Labour markets, wages and trade unions

A surgeon earns many times what a care worker earns, though both keep people alive and the care worker may work longer hours in worse conditions. Nothing in the moral value of the work explains the gap. Wages are prices, set in markets, and they are determined by what employers are willing to pay for the output a worker produces and by how many people are able and willing to do the job. Understanding that is uncomfortable but it is the entire explanation.

The demand for labour comes from employers and is a derived demand: nobody wants workers for their own sake, only for what they produce. It therefore rises when demand for the final product rises, when labour becomes more productive, and when the price of substituting capital rises. The supply of labour comes from workers and depends on the wage on offer, the qualifications and training required, the length of training, working conditions, and how attractive alternative occupations are. The wage settles where the two meet.

Wage differences between occupations follow directly. Jobs requiring long or expensive training have restricted supply, because few people are qualified, so the wage must be high enough to compensate for the years of study and forgone earnings. Dangerous, unpleasant or unsocial work commands a compensating differential, though only where workers have alternatives. Highly productive workers, or those whose output sells for a high price, are worth more to an employer. And where a job needs few skills and almost anyone can do it, supply is large and the wage is low regardless of how socially valuable the work is.

An individual's choice of job depends on more than the wage. Wage factors include the basic pay, overtime, bonuses and commission. Non-wage factors include working hours and holidays, job security, the chance of promotion and training, working conditions and safety, the distance to travel, fringe benefits such as a pension or company car, and job satisfaction. A worker may choose a lower-paid job because it is secure, interesting or close to home, which is why wages alone do not explain where people work.

Wages also differ between groups of workers. Skilled workers usually earn more than unskilled workers, because fewer people can do the job and each produces more. Pay differs by sector: tertiary sector jobs in finance or technology often pay more than primary sector jobs in farming. Public sector workers, employed by the government, often have more job security and better pensions but may earn less than similar workers in the private sector, where pay is set by firms seeking profit. Discrimination, such as paying women less than men for work of equal value, is illegal in many countries but still contributes to gaps in pay. And government policy, through minimum wages and public sector pay decisions, changes wages directly.

A trade union exists because an individual worker bargaining alone against an employer has little power, while all the workers bargaining together have a great deal. Collective bargaining is the process by which a union negotiates on behalf of all members at once. Unions pursue higher pay, better and safer conditions, shorter hours, job security and training, and they represent individual members in disputes. Their strength depends on how large a share of the workforce they represent, how easily the employer could replace them, how profitable the employer is, and the legal framework governing industrial action.

A national minimum wage is a legal lower limit on the hourly wage. It raises the pay of the lowest-paid workers and reduces poverty among those in work, and it may encourage people to take jobs rather than stay on benefits. The risk is that, if it is set above the wage the market would pay, firms want to employ fewer workers while more people want to work at the higher wage, so some unemployment may result, especially among young and unskilled workers. How large that effect is depends on how high the minimum wage is set.

The division of labour raises output because workers become skilled and quick at their one task, no time is lost moving between jobs, and machinery can be designed for each task. It lowers the cost per unit and makes mass production possible. Its disadvantages are that repetitive work is boring, so motivation and quality can fall; workers with only one narrow skill find it harder to get another job if that task disappears; and if one stage of production stops, the whole line stops.

Labour mobility is how easily workers can change jobs. Occupational mobility is the ability to move between types of work, and it is limited when new skills or qualifications are needed. Geographical mobility is the ability to move to jobs in other places, and it is limited by differences in house prices and rents, family ties, the cost of moving and a lack of information about jobs elsewhere. Low mobility means vacancies and unemployment can exist side by side, which is structural unemployment. Training raises occupational mobility, and help with housing and moving costs raises geographical mobility.