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The wage for a job is set where the demand for labour meets the supply of labour
You already know the market for goods and services. The labour market works in a similar way, but the "price" is the wage and the "good" is workers' time. This lesson is examined on Paper 1 (Microeconomics and Business Economics). The reasons why the curves move are in the lesson on the demand for and supply of labour. Here we use the diagram.
Key terms:
Follow these steps in the exam.
Here is a made-up labour market for delivery drivers in a town.
| Wage per hour | Quantity of labour demanded | Quantity of labour supplied |
|---|---|---|
| £6 | 600 | 200 |
| £8 | 500 | 300 |
| £10 | 400 | 400 |
| £12 | 300 | 500 |
| £14 | 200 | 600 |
Demand equals supply at £10. So the equilibrium wage is £10 an hour and equilibrium employment is 400 drivers.
When the demand for labour changes at every wage, the whole D curve shifts.
Draw D1 to the right of D. In the table above, suppose people order more parcels, so firms want 200 more drivers at every wage. D1 now crosses S at £12 and 500 drivers. The equilibrium wage and employment both rise (W2 above W1, Q2 above Q1).
Draw D1 to the left of D. Firms want fewer drivers at every wage. D1 now crosses S lower down and further left. The equilibrium wage and employment both fall.
Draw S1 to the right of S. For example, migration brings 200 more people who can work at every wage. S1 now crosses D at £8 and 500 drivers. The equilibrium wage falls, but employment rises (W2 below W1, Q2 above Q1).
Draw S1 to the left of S. For example, the retirement age is lowered, so fewer people can work at every wage. S1 now crosses D higher up and further left. The equilibrium wage rises, but employment falls.
A quick way to remember it: a rise in demand for labour pushes wages up, a rise in supply of labour pushes wages down. Always label the old and new equilibrium and say what happened to both wages and employment.
Use the table above (equilibrium £10 and 400 drivers). Many drivers leave to work in a nearby city, so supply falls by 200 at every wage. Supply is now 0 at £6, 100 at £8, 200 at £10, 300 at £12 and 400 at £14.
Look for where it equals demand (600, 500, 400, 300, 200). At £12 both are 300. The new equilibrium wage is £12 and employment is 300. The wage rose by £2 but employment fell by 100 drivers.
Trade unions bargain together for better pay and safer working conditions for their members
A single worker has little power against a large employer. A trade union brings workers together so they have more strength. Members pay a fee, and the union speaks for them.
Unions use collective bargaining to talk to employers about pay, hours, holidays and safety. If talks fail, they may threaten or take strike action. They may also help members who are treated unfairly.
Unions push for safer workplaces, reasonable hours, proper breaks, paid holiday and fair treatment. Better conditions make jobs more attractive and may help workers stay healthy.
Higher wages for members, better and safer working conditions, more job security and a stronger voice for workers. Happier workers may stay longer and work harder.
Higher wages raise a firm's costs, so it may raise prices or make less profit. If the wage is pushed above equilibrium, the quantity of labour demanded falls, so fewer workers may be hired. Strikes lose output and income for firms and for workers.
Notice the link to the diagram. If a union wins a wage above the equilibrium wage, firms may hire fewer workers.
A town has a large call centre. The workers have formed a trade union. The company opens a second call centre in the town,.
(a) Define trade union. [2 marks]
(b) Draw a labour market diagram and explain what happens to the equilibrium wage and employment if the demand for labour rises. [4 marks]
(c) Analyse one way the union's activity could affect the call centre workers and the company. [4 marks]
(a) A trade union is an organisation of workers (1) that works together to protect and improve pay and working conditions (1).
(b) Diagram: wage rate on the vertical axis and quantity of labour on the horizontal axis, with downward-sloping D and upward-sloping S crossing at W1 and Q1 (1); D shifts right to D1, crossing S at W2 and Q2 (1). Explanation: the second call centre means firms want more workers at every wage, so demand shifts right (1). This raises the equilibrium wage from W1 to W2 and raises employment from Q1 to Q2 (1).
(c) The union can use collective bargaining to win higher wages for its members (1). This means workers earn more and may be more satisfied, so they may stay longer (1). However, higher wages raise the company's costs (1), so it may raise prices, make less profit, or hire fewer workers at the higher wage (1).
In a diagram question, label both axes, both curves, and the old and new equilibrium, then use words from the diagram in your explanation ("D shifts right to D1, so the wage rises from W1 to W2").