Wages are just a price — the price of labour — set by demand and supply. But labour markets have their own quirks: demand is "derived", supply depends on far more…
Wages are just a price — the price of labour — set by demand and supply. But labour markets have their own quirks: demand is "derived", supply depends on far more than pay, and immobility causes real market failure.
Learning objectives — by the end of 3.4 you can…
- explain the demand for labour as a derived demand (MRP) and its elasticity; - explain the supply of labour and its elasticity; - analyse wage determination in competitive and non-competitive markets; - explain geographical and occupational immobility as labour-market failure.
Demand & supply of labour
Spec: 3.4.1
The demand for labour is a derived demand — it comes from the demand for the goods that labour produces, captured by the marginal revenue product (MRP). It rises with the demand for the final product, the productivity of labour, the price of the product, and the wage rate relative to the price of capital.
The supply of labour to an occupation depends on the size of the population, net migration, income-tax rates, welfare benefits, government regulations and trade unions, as well as non-pay factors. The market wage is set where labour demand meets labour supply:
Wage determination in competitive & non-competitive markets
Spec: 3.4.2
In a competitive labour market the wage is simply set where labour demand meets labour supply (the diagram above). The equilibrium wage and employment change whenever DL or SL shifts — for example, higher productivity shifts DL right and raises wages. But many real labour markets are not competitive:
| Non-competitive force | Effect on wages & employment |
|---|---|
| Trade unions | Use collective bargaining to push wages above the equilibrium; this can reduce employment (a movement up DL) unless the union also raises productivity or is bargaining against a monopsony. |
| Monopsony employer | A single dominant buyer of labour has wage-setting power and can pay below the competitive wage while employing fewer workers. |
| Public sector / state-owned enterprises | Wages are often set by the government or pay-review bodies rather than by pure market forces. |
Exam Tip
A union and a monopsony can cancel out: a union bargaining against a monopsony employer can raise wages and employment back toward the competitive level. This "it depends on market structure" point is gold in a 20-marker.
Labour market failure: immobility
Spec: 3.4.3
Labour markets fail when workers cannot move to where they are needed — a misallocation of labour:
| Type of immobility | Causes | Consequences |
|---|---|---|
| Geographical | Housing costs and availability, family ties, differing living costs, poor information about jobs elsewhere. | Regional unemployment alongside shortages elsewhere; persistent wage differences. |
| Occupational | Lack of transferable skills; training and qualifications needed; the time and cost of retraining. | Structural unemployment, skills shortages and wider wage inequality. |
Because immobility leaves resources misallocated, it provides a clear case for government intervention — training, relocation support and better job information — which leads us into 3.5.
3.4 Recap — nail these
Viewing only
This content is free to read on superexams.com and cannot be printed or downloaded.
Read the full note, free
Create a free account to read this note in full. Every free account gets 2 complete revision notes, no card needed.