1.2.5 The labour market
- Syllabus
- 2026
- Topic
- 1.2.5
- Level
- —
Learning objectives
1.2.5a Factors affecting the demand for labourExplain how demand for the final product (derived demand), availability of substitutes including machines, and workforce productivity affect demand for labour.1.2.5b Factors affecting the supply of labourFactors affecting the supply of labour:• population size• migration• age distribution of population• retirement age• school-leaving age• female participation• skills and qualifications• ability to move geographic locations/move to different types of employment.1.2.5c Importance of labour quantity and quality to businessesImportance of the quantity and quality of labour to business.1.2.5d Education, training and human capitalImpact of education and training on human capital and quality of labour.1.2.5e Labour-market diagramsUse labour-market diagrams showing labour supply, labour demand, equilibrium wage and employment, and the effects of shifts in labour demand or supply.1.2.5f Trade union involvement in the labour marketTrade union involvement in the labour market:• impact of trade union activity to improve working conditions and increase wages.
Trace product demand, substitutes and productivity into labour demand
Demand for labour is derived demand: firms demand workers because workers help produce goods and services that customers demand.
| Change | Effect on labour demand | Mechanism |
|---|---|---|
| demand for final product rises | increases | firms need more output and therefore more labour input |
| machines become an effective labour substitute | decreases | capital performs tasks previously done by workers |
| workforce productivity rises | usually increases | each worker creates more output or revenue relative to wage cost |
If demand for wooden furniture grows, furniture producers may demand more woodcutters. If automated cutting machines replace their tasks, labour demand can fall despite product demand.
A larger working-age population changes labour supply, not firms' demand for labour. Keep the employer side separate from the worker side.
Explain what changes the available supply of labour
| Factor change | Likely effect on labour supply |
|---|---|
| larger population or a larger working-age share | increase |
| net inward migration of eligible workers | increase |
| higher retirement age | increase by keeping people available longer |
| higher school-leaving age | decrease in the short run by delaying entry |
| higher female participation | increase |
| more workers with required skills and qualifications | increase supply to that occupation |
| greater geographic or occupational mobility | increase effective supply where vacancies exist |
Labour supply is the number of people willing and able to work, or the labour time they offer, at different wage rates. A factor matters when it changes eligibility, willingness, skills or ability to reach a job.
Direction can depend on the occupation and time period. Migration raises supply in the destination labour market but can reduce it in the origin market.
Match labour quantity and quality to business needs
| Labour dimension | Why business needs it | Risk when inadequate |
|---|---|---|
| quantity | enough workers and hours to meet planned output, opening times and deadlines | unfilled roles, lost sales, overtime pressure or constrained expansion |
| quality | skills, knowledge, reliability and productivity needed for correct and efficient work | errors, waste, poor service, low productivity or unsafe output |
The two dimensions interact: many unqualified applicants do not solve a shortage of specialist engineers, while a few highly skilled workers may still be insufficient for large-scale production.
Quality does not mean personal worth. In labour economics it means job-relevant human capital and productive capability.
Build human capital through education and training
Human capital is the economically useful knowledge, skills and capabilities embodied in workers. Education and training add to this productive capacity.
| Investment | Labour-quality route | Business effect |
|---|---|---|
| general education | literacy, numeracy, reasoning and adaptability | workers learn tasks and solve problems more effectively |
| vocational or technical training | job-specific methods and qualifications | fewer errors, safer work and higher task competence |
| workplace training | firm processes, equipment and teamwork | faster, more consistent output and easier adoption of technology |
Education/training → stronger human capital → higher labour quality and productivity → potentially lower unit cost, better quality and greater labour demand.
Training does not guarantee a return: content must match the job, workers must apply it, and benefits must outweigh time and financial cost.
Read equilibrium wages and employment from labour-market shifts
In a labour-market diagram, the vertical axis is wage rate and the horizontal axis is quantity of labour or employment. Downward-sloping labour demand (DL) and upward-sloping labour supply (SL) intersect at equilibrium wage We and employment Qe.
| Curve shift, other curve fixed | Equilibrium wage | Employment |
|---|---|---|
| DL right | rises | rises |
| DL left | falls | falls |
| SL right | falls | rises |
| SL left | rises | falls |
A lower school-leaving age makes more young people eligible to work, shifting SL right; the new equilibrium has a lower wage and higher employment, assuming labour demand is unchanged.
A change in wage causes movement along DL or SL. A non-wage determinant such as product demand, migration or school-leaving age shifts a curve.
Explain how trade unions pursue wages and conditions
A trade union is an organisation representing employees and protecting their employment interests, especially wages and working conditions.
| Union activity | Intended worker effect | Possible business effect |
|---|---|---|
| collective bargaining | stronger negotiating power for higher wages, hours, leave or benefits | higher labour cost but potentially stronger motivation and retention |
| representation and grievance support | fairer treatment and enforcement of agreements | clearer procedures but added management time |
| industrial action or threat | pressure on employers to accept demands | disruption, lost output, revenue and customer trust |
| health-and-safety negotiation | improved conditions and lower worker risk | implementation cost but fewer accidents or absences |
Impact depends on union membership, bargaining power, business finances, labour demand and whether agreement is reached without prolonged disruption.
A union represents workers, not consumers or government. Higher negotiated wages benefit employed workers but can raise costs and may affect employment if firms reduce labour demand.