Unit 3.

2: Occupations & earnings

Topic 1:

Why do people work? / Factors that affect choice of occupation:

People choose to supply their labour to firms due to wage & non-wage factors.

Wage factors:

People supply their services for production of goods & services to earn money. This earning
can be in the form of time rate, piece rate, salary and performance related payments etc.
(there details are in Business Studies notes). All of the above make up gross earnings of an
employee and is a very important factor in the decision of a worker whether to supply his/her
labour.

Non-wage Factors:

 Fringe benefits: Alongside wages firms may offer fringe benefits or perks to attract
the supply of labour. These are benefits given to workers and have a monetary value
e.g. free medical insurance, company car, pension, house etc. People often supply
their labour to occupations that provide more perks even if the wage is relatively low.
In other words people compare the Net advantages of the job i.e. wage + non-wage
benefits before supplying their labour to a certain job or occupation.
 Opportunities for promotion
 Hours of work
 Satisfaction from work
 Level of job security
 Training opportunities
 Promotion chances
 Distance to work from home
 Holidays
 Working conditions
 Qualification required
 Interesting & varied work

All the above factors affect the choice of job and occupation. Remember just listing the
factors gets you half of allotted marks in CIE. You will need to explain a few factors
depending on the marks allotted for the question.

Topic 2:

Occupational Specialization:

Taking training in a particular skill and getting education in that field e.g. engineering,
marketing, teaching etc. is called occupational specialization. It has both advantages &
disadvantages for those who decide to specialize.

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Please note that these are benefits & disadvantages of specialization to workers & not the
business!!!

Advantages of specialization to a worker Disadvantages of specialization to worker

It allows the worker to choose occupation of Individuals have to rely on others to produce
their interest & make best use of their the goods & services they cannot produce
skills themselves
Repeating the same tasks daily would Repetitive nature of work can cause
improve the worker’s skills demotivation & boredom
Skilled individuals can earn much more A change in technology can cause specialist
than unskilled ones as firms’ demand for workers to become unemployed as their
skilled workers tends to be high skills are not required any more e.g. typist are
not required since word processing soft wares
are in place

Topic 3:

The labour Market

The labour market consists of all the firms & people willing & able to hire workers & all
those who are willing & able to supply their labour services i.e. workers. In other words the
labour market is made up of those who demand labour & those who supply labour.

Labour market can local, national & even international if people are willing to migrate
overseas for work.

The demand for labour:

The demand for labour is derived (indirect) demand as firms want labour for goods &
services they can produce. It means labour will only be demanded if the goods & services
they can produce are in demand.

The workers will only be hired if they can add more to firm’s revenue than cost. For
example, if a worker adds $ 5000 to revenue & costs only $ 3000 in wages, he will be hired;
but if he only adds $ 2000 to revenue he will not be hired as the firm will make a $ 1000 loss
if they will hire him.

A profit maximizing firm will hire workers to the point when extra revenue brought by the
last worker is equal to the wages paid to that worker. In the above example, the last worker
hired should bring at least $ 3000 revenue.

The labour demand curve slopes downward from left to right like a normal demand curve.
This is because fewer workers will be hired when wage rate is high & more workers will be
hired when the wage rate is low. Please see figure 1

Note: Change in wage rate does not shift labour demand curve. There is movement
along the curve if wage rate changes

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 Figure 1

The Supply of labour:

Supply of labour refers to the number of people willing & able to do the jobs on offer. For
example, the supply of bus drivers will include the current bus drivers, those who are
unemployed but are willing to able to drive buses and people in other occupations who want
to become bus drivers. The total supply of labour in an economy is its working population or
labour force.

The supply of labour curve slopes upwards like any other product’s supply curve. This is
because more people want to work at higher wage rate & less at lower wage rate. Please see
figure 2

Figure 2

However this positive relationship between wage rate & labour supply may not be the case
for an individual’s labour supply curve.

Why does an individual’s labour supply curve bend backwards?

As wage rate rises, generally more wore workers become available, but some workers may
not work more hours a higher wage. They might choose leisure & free time with their
families over work. This is why an individual’s supply of labour curve is backward bending;
please see figure 3

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 Figure 3

We can see as wage rate rises from W2 to W3. The hours this worker is willing to work falls
from L2 to L3. This is because now he will earn enough in less time due to high wage rate,
hence he chooses to work lesser hours & enjoy some free time. This is the reason for the
backward bend in an individual’s labour supply curve.

How is the market wage for a job determined?

Market wage for a particular job or occupation is determined like the market price for any
good or service. Only in this case labour is the product. The wage rate will be set at a point
where labour supply curve will intersect the labour demand curve. It is also called the
equilibrium wage rate. Please refer to figure 4

Figure 4

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Why firm may change their demand for labour / Factors that influence the demand for
labour:

1 Changes in demand for goods & services:

If consumer demand rises, the firms will produce more & will need to hire more labour;
hence the demand for labour rises. The firms might ask current workers to work more hours
or hire more workers if the demand for goods rises for a long period. On the other hand the
demand for falls in a recession when demand for goods & services is low.

2 Changes in labour productivity:

Labour demand will rise if they become more productive i.e. they add more to firm’s revenue
than cost. Productivity can rise by using latest machines & worker training.

3 Changes in the price & productivity of capital:

If machinery & equipment become cheaper or more productive, the demand for labour will
fall as firms will switch to capital intensive production & vice versa.

4 Changes in the non-wage employment costs:

Wages are not the only cost of hiring labour; firms have to pay employment taxes, welfare
insurance etc. for each worker. If government adds more laws that increase cost of hiring
workers, firms might need to reduce staff to cut costs and labour demand will fall. See figure
5 showing the effect of fall in labour demand & figure 6 a rise in labour demand & its affect.

Figure 5 Figure 6

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Why labour supply might change / Factors that influence labour supply:
The labour supply might shift due to the following factors;

Net advantages of an occupation:

People choose jobs or occupations after comparing their net advantages i.e. both wage & non-
wage factors. Therefore an ancrease in net advantages in say textile industry e.g. free medical
facility & chances of promotion will make workers switch to textile industry. On the other
hand a fall in net advantages will make workers move away from that occupation.

Level & type of education & training offered:

If there is an increase in the number of universities & schools and they offer variety of
cources e.g. computer skills, business, medicine etc., the supply of labour will increase and
the curve will shift outward to the right & vice versa.

Demogrphic (population related) factors:

Changes in the size and/or age structure of a country’s population also affects the labour
supply.

 Immigration will increase the supply of labour (shift of curve to the right)
 Emigration or outward migration will reduce the supply of labour ( shift of curve to
left)
 Ageing population due to low birth & low death rates means many people will be
above working age & supply of labour will reduce
 Older people & single parents also look for part-time work which reduces supply of
labour

Topic 4:

Wage differentials
Difference in wages between different occupations & workers in the same occupation are
called wage differentials.

Note: When you answer a question about wage differentials; always analyse it with
reference to supply & demand of labour to get maximum marks.

Occupational wage differentials / Why employees in different occupations earn different

wages?

Education/training & skill:

Workers have different levels of education, training & skills. For example a doctor undergoes
a long period of training whereas a cleaner needs very little training. Therefore doctors
supply is low and cleaners are in access supply. As a result doctor will earn much higher than
the cleaner.

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This is the reason people with extraordinary skills e.g. top actors & sports’ players get a very
high wage as their supply is too low & demand is very high.

Dirty jobs / odd hours of work:

Some jobs are dirty or dangerous & some workers work night shifts. The supply of labour
tends to be low for such jobs & timings. They are paid higher than others to compensate for
this; it is also called compensating differentials.

Job satisfaction:

Some jobs are considered satisfying e.g. nursing & teaching. People are ok to receive a
slightly lower wage for these occupations due to the satisfaction they get. A large supply of
labour to such occupations might make the wage rate low.

Lack of information about jobs & wages:

Sometimes workers are unaware of wages & availability of jobs and may be working for
lower than they could have earned somewhere else. Lack of such information restricts supply
of labour, therefore different wage rates may exist in different regions & jobs.

Immobility of labour:

The ease with which workers can move between different jobs & different regions is known
as mobility of labour. The more mobile the workers are the easier it will be for them to move
to the job with most pay.

However workers tend to be both geographically (move from one area to another &
occupationally (from one occupation to another) immobile.

The attchment with their home town, fear of moving etc. restricts workers from moving from
one area with low pay to anpther with higher pay.

The workers may not move to a higher pay job due to lack of skills required & high traing
costs involved.

This is why huge wage differentials remain between different occupations and even in the
same occupation.

Why do people in same job earn different amounts?

People earn different amounts in different occupations, but even people in the same job can
earn very different amounts. This can happen because:

1. Regional differences in labour market conditions

There can be shortage in supply of a particular type of skilled labour in some parts of the
country. Firms in such areas may offer higher wage to attract workers. For example big city
construction workers in Lahore & Karachi earn more than construction workers in a small
Pakistani village.

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 2. Length of service

Many firms offer higher pay to workers that have been with them for a number of years. This
is for two reasons; one to reward the worker’s loyalty & second to keep them with the firm
as with more experience their skills have improved. In other words their demand has risen.

3. Local pay agreement

Many workers & employers often agree their pay locally, so regional differences can exist in
the same job.

4. Fringe Benefits

Some firms offer other benefits along with pay e.g. more holidays, free healthcare etc. These
benefits are not taxed in some countries whereas pay is taxed. Workers tend to accept a lower
pay for the same job as the net advantages may be high.

5. Discrimination

Workers doing the same job may be treated differently by employers simply because of their
sex, age, colour, religion etc. Therefore wage differences may exist. It has been made illegal
in most countries.

Other wage differentials

Between public & private sector workers

Both public & privater sector employ people; therefore they compete with each other for
labour. Some people believe government workers are paid lower because government has the
power to hold down wages. The real explanation of generally lower wages in public sector
may be security of jobs & in some cases better pension rights.

The data is mixed though, as a recent study shows that in Pakistan public sector workers are
paid 49% higher than private ones as they have more education & skill levels.

The wages will depend on the demand in supply conditions in both sector. If there is more
demand in one sector it will pay higher. On the other hand if there is greater supply of labour
in a particular sector, the wages paid there will be lower.

Between skilled & unskilled workers

The gap between the wages of skilled & unskilled workers is increasing in many developed
& developing countries. The following are the reasons for this trend:

 Globalization of production
 Demand for skilled workers is rising & they are being offered higher pays
 Reduced trade union powers due to reduction in labour-intensive industries
 Advances in technology reducing demand for unskilled workers

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Between different Industries

Expanding industries will offer higher wages to attract the workers. Therefore workers with
the required skills will be in greater demand and may be low in supply and receive high wage
rates.

The demand for workers in old, declining industries is falling and there wage rates are falling
as a result. However in the existance of powerful trade unions this might not be a case in
some industries.

Between males & females

Average earnings of men usually exceed those of women all over the world e.g. women’s
hourly wages were 12.6 % lower than men’s in UK in 2006. The reasons for this differential
are:

 Occupational distribution: More women tend to join low paying professions like
nursing, teaching & retailing than men.
 Women may take career breaks to raise children and may build up less experience.
This results in lower career progress & wages
 More women work part-time compared to men which results in lower pay

However, the pay gap between men & women is declining over the past few years in most
developed countries. This is because attitudes about women working are changing fast &
more equal pay laws are being introduced.

Between Countries (International wage differentials)

It is difficult to make international wage comparisons as data is not easily available.

However, there are clear differences;

 Workers in developed countries earn much higher than those in less developed &
developing countries even after adjusting for cost of living which is higher in
developed countries
 This is because the demand for goods & services is much high in developed countries,
so the demand for workers is high. The workers are also more skilled hence short in
supply and paid highly
 Less developed countries have low demand for goods & thus labour. There is also
large supply of low skilled labour; the combination of low demand and high supply of
labour means the wages will be low.
 The trend is changing in rapidly developing countries like China & India where rising
demand for goods & services is raising demand for labour. The labour is gettting
trained & productive therefore getting better wages both in home and overseas.

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 Topic 5: Why does government intervene in labour market

Government employs many people in the public sector. Because of such huge demand, it has
a great influence on market wage rates for different occupations. Other than hiring many
workers, a government also intervenes in the labour market for the following reasons:

1. To protect the rights of employees & employers:

Government makes laws & regulations such as health & safety laws to give workers &
emplyers some rights , but also to make them responsible for some things.

In a free market, a powerful employer may not provide a safe working environment for
employees or a strong trade union may get high wages for workers with low levels of
productivity. Therefore government tries to ensure both parties follow certain rules & do not
exploit each other.

The table shows the legal (required by law) rights & responsibilities of employers &
employees:

Employers Employees
To comply with the terms & conditions of To comply with the terms & conditions of
employment contract employment contract e,g, hours of work,
holiday policy etc.
Not to discriminate on the bases of colour, To have protection from unfair dismissal &
religion, age etc. to go to court if dismissed unfairly
To provide a safe & healthy working To follow the safety proceedures while using
environment equipments & machinery
To comply with employees legal rights e.g. To receive minimum 4 weeks holiday a year
minimum daily rest perios, paid holidays e.g. & receive minimum level of sick & maternity
sickness & maternity etc. pay
To have the right to terminate (fire) To not be forced to work more than 48 hours
employees a week

2. To restrict powerful employers & trade unions:

Governments pass laws to control powerful employers from mistreating workers. They need
to provide certain rights to employees e.g. health & safty. The trade unions powers have been
reduced by taking away their right to strike without a full ballot of their members voting for
it. A trade union may also be liable to pay any losses or damges suffered by employer during
strike.

3. To raise the wages of lowest paid workers:

Many governments use minimum wage law to protect unskilled workers from being paid so
low. This law sets an hourly wage above market/equilibrium wage to help these poor
workers. However, minimum wage law has many drawbacks. Lets analyze its benefits &
problems in the figure 1 & table 2 given on the next page.

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Fig 1

As we can see the market wage was W & no of workers was Q. Since the implementation of
minimum wage at W1, only Q1 workers are hired by firms causing unemployment from Q to
Q1.

Arguments for minimum wage Arguments aginst minimum wage

It will stop unskilled worker’s exploitation It raises firms’ cost of production which will
be passed on to customers in form of high
prices. This would reduce demand & less
workers will be hired causing unemployment
(Fig 1)
It will reduce poverty Minimum wage raises firms’ cost of
production as skilled workers demand higher
wages to maintain their wage difference from
unskilled workers. This could lead to price
inflation in a country.
The raised pay will motivate them to work It distorts the market forces of demand &
hard & their productivity will rise supply & leads to inefficiency

4. To reduce unemployment:

Government may intervene in the labour market to reduce unemployment. They can do this
by:

 Giving subsidies & grants to firms to encourage them to locate to areas with high
unemployment e.g. Baluchistan in Pakistan
 They may help the workers by retraining them for those expanding occupations where
supply of labour is low and demand is high
5. To stop discrimination: (We have already studied discrimination & unfair
dismissal). Governments pass equal opportunity laws in hiring & promotion of
workers.

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