is needed, so almost anyone can do the job
2. demand exists but is not scarce-supply-limited
3. high supply gives a low wage.

Add an evaluation point. Wages also reflect bargaining power and government policy: cashiers' pay may be set close to the national minimum wage, while doctors in some countries are paid on public-sector scales rather than by market forces alone.

Common exam mistakes

• Saying a job pays well simply because it is "important". Nurses and teachers are important and not always well paid, what matters is supply and demand.
• Explaining only demand, or only supply. The wage is set by both.
• Forgetting that demand for labour is derived from demand for the product.
• Ignoring non-wage factors, which explain why some pleasant jobs pay less.
• Treating all low pay as discrimination without considering supply.

Exam technique

Structure every wage-difference answer around demand and supply, then add the extra factors, unions, government, discrimination, immobility, as further reasons.

Where the question names two specific jobs, compare them directly: say what supply and demand look like for each, rather than describing them separately.

For lifetime earnings, describe the shape, low, then rising to a peak, then falling, and give a reason for each stage.

Building an answer

4 marks, "Explain two factors that affect an individual's choice of occupation."

One is the wage. Higher pay raises the financial reward and attracts workers, particularly where skills transfer easily between jobs.
Another is job satisfaction. Many people accept lower pay for work they find worthwhile, or for better conditions, security or holidays, the non-wage factors that make up net advantages.

6 marks, "Analyse why a surgeon earns more than a cleaner."

Demand for surgeons is high because their marginal revenue product is high, the value of the work they do is large.
Supply is very restricted: years of training, high qualification requirements and limited places mean few people can do it, so supply is inelastic.
High demand meeting restricted supply produces a high equilibrium wage.
For cleaning, demand exists but the work requires little training, so supply is large and elastic. Almost anyone can enter, which keeps the equilibrium wage low.
The gap is therefore explained by supply conditions at least as much as by demand.

That final sentence is the analysis mark. Answers that say only "surgeons are more skilled" describe the difference without explaining it.

Wage and non-wage factors

Together these make up net advantages, the full package. It is why a nurse may stay in a job that pays less than a similar-skilled role elsewhere.

Trade unions

Trade unions stopped being a topic of their own for 2027. They are still referenced under 3.3.2, as one influence on wage determination, which is why they now sit inside Workers.

Syllabus points

• Define a trade union and explain its role.
• Explain the advantages and disadvantages of trade unions to workers, firms and the economy.

What is a trade union?

A trade union is an organisation of workers formed to protect and advance the interests of its members.

The core idea is bargaining power. One worker negotiating alone has very little; thousands negotiating together have a great deal, because the employer cannot easily replace them all. This is called collective bargaining, negotiating on behalf of all members rather than individually.

What trade unions do

• Negotiate pay and pay rises.
• Negotiate working conditions: hours, breaks, holidays, safety.
• Protect job security and challenge unfair dismissal.
• Represent individual members in disputes with employers.
• Provide training and, in some countries, legal advice or benefits.
• Lobby governments on employment law.

Industrial action is the union's ultimate threat if negotiations fail:

• Strike: refusing to work.
• Overtime ban: refusing extra hours.
• Work to rule: doing only the exact minimum the contract requires.

Industrial action is a last resort, because members lose pay and the firm may suffer lasting damage.

Advantages and disadvantages

To workers

To firms

To the economy

The key economic argument

The most important point, and the one that earns evaluation marks, is about productivity:

If wages rise in line with productivity, firms can afford them: each worker is producing more, so unit costs do not rise. If wages rise faster than productivity, unit costs rise, which can cause cost-push inflation and job losses.

So the answer to "are trade unions good for the economy?" is genuinely conditional, not a simple yes or no.

What determines union strength?

• Membership size: a union representing most of the workforce is far stronger.
• The state of the economy: unions are stronger in a boom, when firms cannot afford to lose output and workers are hard to replace.
• How easily workers can be replaced: skilled workers have more power than unskilled.
• The law: some governments restrict strikes or ballot requirements.
• The firm's profitability: a profitable firm can afford to concede.

Worked example

A union at a car factory demands a 10% pay rise. Productivity has risen by 3%.

1. The wage demand is higher than the productivity rise
2. unit labour costs rise
3. the firm's costs increase
4. it may raise prices (contributing to cost-push inflation), accept lower profit, or reduce the number of workers.

For workers who keep their jobs, real incomes rise. For those made redundant, the outcome is far worse, so the union's gain is not shared evenly among its own members.

Evaluation. The outcome depends on the firm's ability to pay, how much competition it faces (a firm facing cheap imports cannot easily raise prices), and whether the pay rise improves motivation enough to raise productivity further. If it does, the higher wage may partly pay for itself.

Common exam mistakes

• Saying unions "always" raise wages. It depends on their strength and the firm's position.
• Discussing only workers when the question asks about firms or the economy too.
• Forgetting that higher wages can cost some union members their jobs.
• Ignoring the productivity comparison, which is the heart of the argument.
• Confusing a strike with a work-to-rule.

Exam technique

Organise evaluation by group, workers, firms, the economy, and give at least one advantage and one disadvantage for each. That structure produces balance automatically.

Use the productivity test as your judgement: wage rises matched by productivity are sustainable; wage rises above productivity raise costs.

For "how strong is this union?" questions. Use membership size, the state of the economy, and how replaceable the workers are.

Union power, and what limits it

A real case to quote

UK HGV drivers, 2021. A shortage of qualified drivers pushed advertised salaries up by a third in months. Demand had not changed much; supply had fallen, because the qualification takes time, testing was backlogged and drivers had left the profession. It is a clean, recent illustration that wages are set by both blades of the scissors, and that when supply is inelastic the adjustment comes almost entirely through pay.

Definitions the mark scheme accepts

Quick revision

• Wages are the price of labour, set by demand for and supply of workers.
• High pay = high demand + low supply.
• Demand for labour is derived from demand for the product.
• Supply is limited by qualifications, training, skills and conditions.
• Unpleasant jobs need higher pay to attract workers (compensating differential).
• Other factors: unions, minimum wage, discrimination, region, immobility.
• Earnings typically rise with experience, peak in middle age, then fall.

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