Labour Market – Forces, Determination and Government Intervention
Learning Objective
Explain the causes of shifts in, and movements along, both the labour‑demand and labour‑supply curves for a firm or an occupation, and evaluate the impact of government intervention (Cambridge IGCSE/A‑Level Economics 8.3).
1. The Labour Market – Overview
Labour demand – firms’ derived demand for workers.
Labour supply – individuals’ willingness to work at different real wages.
Equilibrium occurs where the quantity of labour demanded equals the quantity supplied at the prevailing real wage (w).
2. Labour Demand
2.1 Derived Demand for Labour
Labour is a derived input: the demand for labour depends on the demand for the goods or services that the firm produces.
2.2 Marginal Revenue Product (MRP) Theory
For a price‑taking firm in the short run (labour is variable, capital is fixed):
MRPL = MR × MPL = Py × ΔQ/ΔL
Firms hire workers up to the point where MRPL = w.
Assumptions:
Product market is perfectly competitive (price‑taking).
Labour is a variable input; other inputs are fixed in the short run.
Firms aim to maximise profit.
The MRP curve is downward‑sloping because each additional worker adds less to output (law of diminishing marginal product).
Diagram (placeholder): Downward‑sloping MRP curve = labour‑demand curve; equilibrium where MRP = w.
2.3 Determinants of Labour Demand (non‑price factors)
Output (product) price (Py) – higher price raises MR and shifts the demand curve rightward.
Product (output) demand – an increase in consumer demand for the firm’s output raises labour demand.
Cost of other inputs
Higher price of complementary inputs (e.g., energy for energy‑intensive factories) raises the cost of production, shifting labour demand leftward.
Higher price of substitute inputs (e.g., capital) can make labour relatively cheaper, shifting demand rightward.
Labour productivity (MPL) – higher productivity makes each worker more valuable, shifting demand rightward.
2.4 Movements Along vs. Shifts of the Labour‑Demand Curve
Movement along the curve – caused **only** by a change in the product price (or marginal revenue). Example: A rise in the world price of oil raises MR for oil‑field firms; they move up the demand curve and hire more workers at the same wage.
Shift of the entire curve – caused by any non‑price determinant listed in 2.3 (technology, input costs, product‑market demand, etc.). Example: Introduction of robotic assembly lines (labour‑saving technology) shifts the demand curve for assembly‑line workers leftward.
2.5 Summary of Demand‑Side Changes
Change
Effect on Curve
Typical A‑Level Example
Higher output price
Rightward shift
Oil price surge → more drilling crew hired
Labour‑augmenting technology
Rightward shift
CAD software increases demand for design engineers
Labour‑saving automation
Leftward shift
Robotic car‑assembly reduces line‑workers
Higher price of complementary inputs (e.g., electricity)
Leftward shift
Rising electricity costs cut labour in energy‑intensive plants
Increase in labour productivity
Rightward shift
Training programme raises output per worker
Increase in product price (or MR) – no other change
Movement up the demand curve
World steel price rise → steel firms hire more at the same wage
Decrease in product price (or MR)
Movement down the demand curve
Fall in newspaper demand reduces journalists hired
3. Labour Supply
3.1 The Labour‑Supply Curve
Shows the relationship between the real wage (w) and the quantity of labour supplied (Ls).
Functional form (simplified):
Ls = f(w, T, P, E, A, G)
T – Training and education costs
P – Working‑age population and demographics
E – Expected future earnings
A – Attitudes towards work (cultural norms, gender roles)
G – Government policies (taxes, subsidies, immigration rules)
3.2 Movements Along the Labour‑Supply Curve
Higher real wage (w ↑) – workers are willing to supply more labour (movement up the curve).
Lower real wage (w ↓) – workers supply less labour (movement down the curve).
3.3 Non‑Wage Determinants that Shift the Supply Curve
Population size and structure – growth or a younger age profile shifts supply rightward; ageing shifts leftward.
Education and training – greater access or lower costs raise the skill base, shifting supply rightward for skilled occupations.
Social and cultural attitudes – greater acceptance of women, part‑time work or older workers expands supply; stigma contracts it.
Government policies
Higher marginal tax on labour income → lower net wage → leftward shift.
Wage subsidies or rebates → higher net wage → rightward shift.
Immigration policy – liberal immigration expands the labour pool (rightward); restrictions contract it (leftward).
Minimum‑wage legislation – can create a surplus at the statutory wage, effectively shifting the low‑skill supply curve leftward.
Training subsidies/apprenticeships – lower cost of acquiring skills → rightward shift for targeted occupations.
3.4 Summary of Supply‑Side Changes
Factor
Direction of Shift
Typical A‑Level Example
Population growth / younger age structure
Rightward
Post‑war baby boom expands the working‑age pool
Population ageing
Leftward
Higher proportion of retirees in Japan reduces labour supply
Expansion of higher‑education places
Rightward (skilled occupations)
More university seats in engineering
Higher training costs / fewer apprenticeships
Leftward
Cuts to vocational‑training funding
Higher expected future wages
Leftward (postponement)
Anticipated tech‑salary boom keeps students in study
Lower expected future wages
Rightward (earlier entry)
Recession expectations push graduates into work sooner
Greater social acceptance of women/part‑time work
Rightward
Rise in female labour‑force participation in the UK
Higher marginal tax on labour income
Leftward
Introduction of a higher income‑tax bracket
Wage subsidies or rebates
Rightward
Government wage‑support scheme for apprentices
Liberal immigration policy
Rightward
EU freedom of movement increasing low‑skill pool
Restrictive immigration controls
Leftward
Brexit work‑permit limits on EU nationals
4. Wage Determination
4.1 Perfectly Competitive Labour Market
In a perfectly competitive product market, firms hire labour up to the point where:
MRPL = w
Equilibrium wage is found where the downward‑sloping labour‑demand curve (MRP) intersects the upward‑sloping labour‑supply curve.
Diagram (placeholder): Labour‑demand (MRP) and labour‑supply curves with equilibrium wage (w*) and employment (L*).
4.2 Imperfect Labour Markets
Trade Unions (Collective Bargaining)
Unions negotiate a wage above the competitive equilibrium.
Result: a price floor that creates a surplus of labour (unemployment) if the wage is set above the intersection point.
Diagram (placeholder): supply curve, demand curve, and a horizontal wage line above equilibrium showing excess supply.
Monopsony (Single Large Employer)
A monopsonist faces the upward‑sloping labour‑supply curve and chooses employment where its marginal factor cost (MFC) equals MRP.
MFC lies above the supply curve, so the monopsonist hires fewer workers at a lower wage than in a competitive market.
Diagram (placeholder): labour‑supply curve, MFC curve (steeper), MRP curve; equilibrium at MFC = MRP, showing lower wage and employment.
Minimum‑Wage Legislation
Sets a statutory floor wmin. Two possible outcomes:
If wmin is below the competitive equilibrium, it has no effect.
If wmin is above equilibrium, it creates a surplus of labour (unemployment) in a perfectly competitive market.
In a monopsony, a minimum wage set between the monopsony wage and the competitive wage can increase both employment and wages (the “efficiency‑wage” effect).
Diagram (placeholder): show both competitive and monopsony cases.
Higher wage, unemployment; in monopsony can raise both wage and employment
5. Government Intervention – Impact on Labour Demand and Supply
5.1 Price‑Based Interventions
Minimum wage
Demand side: raises the employer’s marginal cost → effective leftward shift of the labour‑demand curve.
Supply side: higher net wage may attract more workers → movement up the supply curve (or rightward shift if the net wage increase is substantial).
Payroll tax – raises the employer’s cost to w(1+t).
Acts like a leftward shift of the labour‑demand curve.
Net wage to workers falls, causing a leftward shift of the labour‑supply curve.
Wage subsidies or rebates
Reduce the effective cost to firms → rightward shift of labour‑demand.
Increase workers’ net wage → rightward shift of labour‑supply.
5.2 Non‑Price‑Based Interventions
Education & training policy – expands the skill base, shifting the supply curve rightward for skilled occupations.
Immigration legislation – liberal policies shift supply rightward; restrictive policies shift it leftward.
Health & safety regulations – raise the “cost” of working in certain jobs, effectively shifting supply leftward (e.g., stricter mining safety rules).
Trade‑union legislation – can strengthen collective bargaining power, moving the effective wage floor upward.
5.3 Combined Diagram (placeholder)
Show both labour‑demand and labour‑supply curves. Illustrate a rightward shift of supply (e.g., liberal immigration) together with a movement up the demand curve due to a rise in product price, and label the new equilibrium wage and employment.
6. Key Takeaways
Labour demand is derived from product demand and is governed by the MRP rule (MRP = w).
Non‑price determinants shift the entire demand curve; only a change in product price (or MR) moves the firm along the curve.
Labour supply depends on the real wage and a set of non‑wage factors (population, education, expectations, attitudes, government policy).
Movements along the supply curve are caused solely by changes in the real wage; all other factors shift the curve.
In perfectly competitive markets equilibrium wage is where labour‑demand = labour‑supply. Imperfect markets (trade unions, monopsony, minimum‑wage) can create wage differentials and unemployment.
Government interventions can be price‑based (minimum wage, payroll tax, subsidies) or non‑price‑based (education, immigration, health & safety, union legislation) and may affect demand, supply, or both.
Distinguishing between movements and shifts, and understanding the underlying assumptions of the MRP model, is essential for analysing policy impacts on employment and wages.
Suggested diagram set: (i) Labour‑demand curve shifting right due to higher product price; (ii) Labour‑supply curve shifting right due to increased immigration; (iii) New equilibrium wage and employment; (iv) Minimum‑wage floor above equilibrium illustrating surplus labour.
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