Reasons for differences in wages: government policy

Microeconomic Decision‑Makers – Workers

1️⃣ What are wages?

Wages are the money workers receive in return for their labour. Think of it as a “price tag” on the effort you put into a job. The amount you earn can be written as $w$.

2️⃣ Why do wages differ? Government policy

Governments use policies to influence how much workers earn. Below are the main tools:

• 📈 Minimum Wage – sets a floor below which wages cannot fall.
• 📉 Taxation – progressive taxes can reduce take‑home pay, while tax credits can increase net wages.
• 💰 Subsidies & Grants – direct payments to workers or employers can raise wages.
• 🏦 Regulation of Labour Markets – e.g., collective bargaining rights, labour‑rights enforcement.

📊 Example: Minimum Wage Impact

⚖️ Analogy: The Wage Scale

Imagine a balance scale. The left side is government policy and the right side is workers’ wages. If the government adds a heavier weight (e.g., a higher minimum wage), the scale tips and wages rise. If the government removes a weight (e.g., cuts subsidies), the scale tips the other way and wages fall.

💡 Exam Tip Box

📚 Further Reading

To deepen your understanding, check out the following resources (no links, just titles):

• “Labour Market Regulation” – Cambridge University Press
• “The Impact of Minimum Wage on Employment” – OECD Report
• “Taxation and Income Inequality” – World Bank Publication

📝 Quick Quiz

Answer the following in one sentence:

1. How does a higher minimum wage affect low‑skill workers?
2. What is one way tax policy can increase workers’ net wages?