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

This guide is written for the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2. It covers sections 3.3.4.5 (discrimination in the labour market) and 3.3.4.6 (minimum wage laws). Section 3.3 is extra International A2 content. The quantitative skills in section 3.5 can be assessed in any unit, so the calculations below use them. Every firm, region and figure is invented.

The revision notes and practice questions go with this guide. The curves behind labour demand and supply are on the demand for and supply of labour guide. Elasticity is on the elasticities of demand guide. See also the OxfordAQA Economics hub, the printable checklist and the free diagnostics.

What this unit covers

Section	What you must be able to do
3.3.4.5	State the conditions necessary for wage discrimination
3.3.4.5	Explain how gender, ethnic and other discrimination change pay, job numbers and the kinds of job held
3.3.4.5	Weigh the gains and losses of wage discrimination for workers, firms and the wider economy
3.3.4.6	Analyse the effects of minimum wage controls on labour markets
3.3.4.6	Evaluate the advantages and disadvantages of a national minimum wage

The specification asks for real-world examples of wage discrimination. Collect two from your own country, such as a pay-gap report or a court case. The examples here are invented so the arithmetic can be checked.

Wage discrimination (3.3.4.5)

Wage discrimination means paying workers different wages, or giving them different access to jobs, for reasons unrelated to productivity. The characteristic may be gender, ethnicity, age, disability or religion. A pay difference that reflects skills, experience or hours is not discrimination. It parallels price discrimination (see the monopoly power and price discrimination guide).

Conditions necessary

1. The employer has some wage-setting power. In a perfectly competitive labour market a firm paying one group less than equally productive workers elsewhere would lose them to rivals. Discrimination needs monopsony power, few rival employers or immobile workers.
2. The groups can be identified and kept apart. Gender, ethnicity and age are visible, so the firm can pay by group.
3. The groups differ in how elastic their labour supply is to the firm. The group with the less elastic supply (fewer alternative jobs) is paid less.
4. Workers have poor information or cannot move. If pay is secret or moving is costly, the lower-paid group cannot easily go elsewhere.

Prejudice (taste-based discrimination), beliefs about group averages (statistical discrimination) and weak enforcement of equal-pay law explain why it arises. The four conditions let it persist.

Worked example 1: a monopsonist pays two groups differently

A small workshop in Country A hires two groups, A and B, whose workers are equally productive. The value of an extra worker’s output (marginal revenue product, MRP) is 40 per hour for both groups. Hourly wage w and number of workers L on each supply curve:

• Group A: w = 24 + 0.1L, so marginal cost of labour MC = 24 + 0.2L
• Group B: w = 8 + 0.4L, so MC = 8 + 0.8L

The firm hires where MC = MRP for each group.

• Group A: 24 + 0.2L = 40, so L = 80, and w = 24 + 0.1 × 80 = 32
• Group B: 8 + 0.8L = 40, so L = 40, and w = 8 + 0.4 × 40 = 24

Supply elasticity at these points is 4.0 for group A and 1.5 for group B, and each wage equals MRP × e/(1 + e): 40 × 4/5 = 32 and 40 × 1.5/2.5 = 24. The less elastic group is paid a quarter less ((32 − 24)/32 = 25%), though both produce the same.

Totals: 120 workers, wage bill 32 × 80 + 24 × 40 = 3,520, output value 4,800, so the surplus (MRP minus wages) is 1,280.

Now a law requires one wage for both groups. Where both supply, combined supply is w = 20.8 + 0.08L, so MC = 20.8 + 0.16L. Setting this equal to 40 gives L = 120 and w = 30.4. Group A supplies 64 workers and group B 56. The wage bill is 3,648 and the surplus falls to 1,152, a fall of 10%.

	Discrimination	One wage
Group A wage and jobs	32, 80	30.4, 64
Group B wage and jobs	24, 40	30.4, 56
Firm’s surplus	1,280	1,152

Group B gains 6.4 an hour and 16 jobs, group A loses, and total employment is unchanged in this linear case. Pay is still below MRP of 40: that is the monopsony effect, not discrimination.

Effects on wages, levels and types of employment

Wages. A pay gap compares average pay. Five men in a firm earn 14, 16, 18, 20 and 32 an hour. Five women earn 12, 14, 16, 18 and 20.

• Mean: men 100/5 = 20, women 80/5 = 16. Mean gap = (20 − 16)/20 = 20%
• Median: men 18, women 16. Median gap = (18 − 16)/18 = 11.1%

The mean is pulled up by the 32, so compare both. The raw gap also overstates discrimination. Suppose analysis shows that job type, hours and experience explain 12 percentage points of the 20. The unexplained gap is 8 points, and this is the part that discrimination may explain.

Levels of employment. Discrimination at hiring leaves the affected group with higher unemployment and lower participation (discouraged workers). The economy loses output because willing, productive workers are not employed.

Types of employment. Occupational segregation, a glass ceiling to promotion and over-representation in part-time or insecure work are all patterns. The crowding model shows the result.

Worked example 2: crowding

Country B has 300 equally skilled workers: 100 in group P and 200 in group Q. Two occupations each have labour demand w = 30 − 0.1L. Without discrimination 150 work in each and the wage is 15 in both. Output value in one occupation is the area under the demand curve, 30L − 0.05L². Two occupations at L = 150 give 2 × (4,500 − 1,125) = 6,750.

Now group Q is excluded from occupation 1. Group P’s 100 workers take all the occupation 1 jobs, and group Q’s 200 are crowded into occupation 2.

• Occupation 1 wage: 30 − 0.1 × 100 = 20. Occupation 2 wage: 30 − 0.1 × 200 = 10.
• Gap = (20 − 10)/20 = 50%.
• Output value: (3,000 − 500) + (6,000 − 2,000) = 6,500, which is 250 (3.7%) less than 6,750.

Crowding lowers pay where the excluded group is concentrated, raises it where they are barred, and wastes output through misallocation.

Advantages and disadvantages

	Advantages	Disadvantages
Workers	The favoured group earns more and keeps more jobs (32 and 80 against 30.4 and 64 in example 1)	The discriminated group gets lower pay, fewer jobs and less incentive to train
Employers	Higher surplus (1,280 against 1,152), perhaps lower prices	Smaller pool of talent, legal and reputation risk, demotivated staff and higher turnover
Economy	Lower costs may lower prices; no gain in jobs in example 1	Misallocation of labour (3.7% of output in example 2), wasted human capital, wider inequality, lower tax receipts, social division

Evaluation. The advantages are narrow and private; the disadvantages fall on the economy. Judgement depends on:

• the size of the unexplained gap, not the raw one;
• employer market power, since competition for workers erodes discrimination in the long run;
• how strongly equal-pay law is enforced.

Minimum wage laws (3.3.4.6)

A minimum wage is a legal price floor under pay. It matters only if set above the market wage.

Worked example 3: a competitive market

Care assistants in Region C: demand L = 900 − 30w, supply L = 40w + 200. Equilibrium: 900 − 30w = 40w + 200, so w = 10 and L = 600. A minimum wage of 12 is imposed.

• Demand: 900 − 360 = 540. Supply: 480 + 200 = 680.
• Employment falls by 60 (10%) while the wage rises 20%. Unemployment is 680 − 540 = 140: 60 lost jobs plus 80 extra people drawn into the market.
• Elasticity of demand for labour = −10%/+20% = −0.5 (inelastic).
• Wage bill: 10 × 600 = 6,000 before, 12 × 540 = 6,480 after (+8%). The 540 still employed gain 2 each (1,080) and the 60 who lose jobs lose 10 each (600).

If demand were elastic, the bill would fall and the low paid as a group would lose. A floor at or below 10 has no effect.

Other effects. Firms may substitute capital for labour, cut hours or training, raise prices, or work informally. Higher pay may raise productivity and cut turnover, and low earners spend most of any extra income.

Worked example 4: a monopsony

Suppose one employer hires all the care assistants, and demand is its MRP: w = 30 − L/30. The supply curve is w = 0.025L − 5, so MC = 0.05L − 5.

• MC = MRP: 0.05L − 5 = 30 − L/30, so L = 420 and w = 0.025 × 420 − 5 = 5.5. MRP at 420 is 16, so workers are paid well below their MRP.
• Floor of 8: supply is 520 and demand 660, so employment is 520. The firm cannot cut the wage as it hires more, so MC equals 8 up to 520 workers.

Minimum wage	Competitive market: employment	Monopsony: employment
None	600 (wage 10)	420 (wage 5.5)
8	600 (not binding)	520
10	600	600
12	540	540
16	420	420

In a monopsony a modest floor raises both pay and employment. The gain peaks at the competitive wage. Above it, employment is set by demand and falls as in a competitive market. Here employment does not fall below 420 until the floor goes above 16.

Advantages and disadvantages of a national minimum wage

Advantages	Disadvantages
Raises pay at the bottom, reducing poverty and inequality	Job losses where demand for labour is elastic, mainly among the young and low-skilled
Makes work pay relative to benefits and may reduce welfare spending	Cost-push pressure on prices; firms may cut hours or training
May raise productivity and cut staff turnover	Not targeted: a low earner may live in a high-income household
Raises employment where there is monopsony power	One national rate fits poorly across regions with different pay and living costs
Sets a floor so firms cannot compete by cutting wages	Needs enforcement, and non-compliance and informal work can result

Judging the level

• Real terms. In Region C the minimum rises from 12 to 12.30 (+2.5%) while the price index goes from 100 to 104.5. Real minimum = 12.30/1.045 = 11.77, a real fall of 1.9%.
• Ratio to median. With median pay of 20, a minimum of 12 is 60% of the median. The higher the ratio, the more workers are affected and the greater the risk to jobs.

Evaluation. The effect on jobs depends on the level relative to the median, the elasticity of labour demand (labour’s share of costs, ease of substituting capital, elasticity of product demand), employer market power, the point in the cycle, and the time period.

Common errors

• Calling any pay difference discrimination without allowing for productivity.
• Showing unemployment from a floor drawn below equilibrium.
• Saying a minimum wage always creates unemployment, without considering monopsony.
• Using monopsony rules (MC = MRP) for a competitive market, or the reverse.
• Mixing real and nominal wages when judging the level.
• Listing effects with no chain of reasoning or judgement.

Next steps

Try the practice questions, then the revision notes.

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 the quantitative skills in section 3.5. First teaching September 2020, first AS exams May/June 2021, first A-level exams May/June 2022.