In this section we focus on some aspects of the factor market for labour resources. It is a good chance to revisit the conditions of supply and demand by looking at labour supply and demand factors in different industries and occupations. A common error among students is to discuss “the demand for labour” as coming from individuals looking for work! In fact, labour demand focuses on how many people an employer is willing and able to take on at a given wage rate. Ensure you understand that factors influencing the supply of labour including population migration, income tax and benefits, the national minimum wage) and also the roles played by trade unions.

1. Labour Market Economics

2. How Markets Work
The Labour
Market

3. The Demand for Labour
• There is an inverse
relationship between demand
for labour & the wage rate
• If the wage rate is high - more
costly to hire extra employees
• When wages are lower, labour
becomes relatively cheaper
than capital. A fall in the wage
rate might create a
substitution effect and lead to
an expansion in labour
demand
The demand for labour shows how many workers an employer is
willing and able to hire at a given wage rate in a given time period
Wage
Rate
Employment
Labour
Demand
W1
W2
W3
E2 E1 E3
Higher wages –
contraction of
demand
Lower wages
– expansion
of demand

4. Elasticity of Labour Demand
1. Labour costs as a % of total
costs: When labour expenses are
a high % of total costs, then
labour demand is more elastic.
2. Ease and cost of factor
substitution: Labour demand is
more elastic when a firm can
substitute easily between labour
and capital inputs.
3. Price elasticity of demand for
the final output: This determines
whether a firm can pass on
higher labour costs to consumers
in the form of increased prices.
Elasticity of labour demand measures the responsiveness of
demand when there is a change in the wage rate. It depends on ……
Wage
Rate
Employment
LD1
LD2
W1
W2
W3
E1E3E2
LD2 is inelastic – i.e.
a large rise in wages
causes only a small
fall in employment
LD1 is elastic – i.e.
employment is
sensitive to a
changing wages

5. Shifts in Labour Demand
• The labour demand curve shifts
when there is a change in the
conditions of demand in the jobs
market.
• A rise in consumer demand
which means that a business
needs to take on more workers
• An increase in the productivity
of labour which makes labour
more cost efficient than capital
• A government employment
subsidy which allows a business
to employ more workers
• The labour demand curve would
shift inwards during a recession
as businesses shed labour
Wage
Rate
Employment
LD1 LD2LD3
W1
E1E3 E2
Shifts in labour demand
are caused by factors other
than the wage rate

6. Labour Supply to an Industry / Occupation
• The labour supply curve for
any industry or occupation will
be upward sloping.
• As wages rise, other workers
enter this industry attracted
by the incentive of higher
rewards.
• The extent to which a rise in
the prevailing wage or salary
in an occupation leads to an
expansion in the supply of
labour depends on the
elasticity of labour supply
The labour supply is the number of hours people are willing and
able to supply at a given wage rate
Wage
Rate
Employment
Labour
supply
W1
W2
W0
E1 E2
W0 – reflects the minimum
pay rate at which people
are willing to work in an
occupation

7. Key Factors: Industry / Occupational Labour Supply
1. Real wage rate on offer in the industry itself
2. Extra pay – e.g. overtime payments, productivity pay, share options
3. Wages in substitute occupations: e.g. increase in the earnings for
plumbers and electricians may cause people to switch their jobs
4. Barriers to entry: Artificial limits to an industry’s labour supply (e.g.
minimum entry requirements) can restrict supply and increase wages
5. Improvements in the occupational mobility of labour e.g. as result of
expansion of apprenticeships and other forms of work experience
6. Non-monetary characteristics of specific jobs – e.g. risk, requirement
to work anti-social hours, job security, working conditions,
opportunities for promotion, chance to live and work overseas,
employer-provided in-work training, occupational pension schemes.
7. Net migration of labour – e.g. net inward migration boosts the active
/ available labour supply in many occupations such as skilled
professionals working in the National Health Service

8. Elasticity of Labour Supply
Elasticity of labour supply measures the extent to which labour
supply responds to a change in the wage rate in a given time period
Wage
Rate
Employment
LS1
W1
W2
E1 E2
Wage
Rate
Employment
LS2
W1
W2
E1 E2
In lower-skilled jobs, the labour
supply is elastic because a pool of
labour is available at a fairly
constant market wage rate
Where jobs require specific skills
and training, the labour supply
will be more inelastic

9. Equilibrium Wages in the Labour Market
The equilibrium market wage rate is at the intersection of the supply and demand
for labour. Employees are hired up to the point where the extra cost of hiring an
employee is equal to the extra sales revenue from selling their output.
Wage
Rate
Employment
LS1
W1
E1
Wage
Rate
Employment
LS1
W1
W2
E1 E2
LD1
LD1
LD2
An outward shift of
labour demand

10. High and Low Pay in the UK Labour Market
Median full time gross weekly pay for different UK occupations, April 2014
Highest paid occupations in 2014 £s Lowest paid occupations in 2014 £s
Aircraft pilots and flight engineers 1,746 Bar staff 254
Air traffic controllers 1,549 Waiters and waitresses 258
Chief executives and senior officials 1,533 Dry cleaners and pressers 259
Marketing and sales directors 1,298 Hairdressers and barbers 269
Advertising and public relations
directors
1,289 Kitchen and catering assistants 268
Information technology and
telecommunications directors
1,226 Leisure and theme park attendants 273
Legal professionals 1,217 Retail cashiers and check-out operators 279
Medical practitioners 1,167 Other elementary services occupations 280
Brokers 1,149 Nursery nurses and assistants 285
Financial managers and directors 1,143 Cleaners and domestics 286

11. Key Causes of Pay Differentials in the Labour Market
1. Compensating wage differentials – a reward for risk-taking,
working in poor conditions and during unsocial hours.
2. Reward for human capital – differentials compensate workers for
(opportunity and direct) costs of human capital acquisition.
3. Different skill levels – market demand for skilled labour (with
inelastic supply) grows more quickly than for semi-skilled workers.
4. Differences in labour productivity and revenue creation - workers
whose efficiency is highest and ability to generate revenue for a
firm often rewarded with higher pay.
5. Trade unions who might use their collective bargaining power – to
achieve a mark-up on wages compared to non-union members
6. Other artificial barriers to labour supply e.g. professional exams
7. Employer discrimination - a factor that cannot be ignored despite
over twenty years of equal pay legislation in place

12. Trade Unions in the Labour Market
• Trade unions use collective
bargaining with employers
to protect their members
• Most unions belong to the
Trades Union Congress
• Examples: Amicus, Unison,
Unite and the National
Union of Teachers
• The % of employees that
were members of a trade
union in the UK fell from
32% in 1995 to 25% in 2013
• In 2013, just over 7 million
people were registered as
members of a trade union
• Key roles for trade unions
1. Protecting and improving the
real living standards of their
members
2. Protecting workers against unfair
dismissal (upholding
employment rights)
3. Promoting improvements in
working conditions, workload &
health and safety issues
4. Workplace training and
education, i.e. the accumulation
of human capital
5. Protection of pension rights for
union members

13. Some Key Causes of Labour Market Failure
Markets fail when they fail to reach a socially efficient/equitable outcome.
• Occupational immobility - barriers to moving easily between jobs
• Geographical immobility – barriers to changing location to find a new job
Labour Immobility
• The unemployment trap – where economic incentives to take a job are poor
• The poverty trap – where there are disincentives to earn extra income
Disincentives to find / take work
• This is a part explanation of the gender gap in pay and women in senior roles
• Discrimination badly affects wages and employment for affected groups
Discrimination by employers
• They can use their “buying power” in labour market to drive down wages
Monopsony power of employers

14. Government Policies to address Labour Market Failure
Policies seek to improve incentives, skills and labour flexibility
• Targeted employment subsidies / apprenticeships / internship opportunities
• Reforms to the housing market to improve affordability / lower travel costs
Labour Immobility
• Reforms to incomes taxes (lower rates) & benefit reforms (e.g. benefit cap)
• Increase in the national minimum wage / expansion of the living wage
Disincentives to find / take work
• Tougher laws on equality and penalties for businesses flouting the law
• Laws on unfair dismissal / min wage + other measures to cut poverty pay
Discrimination by employers
• Encourage business start-ups / small businesses as new employers
Monopsony power of employers

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