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Edexcel unit 5 June 2004

Asked by Amma | Apr 27, 2006 | A Level > Economics > Revision
Amma asks:

Could someone please help me with these Economics questions i am having real difficulties with these
a) Discuss two factors which might explain differences between the German labour force participation rate and those of the other countries shown.

b) Using marginal productivity theory, examine the view that wages are determined not by productivity alone but by the interaction of demand and supply for workers of various skills

etutor answers:

I have somehow managed to locate the Unit 5A Edexcel June 2004 paper! You didn't send me the data that appears on the paper!

Question A

The participation rate measures those in the workforce (either in work or actively seeking work) as a proportion of the population of working age. At 72%, the German PR is higher than the eurozone average (68.6%); it is high relative to Spain and France, but low relative to the UK or the Netherlands. Some of the factors appear to be:

- The numbers in higher education
- Relative retirement ages
- The level of benefits (income support) other than unemployment benefit
- An increased tax burden for part-time workers (line 4) means that people drop out of the labour market
- (On a theoretical basis) the income and substitution effects on the supply of labour

On an evaluation basis, you could comment critically on relative participation rates within the EU. Or you could comment critically on the factors above - for example, despite high benefits compared with Spain or France, these do not seem to affect participation unduly. Indeed, you could even argue that Germans might be more willing to work DESPITE the high benefit levels. Marks can also (always) be gained by prioritising all of the factors you identify.

Question B

The factors you identify can be broadly divided into demand side and supply side.

On the demand side, you could focus on explaining the MRP theory - i.e. show that the MRP curve is the demand curve for labour, and that it is derived by multiplying marginal physical product by marginal revenue. Then explain why the equilibrium wage occurs where MRP equals marginal factor cost (the increase in the firm's wage bill as a result of employing one more unit of labour). Hence productivity (reflected in MPP) is clearly one of the determinants of wages. You could also then look at the price elasticity of demand - both for the final product and for labour (reflecting the ease with which it can or cannot be substituted).

On the supply side, the key factors worth discussing are skills and training, education, the nature of the job (include references to vocational employment) and elasticity of supply of the labour in question. Hence use all this to explain why some types of labour are more abundant than others, and also why the elasticity of supply is greater in some cases than others (doctors vs. roadsweepers, etc).

Throw in a diagram equating MRP with MFC. Stress that the MRP theory is designed to apply in an 'efficient, competitive labour market' (line 19) rather than in imperfect market conditions.

Here the evaluation is then critical (8 of the total of 20 marks). Points you could make include:

- Marginal productivity theory of limited use - often difficult to measure MPP (especially in the services sector) - moreover, elasticities change over time
- Market imperfections complicate the picture - in particular, monopoly power of unions or monopsony power of some employers
- In practice, the skills level of each worker employed is unlikely to be the same, and this is likely to be reflected in different wages being paid
- Efficiency wage argument - i.e. it often pays employers to pay their workers higher than their MRP since this increases productivity, motivation and loyalty; they are less likely to desert to other firms or opt for unemployment instead - this explains why, even where there is unemployment in the economy, wages may not be bid downwards
- Non-economic factors such as discrimination (sexual, racial, age, etc)
- Government intervention, such as statutory minimum wage or New Deal

Again, marks can be awarded for prioritising such factors.

I hope this helps.

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