CIE IGCSE Economics 0455 Section 3 - Unit 19

Ayman Alam

CIE IGCSE Economics Notes

UNIT 19

UNIT 19 – Changes in Earnings  

The earnings of most workers change during their working life.

Usually, the workers’ earnings increase as they get older, this is because the longer the people work, the more skilled and productive they become.

Derived Demand –  However, if a firm faces financial difficulties, they can cut This is when there is a bonuses and reduce the wages being paid to their employees. demand for a good or Changes in the Demand for Labour factor of production resulting from ͞An increase in the demand for labour will increase the wage rate.͟ demand for an intermediate good or 1. A change in the demand for the good/service – Demand for service. labour is a derived demand. The higher the demand for the good/service, the higher the demand for labour and so more workers are employed.

2. A rise in labour productivity – The higher the productivity, the more cost efficient the workers are (compared to capital goods) and so the demand for them rises.

3. A change in the price of capital goods – If the price of capital increases, the firms may substitute them with labour instead.

4. An employment subsidy – An employment subsidy is granted by the government to firms. It serves as an incentive to businesses to provide more job opportunities in order to reduce the level of unemployment in the country.

Changes in the Supply of Labour ͞A decrease in the supply of labour will increase the wage rate.͟

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Ayman Alam

CIE IGCSE Economics Notes

UNIT 19

1. Change in wages – If there is a rise in the wages being paid, the workers will switch to that occupation. This results in an increase in the supply of labour for that occupation and viceversa.

2. A rise/fall in the labour force – Fewer workers result in greater difficulties when recruiting workers.

3. Qualifications and length of training required – A rise in the length of taring and qualifications required will reduce the number of workers capable of taking up that job.

4. Non – wage factors – If the working hours increase for an occupation, the supply of labour will decrease. Or if the number of fringe benefits being given to the worker(s) increase, the supply of labour will increase as more people will be willing to do that job.

The influence of elasticity on the effect of an increase in the demand for labour  

Inelastic demand and supply – If the demand for skilled workers (occupations that have inelastic demand and supply) increases by e.g. 50%, the rise in wages will be very large.

Elastic demand and supply – If the demand for unskilled workers (occupations that have elastic demand and supply) increases by e.g. 50%, the rise in wages will not be very large compared to the change in the wage rates of skilled workers.

Determinants of Elasticity of Demand for Labour 1. The proportion of labour costs in total costs – If labour costs form a large proportion of total costs, a change a change in wages would have a major impact on costs and so demand would be relatively elastic.

2. The ease with which labour can be replaced with capital – If it is easy to replace workers with capital such as machinery, demand for labour will be relatively elastic.

3. The elasticity of demand for the product produced – The more elastic the demand for a product is, the more elastic the demand for labour is as demand for labour is a derived demand.

4. The time period – Demand for labour is usually more elastic in the long run as firms have more time to change their methods of production.

Determinants of Elasticity of Supply for Labour 1. The qualifications and skills required – The more qualifications and skills required for an occupation, the more inelastic the supply of labour is.

2. The length of training period – The training period for becoming highly qualified has an opportunity cost which is, the amount of time that workers could have earned money by doing jobs. The higher the training time, the more inelastic the supply is.

3. The level of employment – If most workers are already employed, the supply of labour tends to be inelastic. In fact, firms attract more workers from other occupations by raising their wage rate.

4. The mobility of labour – Higher mobility of labour results in a more elastic supply of labour.

5. The degree of vocation – The more the workers are attached to their jobs, the more inelastic the supply of labour is.

6. The time period – In the long run, everything is flexible. Workers can undertake training sessions or notice wage changes and so as the time period increases, the more elastic the supply of labour tends to be.

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Ayman Alam

CIE IGCSE Economics Notes

UNIT 19

Changes in the Stages of Production 

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People working in the primary sector are usually less well paid than workers working in the secondary and tertiary sector as they have less skills and qualifications.

However, some workers in the primary or secondary sector get more wages than workers in the tertiary sector sometimes. For example an engineer working in the oil industry is likely to earn more than a shop assistant.

As the economy develops, labour in the primary sector are less demanded. The demand for workers in the secondary sector rises and then the demand for workers in the tertiary sector rise.

Demand for a number of services rise with income and high qualifications needed to carry out a number of jobs in the tertiary sector.

How Governments Can Change Wage Rates     

Raising the NMW (National Minimum Wage) will increase the pay of low paid workers.

If better education is provided to people, skilled workers may earn higher wages as the increase in demand for them may be higher than the increase in supply.

Making it easier to live in a country may increase the supply of labour of that country. This potential increase in the supply of labour may hold down further increment of wages.

If the government implements some anti-discrimination laws, there may be more people willing to work and they can earn more now.

Advancement of technology can decrease the demand for labour and may eventually lead to lower wages being paid to workers. One the other hand, ICT can open up new job opportunities and hence increase the wage rates being paid to those who do that job.

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