Microeconomics

Group assignment 01
Faculty of Management and Computing
Diploma in Business Semester 2
5/21/2008

Group members: Ahmed Shafiu, Fathmath Ali, Fathmath Suha, Fathmath Sanniyaa, Mohamed
Nasir, Zihuna Faiz
Task 1: Wage Differentials
Provide an economic discussion on the topics why wage differs among
a) Gender
All cultures have a division of labor based on gender, but the particular tasks assigned to
men and women and the wages they receive varies due to certain factors. Some argue that
men and women select jobs based on their lifestyle choices and dominant social values.
Because of the traditional expectation that men act as a bread winner and women perform
domestic roles, this may result in men select jobs on the basis of income maximization
while women select jobs that gives them the flexibility they need to cope with potential
conflicts between jobs and family responsibilities.

Women often have discontinuous patterns of labor market participation, as they take time
out and to bear and raise children, take care of elderly parents or move with their
families. Working mothers are nearly twice as likely to take time off to care for their
children compared to fathers in dual-earner couples. Thus in contrast to men who have a
greater degree of attachment to the labour force, women anticipate interruptions in their
carriers they tend to chose low status jobs where they get a minimum wage.

Unlike the classical view that wages are determined solely by productivity, human capital
theory that workers ensure increased wage as a result of investment in the human capital;
better educated, better trained workers are more productive and improve the wage they
receive through it. The fact that women occupy less advantageous position in the labor
market and with lower wage levels is therefore due to lower investment in the skills
formation.

Discrimination between the genders plays an important role in explaining the wage gap
for the two genders. Often employers make decisions on the basis of criteria which,
appears to be gender neutral though it has an adverse impact on women. Moreover
barriers based on the attitudinal or organizational biases prevent qualified women from

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advancing upwards in to the management-level positions, leaving them in the low paid
jobs.

Women are also more likely to work part-time, while part time work usually increases
flexibility, the part-time worker loses out in the promotion and pay increases. As part-
time workers works fewer hours it’s likely that they get paid lower compared to a full
time worker, and they tend to receive a lower hourly wage rate compared to the full time
worker doing the same job.

In the year 2000 in UK 25% of the female workers were in clerical and secretarial work.
(Peter Cramp (p.24)). This is an indicator that women gravitate to sectors of the economy
that compensate workers at lower levels. Even today fewer women choose to enter
technical fields such as computer science, medicine, law and engineering. A research
report published in June 2007 by the Institute for Social Research examines the effects of
the Norwegian bargaining model on the gender pay gap. The study shows that only 15%
of the observed wage difference between both sexes may be attributed to the fact that
men and women tend to work in different sectors.

Jobs such as nursing, which carry a great deal of satisfaction, will tend to receive a
negative compensating differential. A concentration of female labor in such professions is
therefore a significant explanation of low pay. The part-time and service sector
occupations have low union density as it’s difficult to organize trade union activity due to
the diffuse nature of work.

To conclude we can say that women’s work-life patterns and their occupational
differences and the discrimination in organizational environment are main reasons for
them to get lower wages.

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b) Age
Unlike race and gender discrimination, age discrimination in wages is often enshrined in
law. Age discrimination is not only faced by older people and senior citizens but also this
inequity has been expanded to discriminate people that are too young.

In many countries young people at the age of 13 to 15 works in part time jobs, employers
tend to pay them any rate they like no matter how low. This is because these jobs require
little inputs and looking into the economic side of this as there are more younger people
in the labour market compared to those in the older group, they receive a low rate of
wage.
At the age of 16 to 17 people have little or no experience, this result in relatively low
productivity. Because young workers are generally less skilled, employers can often
justify paying them less than the older workers. And also another reason for being paid
low is that a younger person generally has less of a salary history and may be a cheaper
employee than someone that has been in the workforce for 20 years.

Younger workers have a higher propensity to quit than older workers. This may be
because youths are usually into having fun and living in the moment. They may be
employed in jobs which are low paid and routinely jobs which are more flexible to
change.

On the other hand, older people tend to have more experience in their field as they had
been working for several years. With the long experience they will have acquired a lot of
knowledge and skills. So compared to a young person who have just started his working
life, even though they work in the same field the older will be paid higher than the youth.
High-skilled workers earn more on average than low-skilled workers because the
marginal revenue product of a high-skilled worker is greater than low-skilled worker and
the cost of acquiring skill of a high-skilled worker is greater than low-skilled worker.

To conclude we can say that older workers would receive higher rates of pay because of
higher levels of human capital due to education, training and experiences. In contrast to

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 this, older workers in their 40s, 50s and 60s may be less physically strong and agile or
less adaptable so they get a lower pay than a young worker fitting to the job
requirements.

c) Ethnicity

Ethnic minority workers have a tendency to earn less than that of the white workers. The
difference between overall hourly wages among white and ethnic minority groups comes
approximately from variation in male’s earnings. There are several reasons which cause
minority groups to earn less than the white workers.

Ethnic minorities often live in certain areas of the country and in parts of cities. Located
in the poorer areas of the country these workers are not well educated, most of the time it
depends upon the qualification of the workers, this can lead to a feeling of alienation and
hopelessness discouraging young ethnic minorities from being able to entering the labour
force. This reduces productivity and employability, especially in the service sector and in
the highly paid job. Since the minority workers are less qualified than the whites this
result in lower revenue productivity and have more opportunity to be in manual jobs than
white workers who have more probability of being in managerial posts.

The workers form the minority groups are more likely to work in distributions which
includes shops and moreover in hotels, catering, and even in the health services than the
white workers. Therefore the choice of which sector to work in may describe some
differences in wages.

In a service based economy English language speaking, is a high priority. Those workers
who have English as a second language are at a disadvantage. Lack of language skill is
another cause of wage differential in ethnicity as it reduces productivity and
employability, especially in the service sector and higher paid occupations.

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 Despite with equal pay legislations, discrimination against workers from ethnic minority
groups takes place. When employing for the job, when giving promotions or selecting
employees for different training programs, there can be discriminations among the
minority groups.

Task 2: The National Minimum Wage

Asses the cases for and against minimum wage

Arguments in favor of minimum wage

In a monopsony labor market, a minimum wage can increase both wage rate and employment.
The labor turnover of companies can be reduced due to a minimum wage, as those who receive
higher wages are less likely to leave to seek jobs elsewhere reducing the cost for the companies
to recruit employees.

The diagram show that the total earning from E1 to E2 rises, though there is a loss of earning for
those losing their jobs there is a rise in the earnings for who remains in the job.(from £2.50 to£
3.60 ).

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The main argument in favor of national minimum wage is one of horizontal equity. A minimum
wage sets a floor below which the market forces cannot drive wages leading to a fairer
distribution of income across the population Therefore; minimum rewards are seen as a fair
reward for the labor. And it also reduces the exploitation of low paid workers and improving
incentives for people to actively look for paid work in the labor market. This cause an expansion
in the size, of the economically active labor force.

Minimum wage encourages firms to invest in both human and physical capital as they will have
an incentive to raise the productivity of employees if they must pay the minimum wage. The
increased investment in the human capital of the workforce can also lead to higher economic
growth in the long term for the country.

Similarly, it can be argued that minimum wages encourage rich countries like USA to move
away from production of low value added products to higher value added products. In the long
term, if countries are to grow they will produce ever more refined products. The introduction of a
minimum wage encourages this strength because it encourages investment.

Minimum wages in developed countries can help third world countries become more
competitive. As some low value, unskilled job will disappear in rich countries which introduce a
minimum wage. Then the undeveloped countries will be able to fill the gap left by exporting
those products in the rich country. The foreign exchange earn by third world country will be
spent on goods from other countries, including exports from rich countries. They are likely to be
higher value goods, those goods which rich countries have a competitive advantage in producing.

Arguments against of minimum wage

The main argument against minimum wage is that it creates unemployment. The minimum wage
causes the cost of employing workers to increase this will lead to a decrease in demand for labor.
This may a result lead to an excess in supply of labor, if both the labor supply and demand are
more elastic than more jobs are lost. In some situations the extent to which unemployment is

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created depends in parts whether low paid jobs are in the national traded goods and services
sector and the rates of the pay of the country’s international competitors.

The minimum wage will disproportionally affect the young workers who lack skills and
experiences. Another argument against minimum wage legislation is that it imposes compliance
costs on individual firms. They have to ensure that they are meeting the requirements of the law
and are able to prove that they are doing so. These increase in cost may be passed on to the
consumers and leading to a decrease in the international competitiveness of the country.

Many argue that it did little to reduce the poverty, as minimum wage is not properly targeted to
that particular group. As most of the workers are second earners in their families and may
therefore be supplement the already more than adequate income of the household.
As many of the labor market decisions are not based on levels of pay but pay differentials,
workers who are not in the minimum wage may decide to seek higher wages to restore the level
of their pay relative to those that are. This is likely inflationary and will reduce the real value of
the minimum wage.

When setting minimum wage government often fails to consider the difference in the cost of
living in different regions and disparity in labor market conditions. Moreover it may have a
negative impact on the public sector finances as they employ uneven number of employees.

Task 3: Income Equality

Provide an economic discussion on the causes of income inequality

There are many reasons for economic inequality within societies. Some of the factors that
impact economic inequality include the labor market, innate ability, education, gender, and
preference for earning income or enjoying leisure, willingness to take risks, wealth condensation,
and development patterns.

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A major cause of economic inequality within market economies is the determination of income
by the market, provided that this market is a free market ruled only by the law of supply and
demand. In this view inequality is caused by the differences in the supply and demand for
different types of work. A job where there are many willing workers (high supply) but only a
small number of positions (low demand) will result in a low income for that job. A job where
there are few willing workers (low supply) but a large demand for the skills these workers have
will results in high wages for that job. For example a lawyer gets a higher pay compared to a
waiter as the supply is inelastic due to the qualifications required and the restaurant worker gets a
lower pay because the supply is elastic; there are many people who are suitable for working and
qualifications are not really required.

Lack of information can be another factor in inequalities, if the employer is unaware of the salary
provided by certain area in same job. Still he will wait in his place with less income than the
other, who is earning more income in same occupation or it might be because he is unable to
leave the city or area to get high income due to personal reason.

There are inequalities in the distribution of income in gender differentiation. This means that
women’s are paid less in income than the men. There are many reasons for this for an example
women’s are unable to work in long hours as men does.

One important factor in the creation of inequality is variation in individuals' access to education.
Education especially in an area where there is a high demand for workers creates high incomes
for those with education. As a result those who are unable to afford an education or choose not to
pursue optional education, generally receive much lower wages. In addition to that workers with
innate abilities are in high demand relative to their supply and hence play a large role in
increasing the income of those who have them.

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Task 4 Tackling Income Equality
Asses the policies a government can use to reduce income inequality in a country.
Government attempt to correct labor market failure in a variety of ways; including minimum
wage legislation and equal pay legislation. These may lead to increase in wage for some workers
but may also lead to unemployment for others.

By legally enforcing legislation on equal pay government can allow work of comparable worth
receive equal reward. For an example the part-time workers can be qualified for the same job
protection and redundancy payments as full time workers once they work for a given period of
time. Equal pay legislation is designed to raise wages of workers who are discriminated against.
In UK this has been successfully applied and achieved particularly to women and those from
ethnic minorities. However raising wages will decrease the demand for and increase supply of
labor.

Further more government can extend full time rights for part time workers; this may benefit
women more than men. This is because women are more likely to work in part time decreasing
inequality in pay of gender.

Legislation against racial and sexual discrimination can prevent employers discriminating on
grounds of non economic factor. As a result of implementing such laws it can lead to a more
distributed income. Though legislation like this already exists it difficult implement. For
example, how do you prove not getting a job is due to discrimination

The government can allow job seekers allowance, as main cause of poverty is unemployment
increasing job seekers allowance would increase equality of distribution. However, there is a risk
that higher benefits may increase voluntary unemployment. This is because income from benefits
may become as much as the income from a job therefore, there is disincentive to take a job
increasing unemployment and so does not help to reduce inequality.

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Higher pensions would help reduce inequality amongst pensioners; however, it would be
very expensive to increase the pension.

More over the government can give training and education for the unskilled and unemployed
so that they can get a better chance to get a good job. However it is expensive and takes a
long time and the government training may not be effective.

A progressive tax takes a higher % of income from the rich. The progressive nature of direct
taxation acts as a form of redistribution from those on higher earnings to those on lower
incomes, redistributed in the form of the various benefits offered by the state. However, this
would cause problems because higher taxes may discourage people from working harder
By giving top up benefits or income support to those on low wages government can help
reduce income inequality. However it will be quite expensive for the government and may
encourage firms to pay low wages because the government will top up the wages.

Other policies could include the Minimum wage, this increase wages of those on low pay,
increase labor productivity and incentives to get a job. However, it may cause unemployment
if the labor market is competitive. Also, it will not help the poorest on unemployment
benefits.

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