Employment, Unemployment & Labour Mobility (Cambridge AS & A Level Economics 9708)
Learning Objective
Explain the two main forms of labour mobility – geographical and occupational – and assess their impact on the labour market, wage determination and unemployment. In doing so, apply the core economic concepts (scarcity, choice, equilibrium, efficiency, equity) that underpin the entire AS/A‑Level syllabus.
Key‑Concept Reminder Boxes
- Scarcity & Choice: Limited resources force societies to decide what to produce, how and for whom.
- Marginal Decision‑Making: Choices are made at the margin – e.g., hiring an extra worker if the marginal revenue product (MRP) exceeds the wage.
- Equilibrium & Disequilibrium: Markets clear where quantity supplied = quantity demanded; excess supply = unemployment, excess demand = labour shortage.
- Efficiency & Equity: Efficient allocation maximises total surplus; equity concerns the fairness of income and opportunity distribution.
1. The Economic Problem and the Production Possibility Curve (PPC)
1.1 Scarcity, Choice & Opportunity Cost
- Resources are scarce → societies must choose between alternative uses.
- Opportunity cost = value of the next best alternative foregone.
1.2 The PPC
- Shows maximum feasible output combinations of two goods given resources and technology.
- Points on the curve = efficient production; inside = under‑utilisation; outside = unattainable.
- Movement along the curve illustrates opportunity cost; outward shift = economic growth (more resources or better technology).
2. Demand and Supply – The Core Micro‑Economic Model
2.1 Law of Demand & Determinants
| Determinant | Effect on Demand Curve |
|---|
| Income (normal good) | Rise → right‑ward shift |
| Income (inferior good) | Rise → left‑ward shift |
| Prices of related goods | Substitutes ↑ price → right shift; Complements ↑ price → left shift |
| Tastes & preferences | Favourable change → right shift |
| Expectations of future price | Higher expected future price → right shift today |
| Number of buyers | More buyers → right shift |
2.2 Law of Supply & Determinants
| Determinant | Effect on Supply Curve |
|---|
| Input prices | Higher input cost → left shift |
| Technology | Improvement → right shift |
| Number of sellers | More sellers → right shift |
| Expectations of future price | Higher expected future price → left shift today (hold back stock) |
| Taxes & subsidies | Tax ↑ → left shift; Subsidy ↑ → right shift |
2.3 Market Equilibrium
- Equilibrium price where quantity demanded = quantity supplied.
- Consumer surplus = area above price & below demand curve.
- Producer surplus = area below price & above supply curve.
- Government intervention (price ceiling/floor, tax, subsidy) creates dead‑weight loss – a loss of total surplus.
3. Elasticities – Measuring Responsiveness
3.1 Price Elasticity of Demand (PED)
\[
\text{PED}= \frac{\%\Delta Q_d}{\%\Delta P}
\]
- Elastic (>1), Inelastic (<1), Unit‑elastic (=1).
- Determinants: availability of substitutes, proportion of income spent, definition of market, time horizon.
3.2 Price Elasticity of Supply (PES)
\[
\text{PES}= \frac{\%\Delta Q_s}{\%\Delta P}
\]
- More elastic in the long‑run (firms can adjust capacity).
3.3 Other Elasticities (brief)
- Income elasticity of demand (normal vs inferior goods).
- Cross‑price elasticity (substitutes vs complements).
- Elasticity of factor (labour) supply – covered in Section 7.
4. Market Failure & Government Micro‑Intervention
4.1 Types of Market Failure
- Externalities: Positive (e.g., education) or negative (e.g., pollution). Government can tax (negative) or subsidise (positive).
- Public goods: Non‑rival & non‑excludable (e.g., national defence). Typically provided by the state.
- Information asymmetry: Buyers/sellers lack perfect information (e.g., used‑car market).
- Monopoly power: Single seller restricts output → dead‑weight loss.
4.2 Policy Instruments
| Instrument | Purpose | Potential Side‑effects |
|---|
| Tax on negative externality | Internalise social cost | May raise price for consumers, cause substitution effects |
| Subsidy for positive externality | Encourage socially beneficial activity | Fiscal cost, risk of over‑consumption |
| Regulation (e.g., emission standards) | Directly limit harmful behaviour | Compliance costs, possible market distortion |
| Public provision | Supply where market fails | Financing through taxation, risk of inefficiency |
5. The Labour Market
5.1 Derived Demand for Labour
- Firms demand labour because it is needed to produce goods/services that consumers want.
- Quantity demanded depends on the demand for the firm’s output (derived demand).
5.2 Determinants of Labour Demand
| Factor | Effect on Labour Demand |
|---|
| Product price (or MR) | Higher price → higher MR → right‑ward shift of labour demand. |
| Technology (productivity) | More productive tech raises MPL → right‑ward shift. |
| Output level / market size | Expansion → higher labour demand. |
| Wages of other factors (capital, land) | Higher capital cost may substitute away from labour → left shift. |
| Government policy (taxes, subsidies) | Tax on output → lower demand; subsidy → higher demand. |
5.3 Marginal Revenue Product (MRP) Theory
Labour‑demand curve is derived from the firm’s MRP:
\[
\text{MRP}_L = \text{MR} \times \text{MP}_L
\]
Where:
- MR = marginal revenue from selling an additional unit of output (equals price under perfect competition).
- MPL = marginal product of labour.
Worked Example (perfect competition)
- Product price = £15 → MR = £15.
- MPL of the 5th worker = 8 units.
- MRPL = 15 × 8 = £120.
- If the real wage is £110, the firm hires the 5th worker (MRP > wage). If the wage rises to £130, the firm does not hire.
5.4 Supply of Labour
- Wage‑related (price) factors: real wage rate, expected future wages, non‑wage income.
- Non‑wage (quantity) factors: demographics, education & training, working conditions, migration restrictions, childcare provision, cultural attitudes.
5.5 Wage Determination (Key Market Structures)
- Perfectly competitive labour market – equilibrium where labour demand = labour supply; market‑clearing wage.
- Monopsony – a single large employer faces an upward‑sloping supply curve, hires where MRP = marginal labour cost (which exceeds wage). Result: lower wage and employment than competitive equilibrium.
- Trade unions – collective bargaining can push the negotiated wage above the market‑clearing level, potentially creating a surplus of labour (unemployment).
- Statutory minimum wage – a price floor; if set above equilibrium it creates a surplus (unemployment) and may encourage capital‑labour substitution.
5.6 Wage Differentials
- Transfer earnings: the minimum wage a worker would accept to stay in the current job (opportunity cost of leaving).
- Economic rent: earnings above transfer earnings, arising from scarcity of skill, location advantage or discrimination.
6. Forms of Labour Mobility
6.1 Geographical Mobility
The willingness and ability of workers to relocate from one region, city or country to another in search of better employment prospects.
- Push factors: low wages, high unemployment, poor working conditions, limited career progression.
- Pull factors: higher wages, abundant vacancies, better living standards, superior public services.
- Barriers: moving costs, family ties, cultural/language differences, housing market constraints, immigration restrictions.
6.2 Occupational Mobility
The ability of workers to move between different occupations or sectors, often requiring new skills or qualifications.
- Vertical mobility: moving up or down the skill ladder (e.g., clerk → manager or factory worker → supervisor).
- Horizontal mobility: moving across occupations of similar skill levels (e.g., retail assistant → call‑centre operator).
- Barriers: lack of training, non‑recognition of qualifications, experience mismatch, employer discrimination, high retraining costs.
7. Measuring Unemployment & the Role of Mobility
The unemployment rate is calculated as:
\[
U = \frac{U_t}{L}\times 100
\]
- $U_t$ = number of unemployed persons (actively seeking work).
- $L$ = total labour force (employed + unemployed).
Low labour mobility can keep $U_t$ high even when vacancies exist, giving rise to structural unemployment. High mobility helps re‑allocate workers to where they are most needed, reducing both cyclical and structural unemployment.
8. Government Policies to Promote Labour Mobility
8.1 Enhancing Geographical Mobility
- Housing subsidies or “first‑time buyer” schemes.
- Relocation grants for low‑income households.
- Improved transport infrastructure (rail, road, affordable public transport).
- Visa facilitation and removal of legal barriers for intra‑EU or intra‑regional migration.
8.2 Enhancing Occupational Mobility
- Adult education, lifelong‑learning programmes and community colleges.
- Vocational training, apprenticeships and on‑the‑job training subsidies.
- Recognition of foreign qualifications and portable credentials.
- Tax incentives for firms that invest in employee up‑skilling.
8.3 Evaluation of Intervention (AO3)
| Policy | Potential Advantages | Potential Disadvantages / Limitations |
|---|
| Relocation grants |
Reduces moving costs; encourages flow to high‑demand regions; can quickly lower regional unemployment. |
May be poorly targeted; risk of temporary “ghost” migrations; fiscal cost; may not address underlying skill gaps. |
| Vocational training schemes |
Improves skill match; reduces structural unemployment; can raise productivity and wages. |
Training may not match future industry needs; time lag before benefits appear; risk of “skill‑dumping” if not linked to vacancies. |
| Minimum‑wage legislation |
Raises living standards for low‑paid workers; can stimulate aggregate demand. |
If set above equilibrium, creates a surplus of labour (unemployment); may encourage firms to substitute labour with capital. |
| Union bargaining power |
Improves wages and conditions for members; reduces wage inequality. |
Can lead to wage‑price spirals; may create rigidities that hinder mobility and increase unemployment. |
9. A‑Level Extensions (Key Topics)
9.1 The Multiplier & Fiscal Policy
Multiplier = 1 / (1 – MPC). Expansionary fiscal policy (increase in G or decrease in T) raises aggregate demand by a multiple of the initial change, affecting employment and wages.
9.2 Money, Banking & the Interest Rate
- Central bank controls policy interest rate → influences investment, consumption and thus labour demand.
- Liquidity preference framework: Money demand = L(Y, i). Higher i reduces money demand, raising the interest rate and potentially lowering investment‑driven labour demand.
9.3 The Phillips Curve
Short‑run inverse relationship between inflation (π) and unemployment (U). Policy trade‑off: reducing U may raise π and vice‑versa. In the long‑run the curve is vertical at the natural rate of unemployment (NAIRU).
9.4 Balance of Payments & Exchange‑Rate Regimes
- Current‑account surplus/deficit influences domestic labour demand in export‑oriented sectors.
- Exchange‑rate appreciation makes imports cheaper and exports less competitive → can reduce labour demand in export industries.
9.5 Development Indicators & Globalisation
- Human Development Index (HDI), Gini coefficient, and labour‑force participation rates are used to assess development and mobility prospects.
- Globalisation can increase occupational mobility through offshoring, but may also create structural unemployment in declining sectors.
10. Diagrammatic Illustrations (Suggested)
- Figure 1 – Geographical Mobility: Two regional labour‑market diagrams. Left (Region A) shows excess supply; right (Region B) shows excess demand. Arrow indicating right‑ward shift of supply from A to B, moving both markets toward equilibrium.
- Figure 2 – Occupational Mobility: Declining industry X (left‑ward shift of demand) and expanding industry Y (right‑ward shift). Workers move horizontally across the skill ladder, illustrated by a flow arrow.
- Figure 3 – Monopsony Labour Market: Upward‑sloping labour‑supply curve, marginal labour cost (MLC) above it, and MRP curve. Intersection of MRP and MLC determines employment and wage (lower than competitive equilibrium).
- Figure 4 – Phillips Curve: Short‑run downward‑sloping curve and vertical long‑run line at the natural rate of unemployment.
11. Evaluation of Labour Mobility (AO3)
- Advantages
- Accelerates adjustment to economic shocks and technological change.
- Reduces duration of both cyclical and structural unemployment.
- Improves overall productivity by allocating labour where marginal product is highest.
- Narrows regional wage differentials and promotes balanced economic development.
- Disadvantages / Limitations
- High moving or retraining costs deter low‑income households, potentially widening inequality.
- Skill mismatches persist if training programmes lag behind industry needs.
- Excessive geographical mobility may cause “brain drain” from poorer regions, deepening regional disparities.
- Occupational mobility can be constrained by institutional barriers such as credential recognition and discrimination.
- Policy Trade‑offs
- Resources allocated to relocation assistance may reduce funds for education and training, and vice‑versa.
- Short‑term flexibility (e.g., low barriers to moving) may clash with long‑term regional development goals that require retaining talent.
- Interventions that raise wages (minimum wage, union bargaining) improve equity but can reduce demand for low‑skill labour, affecting mobility outcomes.
12. Summary Points
- Labour mobility (geographical & occupational) is essential for a flexible labour market and for reducing both cyclical and structural unemployment.
- Geographical mobility tackles regional imbalances; occupational mobility tackles sectoral (skill‑based) imbalances.
- Barriers are economic (moving/retraining costs), social (family ties, cultural differences) and institutional (immigration rules, credential recognition).
- Effective policy must target the specific barrier: relocation grants and transport for geographical mobility; adult education and portable qualifications for occupational mobility.
- Measuring impact requires data on migration flows, skill acquisition rates, vacancy statistics and wage differentials.
- All analysis should be framed within the core economic concepts of scarcity, marginal decision‑making, equilibrium, efficiency and equity – the foundation of the Cambridge AS & A‑Level Economics syllabus.