LABOUR MARKETS

THE DEMAND FOR LABOUR

The demand for labour is the firm’s willingness to employ labour at each given 

wage rate.  As the wage rate rises the demand for labour will fall and vice 

versa.

The reasons for this are:

•  As wages increase firms will look to substitute labour for something 

cheaper i.e. capital (machinery). 

•  As wages increase, this puts up costs of production, which will in turn 

put up the price of the product, as prices rise demand falls, therefore 

with less of the product demand there will be less need for labour. 

THE SUPPLY OF LABOUR

The supply of labour is the employees willingness to work at each given wage 

rate.  As the wage rate rises more labour will be supplied and vice versa.

The reasons for this are:

•  Higher wages attract worker from other industries.

•  Higher wages attract people who are currently unemployed.

•  In the long term higher wages encourage people to train to work in that 

occupation.

EQUILIBRIUM

This is established where demand for labour equals supply of labour.  As 

shown in the following diagram: 

SHIFTS IN DEMAND AND SUPPLY

The demand for labour can shift to the right because:

•  Demand for the product has increased.

•  Labour productiveness has increased (through better training, 

education and technology). 

•  Price of capital increases making it relatively cheaper to employ labour.

The diagram below shows the effects:

An increase in the demand for labour also increases both wages and the 

quantity of labour employed.

The supply of labour can shift to the right because:

•  Increase in population.

•  Working conditions have improved (or deteriorated in an alternative 

industry).

•  Increase in training and education (long term).

The effects are shown below:

An increase in the supply of labour causes wages to fall and a rise in the 

quantity of labour employed.

EFFECTS OF A MINIMUM WAGE

A minimum wage is very similar to a minimum price.  The idea of a minimum 

wage is to guarantee a reasonable wage to workers in low paid industries.  

The diagram below shows the effects of a minimum wage: 

The minimum wage is set at Wm above the equilibrium wage W1.  The workers 

in the industry have indeed benefited from higher wages, but there are a few 

negative effects:

The minimum wage has cause a surplus (excess supply of workers), as far as 

the labour market is concerned this has created unemployment in the industry 

equal to Qs – Qd.

Q1 – Qd have now lost their jobs (these people were originally working before 

the minimum wage was introduced).