Neo Classical Theory Of Distribution

Neo-classical theory of distribution

To start off this topic we will look at the neo-classical explanation.

The neo-classical economists believe that the distribution of wages relates to demand and supply, that the occupations which need higher skills, offer such high wages and benefits to attract the shortage skills needed. So less people have these skills more money is offered to gain the attention of the low percent of people who have them.

So for example if there was high demand for people with certain skills and low supply of them then the wage offered would be high. But if both demand and supply where high then it would lower the wages offered as there would be competition between the people to gain the job.

So CEO's are highly skilled and the demand for them is high especially if they have experience, with very little people fitting this category then companies have to offer high wages (plus incentives) to gain (buy) these skills to use in their company SHOW YAHOO GUY AGAIN If they want them they need to compensate them. Another reason for companies to offer high wages is that the more important the decision and the more people it affects relates to how much you should be paid to CEO's are making hundreds of decisions a week which could affect hundreds and even thousands of employees within the company in a good or bad way so there jobs are always at risk if a bad decision or no action is made, so there is a high risk involved which is compensated by pay.

Economic Rent and transferred earnings

Transfer earnings are defined as the minimum reward required keeping labour in its present occupation. This is shown by the area under the labour supply curve.

In diagram 2.1 there is a perfectly elastic supply curve to a particular labour market. The ruling equilibrium wage is at Ј200 per week. The wage that workers receive is equal to the minimum they are prepared to supply their labour at. Thus the entire factor earnings (shaded in yellow) are transfer earnings.

Economic Rent is defined as the payment to labour in excess