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The Labour Market » Demand for and Supply of Labour

What you'll learn this session

Study time: 30 minutes

Edexcel spec: 1.2.5 (a) and (b)

What the demand for labour and the supply of labour mean
Three factors that affect the demand for labour: demand for the final product, substitutes including machines, and productivity
Eight factors that affect the supply of labour, from population size to how easily workers can move

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The labour market

Businesses need workers, and people need jobs. The place where they meet is called the labour market. Labour is one of the factors of production, and the reward for it is wages. This lesson is examined on Paper 1 (Microeconomics and Business Economics).

Key terms:

Labour market: the market in which firms demand workers and workers supply their time and skills.
Demand for labour: the number of workers that firms want to employ.
Supply of labour: the number of people who are willing and able to work.
Derived demand: demand for something that comes from the demand for something else. Labour is wanted because of the goods and services it helps to make.
Female participation: the share of women who are in work or looking for work.
Geographical mobility: how easily workers can move to a different area to take a job.
Occupational mobility: how easily workers can move to a different type of job.

Firms are on the demand side. Workers are on the supply side. We look at each in turn. The labour market diagram is taught in the lesson on wage diagrams and trade unions.

Factors affecting the demand for labour

More customers means more staff needed: the demand for labour is derived from demand for the product

🛒 Demand for the final product

Firms do not hire workers for fun. They hire them to make things people want to buy. So if demand for the product rises, firms need more workers. This is called derived demand.

🤖 Substitutes, including machines

If a machine can do the job well and cheaply, a firm may use fewer workers. If machines become more expensive, or workers become cheaper, a firm may hire more people.

💪 Productivity of the workforce

More productive workers make more output for each hour worked. They are worth more to a firm, so the firm wants to hire them. Low productivity makes workers less attractive.

Worked example

Harbour Cycles sells electric scooters. A sudden fashion for scooters makes sales jump. The firm needs to make more scooters, so it hires 20 more workers. This is derived demand: the extra jobs come from the extra demand for scooters. If sales then fall, the demand for workers falls too.

Later, the firm buys a robot arm that can weld frames. It now needs fewer welders. The robot is a substitute for labour.

Remember that productivity means output per worker. Training and better tools can raise it, and the firm will then want more of those workers.

Factors affecting the supply of labour

People in their working years make up the supply of labour, and things like the retirement age change its size

The supply of labour is about how many people are willing and able to work. Many things change it. It helps to think of them in three groups.

Group	Factor	Effect on supply of labour
How many people	Population size	A bigger population means more people of working age, so supply rises.
How many people	Migration	Workers moving into a country raise supply there. Workers leaving lower it.
Who the people are	Age distribution	Many people of working age raises supply. An older population, with many retired, lowers it.
Who the people are	Retirement age	A higher retirement age keeps people working for longer, so supply rises.
Who the people are	School-leaving age	Raising it keeps young people out of work for longer, so supply falls. Lowering it raises supply.
Who the people are	Female participation	If more women take jobs, supply rises. Better childcare and equal opportunities can help.
What the people can do	Skills and qualifications	Skilled jobs need skilled workers. Where few people have the right skills, supply of that type of labour is low.
What the people can do	Geographical and occupational mobility	If workers can easily move to where jobs are, or switch to a new type of job, supply in each place and job is higher.

Looking more closely

👴 Age and retirement

Think of a country where many people are over 65 and few are young. There are fewer workers. If the government raises the retirement age, people stay in work for longer and supply goes up.

🎓 School-leaving age

If young people must stay in school until 18 instead of 16, they cannot take full-time jobs for two extra years. The supply of labour falls for now.

🌍 Migration

A country with many unfilled jobs may attract workers from abroad. A town where many young people leave to study or work elsewhere loses workers.

🚚 Mobility

An out-of-work shop assistant in one town may be unable to move to a job in a city if housing there is expensive. That is poor geographical mobility. A factory worker who has no IT skills may find it hard to become an office worker. That is poor occupational mobility.

Common mistakes

Mixing up demand and supply. Firms demand labour. Workers supply it.
Saying that firms demand labour because they like workers. Say it is derived demand from the final product.
Saying machines always cut jobs. They are a substitute, but firms may also hire people to run them.
Writing 'more people' for every supply factor. Say how the factor changes the number of people willing and able to work.
Mixing up geographical mobility (moving place) with occupational mobility (moving job type).

Exam-style question

In the country of Tolvia, a rise in the retirement age has been announced. Many people are moving into Tolvia to work. At a car factory in Tolvia, a new machine now does the work that 50 workers used to do. The factory's sales of cars have also fallen.

(a) Define the term 'derived demand'. [2 marks]

(b) Identify two factors in the information that may increase the supply of labour in Tolvia. [2 marks]

(d) Analyse one way in which poor occupational mobility could affect a worker who has lost a job at the factory. [4 marks]

Model answer

(a) Derived demand is demand for something that comes from the demand for something else (2). For example, demand for labour comes from the demand for the goods it makes (accept any correct example).

(b) A higher retirement age (1). Migration into the country (1).

(c) The factory has bought a machine, which is a substitute for labour (1). The machine does the work of 50 workers, so the factory needs fewer people (1). Sales of cars have also fallen, so the factory needs to make fewer cars and hire fewer workers. This is derived demand (1).

(d) Occupational mobility is how easily a worker can move to a different type of job (1). A car worker may only have skills for factory work (1). Without new skills, the worker may find it hard to get another type of job (1), so they may stay unemployed for longer (1).

Exam tip

In part (b), pick two factors straight from the text. In part (d), give a chain: skills, then few job options, then longer without work.

Recap

The demand for labour comes from firms. The supply of labour comes from workers.
Demand for labour depends on demand for the final product (derived demand), substitutes including machines, and productivity.
Supply of labour depends on population size, migration, age distribution, retirement age, school-leaving age, female participation, skills and qualifications, and geographical and occupational mobility.

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