2.7 The labour market

• The labour market analyses the market for one factor of production rather than product. But as with any market, equilibrium is always determined by supply and demand. The labour market shows the interaction between workers and employers. The market is made up of supply of labour (workers) and the demand for labour (firms). Any changes in demand or supply of labour will lead to changes in labour market equilibrium. The diagrams for this have wage on the y-axis and quantity of labour on the x-axis. *see notes*
• The labour market is ''where workers sell their labour and employers buy their labour: it consists of households' supply of labour and firms' demand for labour.''

  The role it fulfils is to enable workers who are willing and able to sell labour, to meet employers who are willing and able to offer them a job. In theory, firms send signals to individuals as to which jobs have shorter supply by increasing wages. More workers are therefore attracted to work in these sectors... higher wages incentivise a greater supply of labour (an ''extension of supply'')
• • Supply of labour is defined as ''the total number of people who are willing and eligible to supply their labour, including the unemployed.''
  • Demand for labour is defined as ''the number of workers which firms are willing and able to employ at each given wage rate.''
• Analysis of the determination of wages through S+D:

  1. A rise in the demand for labour, which could result from higher demand for the product, increased profits made by firms and/or increased productivity. *see diagram* Here, a rise in demand for labour (D1 to D2) results in higher wages (W1 to W2). This, in turn, leads to an extension of supply of labour (Q1 to Q2).
• Analysis of the determination of wages through S+D:

  2. A rise in the supply of labour: For example, if the govt. were to raise the state retirement age then more workers would be available to 'supply' their labour. *see diagram* Here, a rise in labour supply (S1 to S2) results in lower wages (W1 to W2) and an extension of demand for labour (Q1 to Q2).
• Factors shifting demand for labour:

  • The productivity of labour
  • The profitability of firms
  • The level of demand for the firms' product
  • The state of the economy in general (is it growing fast?)

  Factors shifting supply of labour:

  • The size of the working population
  • Levels of education + Training
  • Non-monetary benefits of work (e.g. free meals/ perks)
  • The level of qualifications needed to take a job.
• Factors leading to changes in equilibrium wages in the labour market:

  1. Increased demand for products within markets: The demand for labour is a derived demand, so anything that raises the demand for a firms' product will also lead to an increase in demand for labour to increase the output of this favoured product. *see diagram* Here, an increase in demand for labour leads to a rightwards shift of the demand curve (D1 to D2), which, in turn, leads to higher wages (W1 to W2) and therefore an extension of supplied labour (Q1 to Q2).
• Factors leading to changes in equilibrium wages in the labour market:

  2. Increased working population: This shifts the supply curve for labour to the right -> an increase in labour supply. This is because more workers will now be supplying their labour/ searching for work. Also, if workers find that working conditions improve (e.g. better job security), then the supply of labour will increase. *see diagram* Here, the increase leads to a rightwards shift of the supply curve (S1 to S2), which, in turn, lowers wages (W1 to W2) and therefore extends demand for labour from Q1 to Q2.
• • Gross pay is before deductions and is defined as ''the amount of money that an employee earns before any deductions are made''.
  • Net pay is after deductions are made and is defined as ''The amount of money that an employee is left with after deductions are made from the gross income.''
  • 'Deductions' include taxes (income tax and 'national insurance contributions'), pension payments and any student loan payments.
• • Income tax is defined as ''A tax levied directly on personal income i.e. a tax on a person's wages.''
  • National insurance is defined as ''a contribution paid by workers and their employers, towards the cost of state benefits.''
  • Pension is defined as ''A fixed amount paid at regular intervals to a person (usually retired) or their surviving dependents''. It is not a tax.