A wage is payment, normally made under contract for the services of labour. Many great differences occur in wage rates. One important reason is that labour is not a homogeneous factor. Each worker is a unique factor of production possessing a unique set of employment characteristics. Education, training and work experience are also important characteristics in labour. The ability of the workforce to perform tasks including how hard they are prepared to work, their strength and their manual or mental dexterity will also vary.
Because of the variation in employment characteristics of labour, the wages that they are paid tend to show great differences. The variations in conditions of supply and demand in the labour market give rise to different prices, hence the existence of wage differentials. According to market theory, wage rates would be the same if all labour was homogeneous and all jobs possessed the same characteristics. However, in the real world, the tasks involved in jobs and the working hours in different occupations are not identical. The marginal revenue product curve for each type of job is different. The Super Bowl football players have been ‘pocketing nearly 70% of most revenues’ because of a number of reasons.
The main hypothesis behind this is the theory of economic rent. The term ‘economic rent’ means: ‘payment to a factor of production over and above its transfer earnings’. The theory can be applied to any factor of production. With the situation regarding the well-paid footballers-, they are considered ‘celebrities’ and in the entertainment and sporting industries, fans and followers come from along distance to see a certain person. The supply of the ‘certain person’ is inelastic. There is fixed supply.
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Based on the inelasticity of supply, the benefits go to the factor of production-labour in this case. The majority of profits are directed to the footballers as they are aware of the high demand they are in, and have tremendous bargaining power. P Supply inelastic Price he earns as a footballer The inelastic supply indicates there there are no substitutes hence the high price paid for the limited supply Economic Rent The price a footballer would receive at the next best hob available 0 D Quantity of labour Some groups of labour in elastic supply are very capable if recognised. This extenuates that the market that you once appealed to regionally and nationally, has now become an international market. The strong bargaining power is awarded when the product / service one supplies is in inelastic supply.” The right to free agency lets star players’ call the shots in, a hot market for talent.” The star players are able to ‘call the shots’ because of the following circumstances: . It is difficult to substitute other factors for the factor in question…
Their demand is inelastic… The proportion of total costs accounted for by the factor is small. Elasticity of supply is a measure of responsiveness of changes in quantity supplied to price- i. e.
, the wage rate. In the case of the footballers, only a few workers are likely to have the skills and appeal that they contain, and because other wages are fairly low, supply is likely to be elastic-that is, more people will want to work in that industry. If the supply for celebrities was elastic, there would be many alternatives and so wages would be more ‘down to earth’. The larger the potential supply of labour to an occupation, the lower the level of earning is likely to be. However, if the wage earned as a footballer etc. , can be made at an alternative job, and one is paid more to stay at the current source of employment-discriminatory marketing comes into practice.
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This is possible if it is a perfect market and one is aware of what price they have the ability to achieve. Wage rates Short run supply curve Long run supply curve 0 Quantity of labour The demand for such footballers who are recognised and rebound for their achievements, stand very high. With a short supply and high demand for such stars, wages are increased. The marginal revenue product (or value) of the footballers is higher than a machinist or a cleaner. This is because with cleaners and machinists supply is very high and exceeds demand- this may be because such jobs do not require special talents, qualifications or experience. However, this is not always the case, as the statement assumes that markets are relatively free.
Nevertheless, most are not due to trade unions pushing wages up above free market prices, or employees may boast great bargaining power. The highest economic rent is earned by people (footballers) with low transfer earnings in comparison to their actual payment- the earnings of a factor in its next best use. For example, the footballer may get $250, 000 a year. His next best job might be as a teacher getting $200, 000 a year. Therefore, with transfer earnings of $50, 000 he is earning an economic rent of $200, 000. Price SRENTTRANSFER EARNINGS o Quantity of labour Referring to the above diagram, the shaded area above the supply curve is rent, which is the part of the footballers income that is in reward an excess of the price at which his labour would be supplied.
The transfer earnings lie beneath the curve. Recognised workers such as the Super Bowl footballers are at a great advantage and have the power to control their wages for reasons stated above. This does not mean however that other footballers in minor games are not as good or talented-it just shows what can become if one is fortunate enough to get recognition and be lifted into the ‘showbiz’ world of overpaid employees. Other workers would not be able to have such control, as their supply is elastic- there are many more factors available supplying the same service. If one demands higher wages when there is an elastic supply, he will not receive them, as there are ‘plenty more where he came from’ who will settle for the price the employer is prepared to pay.
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This is because there is no other best alternative that he can transfer to and so in this situation, because the employee has no alternative use for his services, he is willing to take any income for it. Overall, the gap between the high paid and low paid workers is growing rapidly. Economic theory predicts that the more they raise the relative wages of low paid workers, the higher the price paid in terms of unemployment. Wage councils should do more to even out the vast difference in wages, as in recent years, salaries of such stars (e. g.
footballers) has been ridiculously high and unfair to other workers whose quality of work is more beneficial to the masses (i. e. doctors / nurses ).
