Above-Equilibrium Wages
Most analyses of wage differences are based on what is called the equilibrium model of the labour market. This is where wages are assumed to adjust where labour supply meets labour demand. But, this assumption does not always apply.
For some workers, wages are set above the level that brings supply and demand into equilibrium.
What are the reasons for these above-equilibrium wages?
1. The minimum wage
Employers are obliged to pay workers over the age of 18
who have worked for them for more than 6 months a minimum wage
of €8.65 per hour. If this law was not in place employers could pay
very low wages and the standard of living could fall dramatically.
2. Trade unions
Unions negotiate with the government and employers on behalf of
their members for higher wages. They may threaten industrial action
such as a 'sit-in' or 'work to rule' if wages are not increased or working
conditions are not improved.
3. Efficiency wages
According to this theory, a firm may find that paying higher wages
leads to low labour turnover, which may increase profits for the firm
in the long run as it is very costly to recruit and train new workers.
Those who are already working in the firm may also work harder and
increase their productivity.
For some workers, wages are set above the level that brings supply and demand into equilibrium.
What are the reasons for these above-equilibrium wages?
1. The minimum wage
Employers are obliged to pay workers over the age of 18
who have worked for them for more than 6 months a minimum wage
of €8.65 per hour. If this law was not in place employers could pay
very low wages and the standard of living could fall dramatically.
2. Trade unions
Unions negotiate with the government and employers on behalf of
their members for higher wages. They may threaten industrial action
such as a 'sit-in' or 'work to rule' if wages are not increased or working
conditions are not improved.
3. Efficiency wages
According to this theory, a firm may find that paying higher wages
leads to low labour turnover, which may increase profits for the firm
in the long run as it is very costly to recruit and train new workers.
Those who are already working in the firm may also work harder and
increase their productivity.