OxfordAQA International AS and A-level Economics: Discrimination and minimum wage (9640) – Revision Notes

These notes condense sections 3.3.4.5 (discrimination in the labour market) and 3.3.4.6 (minimum wage laws) of the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2. Section 3.3 is extra International A2 content. Quantitative skills from section 3.5 appear throughout. For full explanations read the study guide, then test yourself with the practice questions. The OxfordAQA Economics hub, the printable checklist and the free diagnostics are also useful. All figures are invented.

Key terms

Term	Meaning
Wage discrimination	Paying different wages, or giving different job access, for reasons unrelated to productivity
Pay gap	Difference between group average pay, as a percentage of the higher average
Unexplained gap	The part of a pay gap left after job type, hours and experience are allowed for
Occupational segregation	A group concentrated in certain occupations
Crowding	An excluded group squeezed into fewer occupations, which lowers pay there
Glass ceiling	Barrier to promotion for a group
Taste-based discrimination	Prejudice by employers, co-workers or customers
Statistical discrimination	Judging individuals by beliefs about their group’s average
Minimum wage	Legal floor under pay
Monopsony	A single (or dominant) buyer of labour

3.3.4.5 Discrimination in the labour market

Conditions necessary

• The employer has some power over wages (monopsony or immobile workers).
• Groups can be identified and separated.
• Groups differ in the elasticity of labour supply to the firm. The less elastic group is paid less.
• Workers have poor information or cannot move.

Prejudice and weak enforcement explain why discrimination arises. The conditions explain why it lasts.

Method: a discriminating firm

1. Write MC of labour for each group from its supply curve (if w = a + bL, then MC = a + 2bL).
2. Set MC = MRP for each group.
3. Read each wage from that group’s supply curve.
4. Check: wage = MRP × e/(1 + e), where e is the supply elasticity.
5. Compare with a single-wage outcome.

Reminder (study guide example 1): MRP 40; group A supply w = 24 + 0.1L gives L = 80 and w = 32; group B supply w = 8 + 0.4L gives L = 40 and w = 24. Surplus 1,280. A single wage gives w = 30.4, jobs 64 and 56, surplus 1,152. Discrimination raises profit; equal pay lifts the discriminated group’s pay and jobs.

Pay gaps

• Gap (%) = (higher average − lower average)/higher average × 100.
• Compare mean and median. A few high earners lift the mean.
• Explained gap comes from job, hours and experience. Only the unexplained gap points to discrimination.

Reminder: men 14, 16, 18, 20, 32 and women 12, 14, 16, 18, 20. Mean gap = (20 − 16)/20 = 20%. Median gap = (18 − 16)/18 = 11.1%.

Effects on wages, levels and types of employment

Effect	Chain of reasoning
Wages	Less elastic or excluded group paid less, so lower income, wider inequality
Levels	Biased hiring, so higher unemployment and lower participation for the group, and lost output
Types	Segregation, glass ceiling and part-time work, so skills used below potential

Crowding reminder (study guide example 2): two occupations with demand w = 30 − 0.1L and 300 workers. Equal access gives 150 each, wage 15 and output value 6,750. With 100 in occupation 1 and 200 crowded into occupation 2, wages are 20 and 10 (gap 50%) and output value is 6,500, a loss of 250 (3.7%).

Assessing wage discrimination

Group	Gains	Losses
Workers	Favoured group: higher pay and more jobs	Discriminated group: lower pay, fewer jobs, less incentive to train
Employers	Higher profit, perhaps lower prices	Small talent pool, legal and reputation risk, demotivation
Economy	Possibly lower prices	Misallocated labour, wasted skills, inequality, less tax revenue, social division

Judgement: the benefits are private and narrow, the costs are wide. Say how far the answer depends on the unexplained gap, employer power and enforcement of equal-pay law.

3.3.4.6 Minimum wage laws

Method: competitive market

1. Find equilibrium: set demand equal to supply.
2. Check whether the floor is above equilibrium. If not, nothing changes.
3. Read demand and supply at the floor. The firm takes the smaller of the two quantities.
4. Unemployment = supply − demand at the floor.
5. Elasticity of demand for labour = %change in employment ÷ %change in wage.
6. Wage bill = wage × employment before and after.

Reminder (study guide example 3): D = 900 − 30w, S = 40w + 200. Equilibrium 10 and 600. Floor of 12: demand 540, supply 680, unemployment 140. Elasticity −0.5, so the wage bill rises 8% (6,000 to 6,480).

Method: monopsony

1. Treat demand as MRP and find MC from the supply curve.
2. MC = MRP gives the monopsony employment. Read the wage from supply.
3. A floor sets a flat MC up to the supply quantity. Employment is whichever is smaller at that wage: the number willing to work or the number the firm wants.
4. The gain is largest at the competitive wage. Above it, demand sets employment.

Reminder (example 4): the same curves give employment 420 at wage 5.5. A floor of 8 gives 520, a floor of 10 gives 600, and a floor of 12 gives 540.

Other effects of a floor

• Firms may substitute capital, cut hours and training, raise prices, or move to informal work.
• Productivity, motivation and retention may rise.
• Low earners spend much of any extra income, which supports demand.
• Work pays relative to benefits, which may raise participation.

Advantages and disadvantages of a national minimum wage

Advantages	Disadvantages
Lifts the lowest pay and reduces poverty	Job losses if demand for labour is elastic
Less need for in-work benefits	Cost-push pressure on prices
Productivity and retention gains	Not targeted at poor households
Employment rises under monopsony	One rate fits poorly across regions
Stops firms undercutting on wages	Enforcement and informal work

Judging the level

• Real minimum = nominal ÷ (price index/100).
• Ratio to median = minimum ÷ median pay. A higher ratio affects more workers and puts more jobs at risk.

Evaluation checklist: level against the median, elasticity of labour demand, employer power, economic cycle, time period and enforcement.

Must-know distinctions

• Discrimination versus a productivity-based pay difference.
• Raw pay gap versus unexplained gap.
• Mean gap versus median gap.
• Competitive floor (jobs fall) versus monopsony floor (jobs may rise).
• Nominal versus real minimum wage.
• Wage bill (rises if demand is inelastic) versus employment (falls whenever the floor binds in a competitive market).

Quick self-test

1. The wage rises from 8 to 9 and employment falls from 500 to 475. Calculate the elasticity of demand for labour.
2. What is the wage bill change in question 1?
3. A nominal wage of 15 is paid when the price index is 125 (base 100). Find the real wage.
4. Mean male pay is 25 and mean female pay 21. Calculate the pay gap.
5. Five wages are 9, 11, 12, 14 and 29. Find the mean and the median.
6. A firm with MRP of 30 faces labour supply elasticity of 2 for one group and 4 for another. Find each wage.
7. Demand is L = 700 − 30w and supply is L = 20w + 200. A floor of 12 is set. Find unemployment, the elasticity and the percentage change in the wage bill.
8. The nominal minimum rises from 10 to 10.50 while prices rise 3%. Find the real minimum and its percentage change.
9. A pay gap is 18 points, of which 11 points are explained by job type and hours. What is the unexplained gap?
10. A minimum wage is 9 and median pay is 15. Find the ratio.
11. Why can a modest minimum wage raise employment under monopsony?

Answers

1. Employment change −25/500 = −5%, wage change +1/8 = +12.5%, so −5 ÷ 12.5 = −0.4.
2. Before 8 × 500 = 4,000; after 9 × 475 = 4,275; change +6.9%.
3. 15 ÷ 1.25 = 12.
4. (25 − 21)/25 = 16%.
5. Mean 75/5 = 15; median 12. The 29 pulls the mean up.
6. 30 × 2/3 = 20; 30 × 4/5 = 24.
7. Equilibrium is 10 with 400. At 12, demand is 340 and supply 440, so unemployment is 100. Employment change −15%, wage change +20%, elasticity −0.75. Wage bill 12 × 340 = 4,080 against 4,000, up 2%.
8. 10.50 ÷ 1.03 = 10.19; the change is +1.9%.
9. 18 − 11 = 7 points.
10. 9/15 = 60%.
11. The monopsonist pays the supply wage for every worker, so MC lies above the wage. A floor makes MC equal to the floor up to the supply quantity. If the floor is below MRP, hiring more is profitable, so employment rises until supply or demand binds.

Where marks are usually lost

• Defining discrimination as any pay difference, with no mention of productivity.
• Quoting a raw pay gap as proof of discrimination.
• Naming conditions without linking them to the market power or elasticity difference.
• Drawing or describing a floor below equilibrium as if it created unemployment.
• Giving only job losses for a minimum wage and ignoring monopsony and the wage bill.
• Calculating a percentage change against the new value instead of the original.
• Comparing nominal values across years without deflating.
• Listing advantages and disadvantages without a reasoned judgement on which group matters most.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, sections 3.3.4.5 and 3.3.4.6, with section 3.5. First teaching September 2020, first AS exams May/June 2021, first A-level exams May/June 2022.