Cambridge IGCSE Economics 0455 – Workers in the Labour Market
Microeconomic Decision‑Makers: Workers
Learning Objective
Draw and interpret diagrams that illustrate the effects of changes in demand and supply in the labour market.
Key Concepts
Labour demand – the quantity of workers that firms are willing to employ at each possible wage rate.
Labour supply – the quantity of workers that individuals are willing to offer at each possible wage rate.
Equilibrium wage (W*) – the wage at which the quantity of labour demanded equals the quantity of labour supplied.
Equilibrium employment (E*) – the number of workers employed at the equilibrium wage.
Determinants of Labour Demand
Determinant
Effect on Demand Curve
Product price
Higher product price → shift demand right (increase)
Productivity of labour
Higher productivity → shift demand right
Number of firms in the market
More firms → shift demand right
Cost of alternative inputs (capital, land)
Higher alternative costs → shift demand right
Expectations of future demand
Positive expectations → shift demand right
Government policies (taxes, subsidies)
Subsidies to firms → shift demand right; taxes → shift left
Determinants of Labour Supply
Determinant
Effect on Supply Curve
Population size
Larger working‑age population → shift supply right (increase)
Alternative employment opportunities
More alternatives → shift supply right
Education and training
Higher skill levels → shift supply right
Wage expectations (future)
Higher expected future wages → shift supply left (delay entry)
Immigration policies
More immigration → shift supply right
Government policies (minimum wage, tax)
Higher minimum wage (if above equilibrium) → may create a surplus, effectively shifting supply left relative to demand.
Drawing the Labour Market Diagram
Draw a vertical axis labelled Wage (W) and a horizontal axis labelled Employment (E).
Sketch a downward‑sloping demand curve (D) and an upward‑sloping supply curve (S). Their intersection is the initial equilibrium (W*, E*).
Label the equilibrium point and indicate the equilibrium wage and employment.
To show a shift:
For an increase in labour demand, draw a new demand curve (D₁) to the right of D.
For a decrease in labour supply, draw a new supply curve (S₁) to the left of S.
Identify the new equilibrium (W₁, E₁) and compare it with the original equilibrium.
Suggested diagram: Initial labour market equilibrium (D and S intersect at (W*, E*)). Show a rightward shift of demand to D₁ resulting in a higher equilibrium wage (W₁) and higher employment (E₁). Also illustrate a leftward shift of supply to S₁ leading to a higher wage (W₂) but lower employment (E₂).
Interpreting Shifts
Use the following template when analysing a change:
Identify the cause (e.g., increase in product price, new technology, immigration).
State which curve shifts (demand or supply) and in which direction.
Explain the movement of the equilibrium wage and employment:
If demand shifts right: Wage rises, employment rises.
If demand shifts left: Wage falls, employment falls.
If supply shifts right: Wage falls, employment rises.
If supply shifts left: Wage rises, employment falls.
Discuss any possible surplus or shortage of labour and the likely short‑run adjustments.
Example: Minimum Wage Introduction
Suppose the government sets a statutory minimum wage above the equilibrium wage.
The legal floor creates a price floor at \$W_{min} > W*\$.
At \$W{min}\$, the quantity of labour supplied (ES) exceeds the quantity demanded (E_D), producing a labour surplus (unemployment).
Graphically, draw a horizontal line at \$W{min}\$ intersecting the supply curve at ES and the demand curve at ED. The distance between ES and E_D represents the unemployed workers.