Reasons for differences in wages: demand for and supply of labour
Micro‑economic Decision‑Makers – Workers
Objective
Explain why wages differ by analysing the demand for labour and the supply of labour, and by considering the other factors required by the Cambridge IGCSE 0455 syllabus (Section 3.3).
Key Definitions
Wage: The price paid for a unit of labour (usually per hour, week or month).
Labour demand (DL): The quantity of workers that firms are willing to hire at each possible wage.
Labour supply (SL): The quantity of workers that individuals are willing to work at each possible wage.
Equilibrium wage (W* ): The wage at which DL = SL; the market clears.
Trade union: An organisation of workers that negotiates collectively with employers (or the government) on pay, conditions and other employment issues. Its bargaining power can affect both the demand for and the supply of labour.
National Minimum Wage (NMW): A statutory floor on the hourly wage set by the government.
3.3.1 Factors Affecting an Individual’s Choice of Occupation
When deciding which occupation to pursue, a person weighs wage and non‑wage factors.
Wage‑related factors
Level of pay (hourly, weekly, annual)
Prospects of pay rises (bonuses, overtime, commissions)
Job security (risk of redundancy)
Non‑wage factors
Working conditions (hours, shift patterns, health & safety)
Location and commuting distance
Career progression and training opportunities
Job satisfaction, personal interest and status
Family responsibilities (flexibility, part‑time options)
Cultural influences – societal attitudes toward certain jobs, gender‑role expectations, prestige attached to particular occupations.
3.3.2 Wage Determination
Demand‑side factors (derived demand)
Firms hire labour to produce other goods and services. A simple linear demand function is:
\[ D_{L}(W)=a-bW \]
where a is the maximum number of workers firms would hire if wages were zero and b measures how quickly demand falls as wages rise.
Productivity of labour – higher marginal product of labour (MPL) raises the value of the extra output, shifting DL right.
Price of the output – a rise in the market price of the good produced increases revenue per unit, shifting DL right.
Technology
Labour‑saving (automation) → leftward shift of DL.
Technology that makes labour more productive → rightward shift of DL.
Cost of other inputs – cheaper capital can replace labour (substitution effect) → leftward shift of DL.
Number of firms in the market – entry of new firms raises total labour demand (rightward shift).
Expectations of future demand – optimistic expectations can lead firms to hire ahead of time, shifting DL right.
Trade‑union bargaining power – strong unions can push up the effective wage cost for firms, causing a leftward shift of the demand curve or creating a wage‑setting “floor”.
Supply‑side factors
The labour‑supply function can be expressed as:
\[ S_{L}(W)=c+dW \]
where c is the number of workers willing to work even at a zero wage (often zero) and d measures the responsiveness of supply to a change in wage.
Population size and demographics – a larger working‑age population shifts SL right.
Education and training – higher skill levels increase the number of qualified workers for certain occupations (rightward shift for skilled jobs, leftward for low‑skill jobs).
Alternative employment opportunities – more job options make workers less dependent on any single wage level, flattening the supply curve.
Wage expectations (income vs. substitution effects)
Restricts union power → can shift DL right (lower wage‑costs) and/or shift SL right (more workers willing to work for lower wages)
Potentially lower negotiated wages and reduced unemployment pressure
3.3.4 Mobility of Labour
Occupational mobility
Ability to move between occupations through training, retraining or experience.
Increases the effective supply of labour for high‑skill jobs (rightward shift of SL for those occupations).
Geographical mobility
Willingness to relocate or commute to areas with better job prospects.
Reduces regional wage differentials; can shift local SL left (if workers leave) or right (if migrants arrive).
3.3.5 Division of Labour
Definition: The breaking down of a production process into a series of specialised tasks performed by different workers.
Advantages
Disadvantages
Higher productivity – workers become faster and more skilled at a narrow task.
Monotony – can lower job satisfaction and increase turnover.
Lower training costs – less time needed to teach a specific task.
Risk of skill loss – workers may find it hard to switch jobs if the task is highly specialised.
Facilitates use of machinery and mass production.
Dependence on coordination – a breakdown in one stage can halt the whole process.
3.3.6 Government Policy Impact on Labour Markets
Taxes on labour income – reduce the net wage received; may shift SL left (workers supply less).
Welfare benefits (unemployment, sickness, child benefit) – increase the income effect of not working, potentially shifting SL left.
National Minimum Wage (NMW) – creates a statutory floor; if set above equilibrium it can cause a surplus of labour (unemployment) and a leftward shift of DL as firms cut staff.
Trade‑union legislation – laws that strengthen or restrict union power (e.g., right‑to‑work) affect both the demand and supply sides as described above.
3.3.7 Evaluation (AO3)
Evaluation – Minimum Wage Example
Positive aspects: Raises income of low‑paid workers, reduces poverty, can boost consumer spending and aggregate demand.
Negative aspects: If set above the market equilibrium, firms may reduce hiring, cut hours or replace workers with machines, leading to higher unemployment among low‑skill workers.
Balanced judgment: The overall impact depends on the level of the NMW, the price elasticity of labour demand, and the presence of complementary policies (e.g., training programmes, tax incentives) that can mitigate job losses.
Suggested Diagram
Standard labour‑market diagram
Show a downward‑sloping demand curve DL and an upward‑sloping supply curve SL intersecting at the equilibrium wage W* and quantity L*. Use arrows to illustrate:
Rightward shift of DL → new higher equilibrium wage.
Rightward shift of SL → new lower equilibrium wage.
Minimum‑wage floor above W* → horizontal line at Wmin, surplus labour (unemployment) shown.
Summary Points
Wages are the price of labour, determined by the interaction of demand and supply.
Demand is driven by productivity, output price, technology, input costs, number of firms, expectations and trade‑union power.
Supply is influenced by population, education, alternative jobs, wage expectations, non‑wage factors, age, culture and government policies.
Differences in wages arise from skill levels, sectoral profitability, discrimination, public‑vs‑private employment, technological change and institutional factors such as trade‑union legislation.
Labour mobility (occupational and geographical) can shift supply curves and reduce wage differentials.
Division of labour raises productivity but may create monotony and skill‑loss problems.
Government interventions (taxes, welfare, minimum wage, trade‑union legislation) move either curve, creating disequilibrium that must be evaluated in terms of efficiency and equity.
Support e-Consult Kenya
Your generous donation helps us continue providing free Cambridge IGCSE & A-Level resources,
past papers, syllabus notes, revision questions, and high-quality online tutoring to students across Kenya.