Aim:
 To understand wage determination
Objectives:
 Define economic rent and transfer earnings


Explain wage determination in perfectly competitive market
Analyse the football labour market

 Who should be paid more, MPs or news readers?

Real
Wage
Rate
W1
Real
Wage
Rate
W1
D1=MRP
S
D1=MRP
Q
One Employer in the Market
Quantity of Labour
Q
The Whole Labour Market
Quantity of Labour



Each employer passively accepts the ruling market wage rate.
Each firm can hire as many workers as it wishes at the ruling wage rate, but cannot influence it itself.
 Provides a yardstick for judging the extent to which real world markets perform efficiently or inefficiently.

 Economic Rent: the payment received by a factor of production over and above that which is needed to keep it in its present occupation.
 Transfer Earnings: the minimum payment needed to keep a factor of production in its present use.

 What a factor of production can earn in its next best alternative use. I.e. the opportunity cost of a factor performing its current role.

 Surplus payment over and above transfer earnings.
 Total earnings minus transfer earnings.

 E.g. If a footballers’ weekly pay is £10,000 per week, and the next best job he can do is a plumber which pays £500 per week, his economic rent is £9,500 and his transfer earnings are £500.

Real Wage
Rate/MRP
W
O
B
Total Earnings = OWQA
A
Q
S
Economic Rent = WAB
Transfer Earnings =
OABQ
D=MRP
Quantity of
Labour

 The amount of economic rent earned by individual workers will differ.
 First worker would have been prepared to work for much less than the wage rate actually paid, so a high proportion of his earnings will be economic rent.
 The last worker to be employed would have been prepared to work only for the given wage rate and so earns no economic rent.

 The proportion of earnings made up of economic rent depends on the elasticity of supply.
Economic rent will be a large proportion of earnings when supply is inelastic.

 Premiership footballers earn large economic rents.
 Imagine what the next best job for Rio Ferdinand would be….

Real Wage
Rate/MRP
W1
O
Q1
S
 Supply will be inelastic as if the changed the wage rate most footballers would continue to supply themselves.
D=MRP
Quantity of Premiership
Footballers



 http://www.youtube.com/watch?v=0vUDrUY
TsHQ&feature=results_video&playnext=1&lis t=PL4CEC04390392C406 http://www.youtube.com/watch?v=nDvGxNk
X4AU http://www.youtube.com/watch?v=wbT5q1Jr fhs&feature=related


3.29
2.00

 Discuss how Trade Unions may influence wage rates and the labour supply?
 Do you feel as though the power of trade unions was lessened by Margaret
Thatcher?