Labour Markets | A-Level Economics Notes

These revision notes cover everything you need to know about Labour Markets for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.

What is a labour market?

A labour market is a place where workers and firms meet to exchange labour in return for a wage

What is demand for labour?

Demand for labour is the number of workers that firms are willing and able to hire at each given wage.

Remember that firms can choose between employing workers or capital.

Firms will only employ a worker if they are able to generate more additional revenue per hour (marginal revenue product) than the extra cost in wages.

Why is demand for labour downward sloping?

Marginal productivity theory states that a firm will hire a worker if their wage is below their marginal revenue product (MRP).

MRP is the extra revenue a firm can make if they hire one additional worker.

As wages increase, there are fewer workers who are able to generate an MRP that is high enough, so demand for labour decreases.

What are the factors (other than wage) that affect demand for labour?

1. marginal revenue product of workers
2. cost/ quality of capital
3. demand for the final good/service

What is supply of labour?

The number of workers that are willing and able to work at each given wage.

Remember that workers can choose between working in a given labour market or working in a different labour market. Or, they could choose not to work.

Why is supply of labour upward sloping?

At higher wages, the opportunity cost of not working in the given labour market increases, so there is an increase in the number of workers who are willing and able to work. This is known as the substitution effect.

What are the factors (other than wage) that affect supply of labour?

1. wages in substitute jobs
2. barriers to entry
   1. occupational mobility of labour - skills needed
   2. geographical mobility of labour - work from home/transport
3. working population (migration/ demographics)
4. vocational element to jobs

What is PED_L?

% change in demand for labour/ % change in wages.

What factors affect PED_L?

1. labour costs as a % of total costs
2. substitutability of factors of production
3. PED of the final product
4. time

What is PES_L?

% change in supply for labour/ % change in wages.

What factors affect PES_L?

1. barriers to entry and immobility of labour
2. vocational element of the work
3. time

How is wage determined in a perfectly competitive labour market?

Equilibrium wage is the wage where demand for labour meets supply of labour

What are wage differentials?

A wage differential is when two people earn different wages for working in different jobs (different labour markets).

What causes pay gaps between different workers?

The key idea to remember is that equilibrium wages in perfect labour markets can only be different if either:

1. supply of labour is higher/lower
2. demand for labour is higher/lower

so always link back to the factors of demand for labour or the factors of supply of labour.

Later, we will also see that some labour markets can be imperfect (monopsony).

What is wage discrimination?

Wage discrimination is when workers earn different wages despite doing the same jobs.

If it is purely because of ethnicity/gender/age, it is illegal.

However, it could also be due to a difference in MRP which is caused by language barriers/physical strength etc. which means that firms are willing and able to pay more for one worker compared to another.

What is a monopsony labour market?

A monopsony is an imperfect labour market. There is one main buyer.

For example, the NHS have bargaining power when employing nurses. of nurses/firemen/policemen.

Monopsonies under-pay and under-employ.

Monopsony labour market diagram

What government interventions can be used in a labour market?

• education and training
• minimum wages in perfectly competitive labour markets
• minimum wages in monopsony labour markets

Summary questions

1. what is a labour market?
2. what is demand for labour?
3. why is demand for labour downward sloping?
4. what are the factors (other than wage) that affect demand for labour?
5. what is supply of labour?
6. why is supply of labour upward sloping?
7. what are the factors (other than wage) that affect supply of labour?
8. what is PED_L?
9. what factors affect PED_L?
10. how is wage determined in a perfectly competitive labour market?
11. what are wage differentials?
12. what causes pay gaps between different workers?
13. what is wage discrimination?
14. what is a monopsony labour market?
15. monopsony labour market diagram
16. what government interventions can be used in a labour market?

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