Drawing and interpretation of diagrams that illustrate the effects of changes in demand and supply in the labour market
Micro‑economic Decision‑Makers: Workers
Learning Objective
Draw and interpret diagrams that illustrate the effects of changes in demand and supply in the labour market, and understand the wider factors that influence workers’ choices, wage levels, mobility and the division of labour (Cambridge IGCSE Economics 0455 – Topic 3.3).
1. The Labour‑Market Model
- Labour demand (D): quantity of workers firms are willing to employ at each possible wage.
- Labour supply (S): quantity of workers willing to work at each possible wage.
- Equilibrium wage (W*) and equilibrium employment (E*): the wage and employment level where the quantity demanded equals the quantity supplied.
- Diagram convention – vertical axis = Wage (W), horizontal axis = Employment (E). The demand curve slopes downwards, the supply curve slopes upwards.
2. Factors that Influence a Worker’s Choice of Occupation
Workers weigh wage and non‑wage considerations when deciding which job to take.
| Wage‑related factors | Non‑wage factors |
|---|---|
| Level of pay, overtime rates, bonuses | Job security and prospects for promotion |
| Pay differentials between sectors or regions | Working conditions (hours, safety, physical effort) |
| Benefits (pension, health insurance, paid leave) | Status, prestige or social standing of the occupation |
| Location of the workplace (commuting time, housing costs) | |
| Personal interests, skills and qualifications |
3. Determinants of Labour‑Demand (Shift the Demand Curve)
| Determinant | Effect on the labour‑demand curve |
|---|---|
| Product price | Higher product price → demand for labour shifts right (increase) |
| Productivity of labour | Higher productivity → demand shifts right |
| Number of firms in the market | More firms → demand shifts right |
| Cost of alternative inputs (capital, land) | Higher cost of capital/land → firms substitute away from labour → demand shifts left |
| Expectations of future product demand | Positive expectations → demand shifts right |
| Government policies – subsidies to firms | Subsidies lower firms’ cost of labour → demand shifts right |
| Government policies – taxes on firms | Higher taxes raise the cost of hiring → demand shifts left |
4. Determinants of Labour‑Supply (Shift the Supply Curve)
| Determinant | Effect on the labour‑supply curve |
|---|---|
| Working‑age population size | Larger population → supply shifts right (increase) |
| Alternative employment opportunities | More alternatives (e.g., self‑employment) → supply shifts right |
| Education and training (skill levels) | Higher skill levels → supply shifts right |
| Wage expectations (future) | Higher expected future wages → workers postpone entry → supply shifts left |
| Immigration policies | More immigration → supply shifts right |
| Minimum‑wage legislation (if set above equilibrium) | Creates a price floor; at the statutory wage the quantity supplied exceeds the quantity demanded, producing a labour surplus (unemployment). The curve itself does not shift, but the effective outcome is a surplus. |
5. Wage Determination – Interaction of Demand and Supply
- Wages are set where the labour‑demand curve meets the labour‑supply curve.
- Any factor that moves either curve changes the equilibrium wage (W) and employment (E).
- Price‑floor example (minimum wage): if the floor is above W*, a surplus of labour (unemployment) appears. The size of the surplus depends on the elasticity of labour‑supply and labour‑demand.
- Price‑ceiling (e.g., a legally imposed maximum wage) would be set below W* and create a shortage of labour.
6. Reasons for Wage Differentials
| Reason | Explanation / Example |
|---|---|
| Skill level | High‑skill workers (engineers) earn more than low‑skill workers (cleaners). |
| Sector of activity | Finance pays higher wages than agriculture. |
| Geographical location | Wages are higher in London than in rural areas because of higher living costs. |
| Public vs. private ownership | Public‑sector jobs often have lower pay but greater job security. |
| Discrimination | Gender or ethnic discrimination can create systematic wage gaps. |
| Trade‑union coverage | Unionised workers typically secure higher wages than non‑unionised workers. |
Graphical illustration (optional): two parallel supply curves – Shigh‑skill (left) and Slow‑skill (right) – intersect a common demand curve, showing a higher equilibrium wage for high‑skill labour.
7. Mobility of Labour
- Occupational mobility: ability of workers to move between different types of jobs (e.g., from manufacturing to services). Greater occupational mobility shifts the labour‑supply curve right because workers can fill newly created or higher‑paying occupations.
- Geographical mobility: willingness/ability to relocate for work. An influx of workers into a region (e.g., due to new housing) shifts the regional supply curve right; out‑migration shifts it left.
- Both forms of mobility affect the shape of the overall supply curve and therefore the equilibrium wage and employment.
8. Division of Labour
Division of labour is the splitting of production processes into separate, specialised tasks.
| Advantages | Disadvantages |
|---|---|
| Higher productivity – workers become skilled at a narrow task. | Workers become less versatile; harder to replace absent staff. |
| Lower unit costs – economies of scale. | Monotony can reduce motivation and increase turnover. |
| Facilitates use of specialised machinery. | Vulnerability to disruption if a single step breaks down. |
9. Government Policy in the Labour Market
9.1 National Minimum Wage
- Sets a price floor above the equilibrium wage.
- At the statutory wage, QS > QD → labour surplus = unemployment.
- The magnitude of unemployment depends on the elasticities of supply and demand.
9.2 Trade Unions
- Demand‑side effect: Collective bargaining raises the wage that firms must pay, increasing firms’ labour‑costs and shifting the effective labour‑demand curve left.
- Supply‑side effect: Unions may make workers less willing to accept wages below the negotiated level, shifting the labour‑supply curve left.
- Overall, unions tend to raise wages but can reduce the quantity of employment.
9.3 Regulation (Health & Safety, Working‑Time Limits, etc.)
- Regulations raise the cost of employing labour (e.g., training for safety, overtime limits).
- Higher compliance costs shift the labour‑demand curve left.
- In some cases, stricter health‑and‑safety rules may increase the attractiveness of a job, causing a modest rightward shift in supply; the net effect is usually a leftward demand shift.
10. Drawing the Labour‑Market Diagram
- Vertical axis: Wage (W); horizontal axis: Employment (E).
- Draw 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 mark the equilibrium wage and employment.
- To illustrate a shift:
- Increase in labour demand → draw a new curve D₁ to the right of D.
- Decrease in labour supply → draw a new curve S₁ to the left of S.
- Identify the new equilibrium (W₁, E₁) and compare it with the original equilibrium.
- When showing a minimum‑wage floor, draw a horizontal line at Wmin above W*. The distance between the supply and demand points on that line measures the unemployment.
- Remember: the steeper the curve, the less elastic; the flatter, the more elastic. Elasticities affect how large the changes in wage and employment will be after a shift.
11. Interpreting Shifts – Structured Template
- Identify the cause (e.g., rise in product price, new immigration policy, introduction of a minimum wage).
- State which curve moves and in which direction.
- Explain the new equilibrium**:
- Demand right → wage ↑, employment ↑.
- Demand left → wage ↓, employment ↓.
- Supply right → wage ↓, employment ↑.
- Supply left → wage ↑, employment ↓.
- Discuss any surplus or shortage and the likely short‑run adjustment (e.g., firms cut output, workers retrain, government intervenes).
12. Example: Introduction of a Statutory Minimum Wage
Assume the government sets a minimum wage Wmin above the equilibrium wage W*.
- This creates a price floor at Wmin.
- At Wmin the quantity of labour supplied (QS) exceeds the quantity demanded (QD), producing a labour surplus (unemployment).
- Graphically, draw a horizontal line at Wmin. The intersection with the supply curve gives QS; the intersection with the demand curve gives QD. The gap QS – QD measures the unemployed workers.
Mathematically:
\$\text{Unemployment} \;=\; Q{S}(W{min}) \;-\; Q{D}(W{min})\$
Note on elasticity: if the labour‑supply curve is relatively elastic, a small rise in the statutory wage generates a large increase in unemployment; if supply is inelastic, the increase in unemployment is smaller.
13. Practice Questions
- Explain how an increase in the price of a firm’s output affects the labour market for that firm’s workers.
- Draw and label a labour‑market diagram showing the effect of a large influx of immigrant workers.
- Analyse the likely short‑run impact on wages and employment if a new technology makes workers more productive.
- Discuss two reasons why wages differ between male and female workers in the same industry.
- Using the template in section 11, evaluate the likely effects of a rise in the national minimum wage on both wages and unemployment.