What is the labour market?
In the labour market, workers offer their time and skills, and employers pay a wage for them. The wage is the price of labour. There is not one labour market but many: for nurses, drivers, coders, teachers.
Key words: labour force (people working or looking for work), employment, unemployment (people who want work but have none), vacancies (empty jobs).
Demand for labour
Firms do not want workers for their own sake. They want them to make goods people will buy. So the demand for labour is a derived demand.
A firm hires more workers when the wage is lower, so the demand curve slopes down. A firm keeps hiring while an extra worker adds more to revenue than the wage. This extra revenue is the marginal revenue product (MRP) = extra output × price.
Demand shifts when: product demand changes, workers become more productive (training, better machines), or machines replace workers.
Supply of labour
Higher wages bring more people into work and make people offer more hours, so the supply curve slopes up.
Supply depends on: population and age, skills and training needed, working conditions, non-wage benefits, migration, and how pleasant or risky the job is. Jobs needing long training (doctors) have small supply, so pay is high.
How wages are set
In a competitive labour market, the wage settles where demand meets supply: the equilibrium wage. If the wage is above it, there are more workers than jobs (unemployment). If below, there are empty jobs (shortage).
Worked idea
Demand Ld = 120 − 4W, supply Ls = 6W. Set equal: 120 − 4W = 6W, so W = 12 and 72 people are employed.
Wage differentials: pay differs because of skill, training, danger, demand for the product, unions and discrimination.
Minimum wage, trade unions, monopsony and discrimination
A minimum wage is a legal lowest pay. If it is set above the equilibrium, workers who keep their jobs earn more, but firms may hire fewer people and unemployment can rise. In real studies the job loss is often small when the minimum wage is modest.
A trade union bargains for all workers together (collective bargaining) for better pay and conditions.
A monopsony is a single big buyer of labour (for example one mine in a town). It can pay less than a competitive wage and hire fewer people. Here a union or a minimum wage can raise both pay and jobs.
Discrimination: paying or hiring people less because of gender, caste, religion, race or age, not their work. It is unfair and wastes talent. Laws for equal pay try to stop it.
Changes in work
Technology and automation remove some jobs and create new ones. More people now work in services, on short contracts, in the gig economy (app-based delivery, ride-hailing) or from home. Lifelong learning helps workers move to new jobs. Work also gives people income, identity and social contact, so societies support those without jobs through benefits and training.
Key formulas and definitions
- Equilibrium wage: labour demand = labour supply
- MRP = marginal product × price of the product
- Firm hires while MRP ≥ wage
- Unemployment at a wage floor = Ls − Ld
Worked examples
1. Ld = 120 − 4W, Ls = 6W. Find the equilibrium wage and employment.
120 − 4W = 6W, 10W = 120, W = 12. Employment = 6 × 12 = 72.
2. A minimum wage of 15 is set. Find jobs, people wanting work and unemployment.
Ld = 120 − 60 = 60, Ls = 90. Unemployment = 90 − 60 = 30.
3. A worker adds 5 extra shirts per hour; each shirt sells for 3. The wage is 12. Should the firm hire?
MRP = 5 × 3 = 15 per hour, which is more than 12. Yes, hiring adds 3 to profit each hour.
4. Why do surgeons earn more than shop helpers?
Few people have the long training (small supply), and their work creates high value (high demand). Both push the wage up.
Common mistakes
- Thinking firms want workers for their own sake. Labour demand is derived from product demand.
- Drawing the labour supply curve sloping down. Higher wages attract more workers.
- Saying a minimum wage always causes big job losses. It depends on how high it is and on the market (monopsony).
- Mixing up monopoly (one seller) and monopsony (one buyer).