GMAT Labor and Wages

By - Oct 26, 09:00 AM Comments [0]

This is the second post in the series of articles on real-life facts you need to know for GMAT Critical Reasoning.

Here’s the full list (we’ll update it with links as we go!):

  • Economics: Supply and Demand
  • Economics: Labor and Wages
  • Economics: Inflation, unemployment, and interest rates
  • Law: “beyond any reasonable doubt”
  • Statistics: Statistical significance

Labor and Wages

In some ways, this is an extension of the Law of Supply and Demand, but there are enough new ideas that I will count it as a separate fact.

Everyone who works for a living earns some kind of salary, some kind of wage.  By “labor”, I will mean the collective pool of all potential employees.  In the classic free-market perspective, laborers, in offering their capacity to perform work, offer economic goods to management, and wage is the price that management pays for these goods.  As with all prices, this price is determined by supply and demand.  If the demand is low — few employers place any importance on a particular job — or if supply is high — tons of workers could perform that particular job — then the “price”, i.e. the wage, will tend to be low.  McJobs, jobs that require low skill and low commitment, tend to have low wages as well, because just about anyone could do those jobs — supply is ridiculously high.  If demand is high and supply is short — that is, many people want this job done, and very few can do it well – then the “price”, i.e. the wage, will tend to be high.  Rock stars and Major League Baseball pitchers tend to make a lot of money because many people really want them to do what they do, and few people can do it as well as they do it.

The term “blue collar” worker refers to factor workers and folks who do physical or mechanical work.  Typically, blue collar workers are not college educated, although they may have had some vocational training.  The term “white collar” worker refers to office jobs and professional jobs, jobs that are primarily intellectual rather than physical in their demands.  Essentially, all white collar jobs demand a college education, and some (doctor, lawyer, manager, etc.) also involve some kind of advanced professional degree.  White collar jobs tend to have higher wages and associated benefits.  The assumption is: most white collar employees could do most blue collar jobs, but few blue collar employees could do a white collar job; therefore, according to this assumption, supply is considerably lower for white collar jobs, and demand is higher, which make the latter’s wages higher.

union is a collection of blue collar worker who group together to secure certain advantages.  At the beginning of the Industrial Revolution, there were lots of low skill factory jobs, and since so many people could do the job — an extremely high supply of labor —- factory owners could pay very low wages and still get all the jobs filled.  An isolated worker had, essentially, no power to change the situation.  Only when worker gathered themselves into unions, and used collective bargaining methods including strikes, were they able to secure more favorable agreements with management: higher wages, benefits, weekends off, etc.  Over time, the labor movement was able to secure the passage of important labor laws that encoded the rights of workers.  The various rights that workers now have — indeed, the very existence of what we know as “the weekend” — are the product of this history of the labor movement.  Having the gist of this movement, this history, and how it plays out in the modern work environment could be helpful in deciphering any GMAT CR question concern employees and their wages.

This post was written by Mike McGarry, GMAT expert at Magoosh, and originally posted here.

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