Economics • Workers

Labour Market & Wages

The labour market

The demand for and supply of labour, against the wage rate and the number of workers. Quantity of labour (workers, thousands) Wage rate ($ per hour)

    Examples

    Demand for labour (DL)

    Supply of labour (SL)

    The numbers

    Labour Market & Wages — Explanation

    Wages are a price: the price of labour. In a labour market, firms demand labour (DL) and workers supply it (SL). The equilibrium wage is where the two meet: the number of workers firms want to hire equals the number willing to work. Choose a view in the title bar.

    Market. DL slopes down: at a lower wage, firms hire more workers. SL slopes up: a higher wage attracts more people into the job.

    Minimum wage. A national minimum wage is a wage floor set by the government. Set above the equilibrium, it raises the pay of those still employed, but firms hire fewer workers (along DL) while more people want to work (along SL). The gap is a surplus of labour: unemployment. Set below the equilibrium, it is not binding and changes nothing.

    Does this simple model overstate the effect? Many studies (famously Card and Krueger's of fast-food restaurants in the USA, and studies of New Zealand's youth minimum wage changes in the early 2000s) found that moderate rises cost few or no jobs. Reasons include: employers with power to set wages (monopsony, an A Level idea), better-paid workers who work harder and leave less often, and the extra spending of higher-paid workers raising the demand for labour. Large rises are more likely to cost jobs, especially for young and less-skilled workers. The diagram shows the most a floor could cost in jobs if nothing else changes.

    Trade union. A union bargains for its members. It can negotiate a wage above the equilibrium (the same logic as a minimum wage: higher pay, fewer jobs), or it can limit the supply of workers (through long training or licences), which shifts SL left. Either way there is a trade-off between wages and jobs, unless demand for labour is rising or the union agrees to raise productivity in return.

    Wage differences. Two labour markets side by side. Jobs with high demand (workers produce valuable output) and a small supply (long training, rare skills, unpleasant or risky work) pay more. Jobs that many people can do with little training, with less valuable output, pay less. Choose a pair of jobs, then shift each market's demand and supply.

    Key formulae: equilibrium where the quantity of labour demanded = the quantity supplied; total wage bill = wage × number employed (W × L); unemployment under a binding floor = SL − DL at that wage.

    Common exam mistakes: labelling the axes price and quantity instead of wage rate and quantity of labour; saying a minimum wage below the equilibrium causes unemployment; moving SL (instead of DL) when demand for the product changes; forgetting non-wage factors (training, conditions, job security) when explaining why people choose an occupation; saying the trade-off always happens even when demand for labour is rising.

    Objective: Cambridge IGCSE Economics (0455) 3.5 and 3.6, workers: wage determination, the minimum wage, trade unions and why earnings differ. The figures are illustrative.

    Where this fits

    • AP: AP Microeconomics Goes beyond AP Microeconomics: Trade unions and wage differentials between occupations go beyond AP Microeconomics.
    • AQA: AQA A Level Economics (7136)
    • Cambridge: Cambridge IGCSE Economics (0455); Cambridge A Level Economics (9708)
    • IB: IB Economics HL; IB Economics SL Goes beyond IB Economics HL: Trade unions and wage differentials go beyond the IB guide. Goes beyond IB Economics SL: Trade unions and wage differentials go beyond the IB guide.
    • NCEA Level 2 Economics: 91225 Analyse unemployment using economic concepts and models; 91228 Analyse a contemporary economic issue of special interest using economic concepts and models
    • NCEA Level 3 Economics: 91402 Demonstrate understanding of government interventions where the market fails to deliver efficient or equitable outcomes
    • Pearson Edexcel International: Edexcel International GCSE Economics (4EC1); Edexcel International A Level Economics
    • USDP: USDP Economics

    Labour Market & Wages — Key Terms

    Key concepts in English, with te reo Māori, Chinese (Simplified) and Korean.

    EnglishTe reo Māori中文（简体）한국어What it means on this page
    Wage Rateno attested term工资率 (gōngzī lǜ)임금률 (imgeumnyul)The price of labour: the amount a worker is paid for each hour (or other period) of work.
    Demand for Labourno attested term劳动力需求 (láodònglì xūqiú)노동수요 (nodong suyo)The number of workers firms are willing and able to employ at each wage rate. The curve (D_L) slopes down: at a lower wage, firms hire more workers.
    Supply of Labourno attested term劳动力供给 (láodònglì gōngjǐ)노동공급 (nodong gonggeup)The number of workers willing and able to work in a job at each wage rate. The curve (S_L) slopes up: a higher wage attracts more people into the job.
    Derived Demandno attested term派生需求 (pàishēng xūqiú)파생수요 (pasaeng suyo)Demand for something because of what it helps to produce. Firms demand labour because consumers demand the goods and services workers make.
    Equilibrium Wageno attested term均衡工资 (jūnhéng gōngzī)균형임금 (gyunhyeong imgeum)The wage rate at which the quantity of labour demanded equals the quantity supplied, so there is neither a shortage nor a surplus of workers.
    Productivityno attested term生产率 (shēngchǎnlǜ)생산성 (saengsanseong)Output per worker (or per hour worked). More productive workers add more to a firm's revenue, so firms demand more of them at each wage.
    Non-wage Factorsno attested term非工资因素 (fēi gōngzī yīnsù)비임금 요인 (biimgeum yoin)The things other than pay that affect how attractive a job is: working conditions, training and promotion chances, job security, hours, holidays and the work itself.
    National Minimum Wageno attested term全国最低工资 (quánguó zuìdī gōngzī)최저임금 (choejeo imgeum)The lowest wage rate an employer is allowed by law to pay. Set above the equilibrium wage, it is a wage floor that can cause a surplus of labour.
    Excess Supply (Surplus)whakaratonga tuhene供给过剩 (gōngjǐ guòshèng)초과공급 (chogwa gonggeub)In a labour market: more people want to work at the wage than firms will employ (S_L − D_L at a minimum wage above the equilibrium). This surplus of labour is unemployment.
    Unemploymentno attested term失业 (shīyè)실업 (sireop)People who are willing and able to work, and looking for a job, but who do not have one.
    Trade Unionno attested term工会 (gōnghuì)노동조합 (nodong johap)An organisation of workers that acts together to improve its members' pay, working conditions and job security.
    Collective Bargainingno attested term集体谈判 (jítǐ tánpàn)단체교섭 (danche gyoseop)Negotiation over pay and conditions between a trade union, on behalf of its members, and an employer or group of employers.
    Wage Differentialsno attested term工资差别 (gōngzī chābié)임금격차 (imgeum gyeokcha)Differences in wages between jobs, industries, regions or groups of workers, caused by differences in the demand for and supply of each kind of labour.
    Total Wage Billno attested term工资总额 (gōngzī zǒng'é)총임금 (chong imgeum)The total paid to workers: the wage rate × the number employed (W × L), the rectangle under the wage on a labour market diagram.

    On the te reo Māori column. Terms marked as gaps have no attested equivalent in the sources checked — Karaitiana Taiuru's Dictionary of Māori Computer and Social Media Terms, Paekupu, the Reserve Bank's te reo financial glossary, NZQA and Te Aka. No coinage is printed as though it were established; where a class needs one, commission it from Te Taura Whiri i te Reo Māori and credit the translator. Te reo Māori is not italicised and takes no plural "s".