The document discusses several factors that can influence wages, including the marginal revenue product of labor, supply and demand elasticities, national minimum wage, trade unions, and monopsony power. It provides theoretical explanations for how each factor can impact wages and includes diagrams to illustrate the relationships. Evaluation points are also made, such as noting limitations of the theories and circumstances where factors may have less influence on wages. The document concludes by outlining an essay plan to discuss these wage determination factors.

1. Wage determination essay
There are several factors that can influence wages.
• One will be in the question
• e.g. discuss the extent to which the minimum wage
influences wages
• The one in the question is what you write about first
• Pick two to three of the others as the however level 4 points

2. Factors that
determine
(influence)
wages
MRP
Elasticity of
demand
National Minimum
Wage
Elasticity of
supply
Trade Unions
Monopsony

3. MRP – how does it influence wages?
• The marginal revenue product of labour is the change in a firm’s total
revenue from employing one more worker.
• It is found by multiplying the MPP by the price of the product
• The MRP curve, in effect, becomes the demand curve for labour.
• Changes in MRP can therefore result from either a change in the price of
the product or a change in the productivity of labour.
An increase in either will shift the MRP curve to the right.
• Assuming that the supply of labour remains
constant then this change will result in wages
rising in that occupation.
• Similarly a shift to the left of the MRP curve
causes wages to fall. As illustrated in the
diagram

4. Evaluation
It assumes
• That workers are homogenous but they are not – they bring
different skills and abilities to a firm
• Firms have no buying power when demanding workers (i.e. they
have no monopsony power)but in reality monopsony employers
can drive down the wage
• There are no trade unions or minimum wage. Workers can join
trade unions and this can influence the wage more than the MRP as
the TU can push the wage up above the MRP rate. Min wage can
also pay the worker more than their MRP
• That workers’ productivity can be measured accurately whereas it is
difficult to measure output per worker in some occupations e.g.
nurse

5. Supply elasticity – how does it
influence wages?
• If the supply of labour is inelastic, an increase in demand will raise the wage more
than if supply is elastic. Supply elasticity is affected by the qualifications and skills
required, the length of training and the mobility of labour. A premiership
footballer would have inelastic supply owing to the high level of skill required to do
the job. Therefore, if the demand for labour rose, the wage would rise much higher
than for example the wages of a cleaner which would be relatively inelastic in
supply.
• This is because there is a
low level of qualifications
and training to be a
cleaner. This is shown in
the diagrams.
• Hence, the elasticity of
supply for labour can be a
• determinant of the wage

6. NMW – how does it influence wages?
• The National Minimum Wage is the minimum pay per hour almost all
workers are entitled to by law.
• It becomes illegal to pay below the minimum wage. This wage may be
above the market rate.
• This is shown on the diagram. The NMW is the minimum the employer
can pay but this is above the market rate of W, QL. Therefore the
minimum wage can be a determinant of the wage rate.

7. Evaluation
• The extent to which the NMW influences the wage rate
depends on the level at which it is set
• If it is set at below the market rate then it will have little
influence on wages. For example the under 18 rate is
currently £3.79 but many college students are paid at least
£5.30 suggesting that the NMW for the under 18 age group is
not influencing the wage.
• When the new over 25 rate of £7.20 is enforced in April 2016,
this might have more influence on pay as some workers will
be automatically entitled to a pay rise from £6.70

8. TUs – how do they influence wages?
• Workers in unions may be able to
get higher pay because the union
can put pressure on the employer
to increase wages.
• On the diagram the TU wage is
higher than the market rate. The
TU can threaten to strike and use
other methods to disrupt
productivity, causing the employer
to lose profits if the wage is not
raised
• Therefore the TU can influence
wages

9. Evaluation
• A union has more bargaining strength when demand
for labour is inelastic.
• There has been a decline in trade union membership in
recent years which will reduce the TU’s power to
influence wages
• ..but public sector unions still have a large membership
therefore TUs could influence wages more in the public
sector than the private sector currently.
• Whilst the TU can influence wages, it can also cause
unemployment therefore causing labour market failure

10. Demand elasticity – how does it influence wages?
• Demand elasticity for labour explains how sensitive demand is to a change in
the wage rate.
• If demand is inelastic, wages are likely to be higher if there is a reduction in
supply than if demand is elastic as shown in the diagram
• Elasticity of demand for labour is influenced by the price elasticity of demand
for the product, the ease of factor substitution and the proportion of wage
costs to total costs
Therefore the elasticity of demand for
labour can influence the wage , a brain
surgeon might be more inelastic in
demand as they cannot be replaced with
capital. A retail worker could be more
elastic in demand as they could be
replaced with capital e.g. self service
checkouts. Therefore a brain surgeon
could earn more than a cleaner

11. Monopsony – how does it influence wages?
• As the only employer in the market it is
faced by the supply curve of the whole
industry and can choose any point on the
supply curve.
• The employer will employ at the level of
employment where MRP = MCL. Q2 on
the diagram.
• The assumption is that the employer
will act in a maximising manner and
employ labour as long as the MRP of
labour is greater than the marginal cost
of employing the labour (MCL).
• In order to attract Q2 workers the monopsonist has to offer a wage of W2.
• The impact of monopsony power is, therefore, to lower wages compared to
the free market equilibrium level.
• Therefore the monopsony can be said to influence wages

12. Evaluation
• Monopsonies can influence wages to a certain
extent however,
– If the monoposony interacts with a trade union
there is a bi lateral monopoly and the trade union
can force the wage back up to the market rate
thereby limiting the monopsony’s power to
influence the wage
– The monopsony cannot pay below the NMW thus
limiting its power

13. Essay plan
• Explain the theory in the question (L3 5-10
marks)
• Explain the other theories that could affect
wages (L4b 11-15 marks)
• Evaluate these theories where possible (L4a
16-17 marks)
• Judgement (18 marks)
• Discuss judgement (19-20 marks)