3.3.4 - Labour markets
- Syllabus
- 2018
- Topic
- 3.3.4
- Level
- A2
Learning objectives
3.3.41a - Factors that influence the demand for labour to a particular labour occupation: •Factors that influence the demand for labour to a particular labour occupation:; demand for the final product (labour as a derived demand); productivity of labour; price of the product; wage rate relative to price of capital.3.3.41b - Factors that influence the elasticity of demand for labourFactors that influence the elasticity of demand for labour.3.3.42c - Factors that influence the supply of labour to a particular labour occupation: • sizeFactors that influence the supply of labour to a particular labour occupation:; size of population; net migration; income tax rates; level of welfare benefits; government regulations; trade unions.3.3.42d - Factors that influence the elasticity of supply of labourFactors that influence the elasticity of supply of labour.3.3.43a - Labour market equilibrium. of wage rates inLabour market equilibrium. of wage rates in3.3.43b - Causes of changes in the equilibrium wage rate and quantity of competitive and labourCauses of changes in the equilibrium wage rate and quantity of competitive and labour as a result of shifts in demand curves and supply curves. non-competitive3.3.43c - Wage setting in the public sector/state-owned enterprisesWage setting in the public sector/state-owned enterprises.3.3.44a - Causes and consequences of the geographical immobility of the labour market labourCauses and consequences of the geographical immobility of the labour market labour.3.3.44b - Causes and consequences of the occupational immobility of labourCauses and consequences of the occupational immobility of labour.
What changes demand for labour?
Labour demand is derived demand: a firm wants workers because their output can be sold. Stronger demand for the final product raises the value of the extra output workers produce and shifts labour demand to the right; weaker product demand shifts it left.
| Driver | Why labour demand changes |
|---|---|
| labour productivity | more output per worker raises the value of employing labour |
| product price | a higher selling price raises the revenue generated by a worker's output |
| demand for the final product | more planned output requires more labour at each wage |
| wage relative to the price of capital | relatively dearer labour encourages substitution toward capital; relatively cheaper labour encourages substitution toward labour |
A change in the wage rate normally causes a movement along a labour-demand curve. A change in product demand, productivity, product price or the relative price of capital shifts the curve; keep the movement/shift distinction explicit.
What makes labour demand elastic?
The elasticity of demand for labour measures how responsive employment is to a change in the wage rate. Demand is more elastic when a given percentage wage change produces a larger percentage change in labour demanded.
| Labour demand is more elastic when... | Mechanism |
|---|---|
| labour is easy to replace with capital or other inputs | firms can substitute away after a wage rise |
| labour cost is a large share of total cost | a wage change has a large effect on unit cost |
| demand for the final product is price elastic | a wage-led price rise causes a large fall in product sales and labour needed |
| firms have more time to adjust | technology, production methods and staffing can change |
| alternative inputs respond readily | substitution can expand without sharply raising their prices |
A high wage rate does not by itself make labour demand elastic. Elasticity concerns responsiveness, and the own-wage relationship is usually negative even when its coefficient is reported with a minus sign.
What changes labour supply to an occupation?
| Driver | Likely supply mechanism |
|---|---|
| population and working-age participation | a larger available workforce can raise supply |
| net migration | net inward migration can add workers with usable skills; net outward migration can remove them |
| income tax | a higher marginal tax rate lowers the reward from extra gross pay, though income and substitution effects can differ |
| welfare benefits | more generous or less conditional benefits may raise the reservation wage and reduce participation in some cases |
| government regulation | licensing, working-age rules and migration controls can restrict eligible labour |
| trade unions | entry rules may restrict supply, while better pay and conditions may attract or retain workers |
The effect must be analysed for the particular occupation: population growth does little for an occupation if workers lack its qualifications, location or legal permission.
A wage change causes movement along the labour-supply curve. These non-wage determinants shift supply, and their direction can depend on incentives, eligibility and worker preferences.
What makes labour supply elastic?
Elasticity of labour supply measures how responsive the quantity of labour supplied to an occupation is to a change in its wage rate. Supply is more elastic when workers can enter, leave or change hours readily.
| More elastic supply | More inelastic supply |
|---|---|
| short, affordable training | lengthy or costly qualifications |
| transferable skills | highly occupation-specific skills |
| strong geographical and occupational mobility | housing, family, licensing or relocation barriers |
| good vacancy and wage information | poor information about opportunities |
| many qualified non-participants or workers in close occupations | a small pool of suitably qualified workers |
| longer adjustment period | very short adjustment period |
The size of the workforce and elasticity are different ideas: a large workforce can still respond slowly if entry to this occupation requires scarce qualifications.
Labour market equilibrium
In a competitive labour market, equilibrium is where labour demand equals labour supply. The equilibrium wage is the price of labour and equilibrium employment is the quantity hired and offered at that wage.
| Wage position | Imbalance | Adjustment pressure |
|---|---|---|
| above equilibrium | labour supplied exceeds labour demanded: surplus/unemployment | downward pressure on the wage |
| below equilibrium | labour demanded exceeds labour supplied: shortage/vacancies | upward pressure on the wage |
| at equilibrium | planned hiring equals planned labour supply | no market pressure for the wage to change |
Equilibrium does not mean every person has a job or that the wage is fair. It means the quantities demanded and supplied in the defined labour market are equal under the model's assumptions.
How shifts change wages and employment
| Change, other things equal | Equilibrium wage | Equilibrium employment |
|---|---|---|
| labour demand shifts right | rises | rises |
| labour demand shifts left | falls | falls |
| labour supply shifts right | falls | rises |
| labour supply shifts left | rises | falls |
Product demand, productivity and product price can shift labour demand. Population, migration, participation, tax/benefit incentives, regulation and mobility can shift labour supply. Different occupations therefore reach different wage-employment equilibria.
If demand and supply shift together, one result may be determinate while the other is ambiguous. For example, rightward shifts of both curves raise employment, but the wage rises only if the demand shift is relatively larger.
Do not explain a new equilibrium with a movement along one unchanged curve alone: identify which determinant shifted which curve, then trace both wage and employment.
How public-sector wages are set
Public-sector and state-owned-enterprise wages reflect labour demand and supply, but government objectives and institutions can prevent the wage from being set only by short-run profit maximisation.
| Influence | Wage-setting effect |
|---|---|
| recruitment, retention and skills shortages | pay may need to rise to attract enough qualified workers |
| public budget and tax revenue | spending limits can restrain pay or staffing |
| national pay scales/pay review bodies | similar roles may receive standardised rates across regions |
| unions and collective bargaining | worker bargaining power can raise pay or improve conditions |
| service, equity and political objectives | continuity, fairness or wage restraint may be prioritised |
| monopsony power | a dominant public employer may hold wages below a competitive level |
Compare total compensation as well as salary: pensions, job security, hours and leave can offset part of a cash-wage difference. Private-sector profitability and competition also vary, so either sector may pay more.
Public ownership does not imply an automatically high, low or market-clearing wage. The result depends on skills, bargaining, budgets, objectives and alternative employers.
Geographical immobility of labour
Geographical immobility occurs when workers cannot or will not move between locations to take available jobs, even when unemployment and vacancies coexist in different regions.
| Cause | How it blocks a move |
|---|---|
| high house prices, rents and moving costs | the destination is unaffordable or relocation has a large upfront cost |
| family, caring and community ties | moving imposes personal costs not shown by the wage |
| weak transport links | commuting is too slow or expensive |
| poor vacancy/housing information | workers cannot compare opportunities reliably |
| language, visa or cultural barriers | crossing regional or national boundaries is harder |
Workers may remain unemployed or accept lower wages while firms elsewhere face vacancies, higher recruitment costs and capacity constraints. Persistent regional wage and unemployment gaps create structural unemployment and reduce potential output.
Geographical immobility is about location, not missing occupational skills. A worker may be fully qualified for a vacancy yet unable to reach or relocate to it.
Occupational immobility of labour
Occupational immobility occurs when workers cannot move readily between types of job because their skills, qualifications or experience do not match available vacancies.
| Cause | Why switching occupation is difficult |
|---|---|
| long or costly education and training | entry requires time and finance before work can begin |
| occupation-specific/non-transferable skills | prior experience has limited value in the new role |
| licensing and qualification rules | workers cannot enter without formal approval |
| poor careers and vacancy information | workers do not know which skills or jobs are demanded |
| age, health or discrimination barriers | access to retraining or hiring may be restricted |
A changing economy can then have unemployment in contracting occupations alongside vacancies in expanding ones. Firms face recruitment costs and wage pressure, while workers lose income and human capital; structural unemployment reduces output and tax revenue.
Changing employer is not necessarily occupational mobility: a nurse moving hospitals keeps the same occupation. Moving from a declining role into a different skilled role is the relevant transition.