Labour Market — A-Level Economics Revision

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What is Labour Market?

The labour market is where workers sell their labour and employers buy it. The price of labour is the wage rate, which is determined by the interaction of the demand for and supply of labour. Demand for labour is a derived demand, meaning it depends on the demand for the goods and services that labour produces. The supply of labour is determined by the number of people willing and able to work at different wage rates.

Board notes: Covered in detail by AQA, Edexcel, and OCR. AQA and Edexcel focus heavily on the impact of trade unions and the national minimum wage, often requiring diagrammatical analysis. OCR places a greater emphasis on different sources of labour market failure, such as geographical and occupational immobility.

Worked example

Common mistakes

• 1Assuming the labour market works exactly like a product market. While supply and demand principles apply, the labour market has unique features like trade unions, government regulation (e.g., minimum wage), and imperfect information, which can lead to market failures.
• 2Confusing a worker's average wage with their marginal revenue product (MRP). The demand for labour is determined by MRP (the extra revenue a firm gains from hiring one more worker). In a competitive market, firms will hire workers up to the point where the wage equals the MRP.
• 3Thinking that a national minimum wage always causes unemployment. While standard theory suggests a minimum wage set above the equilibrium could cause unemployment, empirical evidence is mixed. Some studies show negligible effects, especially in monopsony labour markets where a single buyer of labour dominates.

Labour Market exam questions

Exam-style questions for Labour Market with mark-scheme style solutions and timing practice. Aligned to AQA, Edexcel and OCR specifications.

Frequently asked questions

• What causes wage differentials between occupations?

  Wage differentials exist due to factors like differences in skills and qualifications required, the elasticity of demand and supply of labour for that profession, the strength of trade unions, and compensating differentials for risky or unpleasant working conditions.

• How do trade unions affect wages and employment?

  By using their collective bargaining power, trade unions can negotiate for higher wages than the competitive equilibrium. However, this can lead to a decrease in the quantity of labour demanded by firms, potentially causing some unemployment, creating a trade-off between higher wages and employment levels.