Wage Differentials and the UK Labour Market (Worked Answer to Edexcel Q7 Paper 1 2019)

Here is an example answer to a 25 mark essay question for Edexcel A-Level Economics on why wage differences exist within the UK labour market.

[Note: Examiner Commentary is provided in square brackets / bold / italics]

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In the free market, wages are determined by the market forces of supply and demand. Demand is defined as the willingness and ability of an employer to pay worker(s) at each given wage. Supply is defined as the willingness and ability of employees to provide their labour at any given wage. Labour markets are also highly sensitive to the elasticities of both demand and supply.

In the football industry, different footballers get very different wages. For example, Harry Kane might earn £200,000 a week at Tottenham Hotspur FC whilst Harry Winks might earn just £20,000 (a tenth of Kane’s earnings) at the same football club. In terms of demand, the club may consider the value that Kane brings to them as much greater than Winks. Kane is the club captain (as well as England captain), he scores many goals per season, contributes heavily to the team’s play and is an influential player. It is often said that when Kane plays well, Tottenham play well. Kane, as a worker, therefore, contributes heavily to the club’s success and its earning potential. If they win matches, leagues and cups then the club makes more money. In addition, Kane is an important figure for branding and brings in a lot of revenue for the club through shirt sales and other merchandise. As a result, the club is willing to pay Harry Kane a lot more money than Harry Winks, who is relatively young, isn’t good enough to be a regular first-team player and does not sell a lot of replica shirts.

[The question asks candidates to apply theory to an industry of their choice – the use of football here is a good example.]

In terms of supply, footballers good enough to play in the Premier League for Tottenham are scarce. However, a player like Harry Kane is more scarce than Harry Winks. Winks is a young academy prospect who has yet to reach his potential. There are a great number of those sorts of footballers in the industry. If Winks gets injured, it will easy for Tottenham to replace him. Kane, on the other hand, is a world-class player who is coveted by all the top teams in the world. If Kane gets injured, there are relatively few players in the world who could stand in for him. Kane could command high wages at other firms (like Real Madrid or Bayern Munich) and so his individual supply curve is much more inelastic than Winks’.

[Many candidates can forget to consider wage elasticities – showing awareness of a broad and deep range of theory is always helpful.]

Wages for footballers though are a source of great controversy. Wages are often ‘locked’ by a contract for a set period of time and have no bearing on current performance (or productivity). Therefore, Harry Kane might have a miserable season and not score any goals, or he might get injured for the season; he still picks up his wage despite contributing very little. There are countless examples of players ‘sitting on the bench’ for years and still picking up huge wages (e.g. Alexis Sanchez). Harry Winks, on the other hand, may end up as the player of the season and become a valuable marketing tool for the club (much like Dele Alli a few seasons back). His wage will eventually rise to reflect this but there will be a time lag.

[Good, applied evaluation.]

Tottenham also has a women’s team. The female players earn nothing like the male players, despite arguably being more successful. The firm is willing and able to spend more money on the wages for a squad player in the men’s team than a world-class player for the women’s team. Some critics may consider this to be discrimination; that certain employees (women) are unfairly perceived to contribute less valuable output. In the traditional sense of industry this belief is clearly untrue but, in the case of the football industry, the simple difference here is just money. The men’s game is awash with money and TV rights for male leagues / matches regularly sell for billions of pounds. Every point in the Premier League and every win in the Champions League earns huge amounts of revenue for the club. Therefore, the club is willing to spend a lot of money to secure the players (workers) who are likely to help it achieve its aims. The women’s team might win more games but, due to a lack of money (less advertising, less sponsorship, less valuable merchandise sales) in the women’s game, that ‘part of the business’ does not bring in as much revenue. Therefore, the club is less willing to spend high amounts of money on female players. The demand curve for female players is further to the left than in the market for male players.

[Consideration of the debate between the market working well (D&S) and the impact of discrimination means that this paragraph can be awarded both KAA and evaluation marks.]

In the future, this may change. The promotion of the Women’s World Cup this year and the increasing focus of major broadcasters, like the BBC, on the women’s game may mean that more money from gate receipts, sponsorship deals, TV rights and merchandising may increase in the future. If it does, then the demand for good, marketable players will also increase and wages will then follow.

[Consideration of how a market might change over time is often a good way to gain evaluation marks]

In conclusion, wage differences exist in the football industry due to demand and supply. In particular, the demand for labour – the willingness to pay players – is very dependent on the amount of money that they themselves bring in, in terms of contributing to team success and also merchandising. This explains why Harry Kane earns more than Harry Winks and why male footballers, in general, earn more than female footballers. It also explains why, if the revenue for the women’s game increases in the future, female players may earn as much as the men in the future, if the revenue in the industry. That said, this is unlikely in the near future and it also doesn’t explain why the wages for all players is prone to ‘misallocation’ – where the best (most valuable) players don’t always earn the highest wages.

[Inclusion of a judgement is vital in 25 mark essays.]