The labour market

How the labour market works

The labour market is the interaction between households who supply their labour and the firms that demand it. We can represent it with a supply and demand curve. The big difference that students sometimes get wrong when drawing a labour market diagram is that it is W for wages not P for price on the y-axis. Demand for labour slopes downwards as the more firms have to pay for workers then the fewer workers they will be prepared to employ. Supply slopes upwards because the more a job pays, the more people will be willing to do the job.

The price of labour is also influenced by the government who set minimum pay and working conditions that businesses must follow. Trade unions lobby on behalf of workers to raise pay and improve conditions as well.

The two main ways that people are paid are by wages or a salary. A wage is an amount that is generally paid weekly or fortnightly based on the number of hours worked. A salary is an amount paid per year that is usually given out monthly.

The labour market can be broken down in a number of ways. You can see this in the way they advertise. Low skilled jobs are likely to be advertised locally and through local job centres. Jobs with higher responsibility and higher pay may attract candidates from across the country. They may be found in national newspapers or industry publications. The very highest paying jobs in business might see firms recruit CEOs and other senior executives from across the world. They would advertise in major international newspapers and across industry publications that span the globe. They would also likely have specialist recruitment departments.

Another way you can divide up labour markets is according to the skills/qualifications needed or by region.

Firms advertise jobs specifying the type of person they are looking for including qualifications, where the job is, what it entails, how much it pays. Workers apply for these roles specifying their personal details, skills, qualifications and experience. There is usually then a short-listing process and interviews to determine the right candidates to hire.

The determination of wages through market forces

Equilibrium wage and quantity of people employed will be the point where supply of labour exactly matches demand for labour. Like with market prices the market will always tend towards equilibrium.

Factors affecting the supply of labour	Factors affecting the demand for labour
Wage rate: The more a job pays the more people with the right qualifications it will attract.	Wage rate: The higher wages are the less people firms will want to employ.
Other payment: If a job offers the chance to earn extra payments such as bonuses or overtime it might appeal to more people.	Increased demand in certain markets: When a particular industry is experiencing growth they will need to attract a lot of new workers.
Size of the workforce: This is the number of active people in the labour market. it excludes children, students, pensioners and the ill. If there are more working age people.	State of the economy: When the economy is growing it is likely to require more labour.
Non monetary factors: This can be a range of things. Increasingly flexible working time and remote working are important factors for workers.	Fall in real wages: Real wages means people's wages after accounting for inflation. If real wages are going down then for businesses it is more efficient to employ people rather than capital.
Qualifications: The level of education and qualifications someone has and their experience will determine the types of jobs they are able to go for with better qualified people able to go for more jobs.	Productivity: If labour is more productive then firms will be willing to employ more people because the average labour costs have gone down.
	Profitability: When firms are making string consistent profits they are more likely to expand and require more labour.

If there is a right shift of demand for workers in an industry, there will be an increase in equilibrium wage and in the number of people employed. The reverse would be true if there were a left shift of demand.

If there is a right shift of supply of workers in an industry, there will be a decrease in the equilibrium wage and an increase in the number of workers employed. If there was a left shift of supply of workers, there would be an increase in the equilibrium wage and a decrease in the number of workers employed.

In low skilled jobs there is a bigger group of people able to do a job. There are also more low skilled jobs than skilled jobs. This means demand for low skilled jobs is quite elastic and so is supply. Many low skilled jobs are noted for their high turnover of staff.

Jobs that require more skills and qualifications are fewer and have lower turnover meaning demand is fairly inelastic. The level of skill and qualifications needed will determine how elastic the supply is. Some roles will be suitable for very few people. In the case of elite athletes and some of the top CEOs there may be a case of perfectly inelastic supply with firms or teams feeling only one person is good enough and willing to pay very high wages to get them.

Pay and tax calculations

Pay and tax term	Description
Gross pay	This is the total amount of pay an employee receives before any deductions are made.
Net pay	This is the total amount of pay an employee receives after any deductions are made.
Deductions	Income tax, national insurance and pension contributions come out of an employees wages before they receive them.
National insurance	This is an amount paid by workers towards the cost of state benefits.
Pension	A pension is a fund that you pay into regularly while you are working and when you retire you receive the money and interest either as a lump sum or as an annuity which is a series of regular payments.
Income tax	Income tax is the amount of tax you pay for earning money above the tax-free threshold.

The myth about higher income and higher tax

It is true that in the UK we have a sliding tax scale with more tax payable on higher incomes. The current tax rates can be found on the government's website here

The important thing to note is that you only ever pay the increased level of tax on the income you earn that is above the threshold for that tax level. Because of this going into the tax bracket will never cause someone's income to drop. It may however mean that the extra amount they earn for doing a little more work may not be of as much benefit if it pushes them into the next tax bracket.

Calculating Gross & Net Pay

Gross pay is made up of a persons basic pay including bonuses and overtime pay.

A person earning £2000 basic pay plus £200 in overtime pay in a month has gross pay of £2000 + £200 or £2200.

Net pay is after deductions are made from gross pay. Let's assume our employee pays £400 tax, £200 national insurance, and pension contributions of £100.

So net pay = gross pay - deductions = £2200 - (£400 + £200 + £100) = £2200 - £700 = £1500.

Click the button below to generate a question to practice calculating gross and net pay

Gross pay: £ Net pay: £

Knowledge check

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Exam style questions

Use the space below each question or a pen and paper to write your answer. When complete click the button for the answer and mark scheme.

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Questions

Explain what is meant by the labour market. (2 marks)

Where households supply there labour(1) to meet the demands of firms for workers.(1)

Explain the role of trade unions in the labour market. (2 marks)

Trade unions are groups that represent employees(1) and advocate for better pay and conditions.(1)

Explain what net pay is. (2 marks)

net pay is the pay a worker receives after deductions(1) like tax and national insurance.(1)

Explain what national insurance is. (2 marks)

National insurance is a contribution collected from the income of workers(1) to contribute toward the provision of state benefits.(1)

Explain what a pension is. (2 marks)

A fund workers pay into each pay check throughout their lives(1) that pays out when they retire either as a lump sum or an annuity.(1)

Case study/Scenario

When Britain went through the process of Brexit it made it more difficult for European workers to work in the UK. This has had a particular impact on the fruit farming industry who have found it hard to get enough pickers and packers.

Analyse the effect of this on the UK labour market for fruit farm workers. (6 marks)

Sample answer:

Case study/Scenario

The UK has a National Minimum Wage(NMW) and a National Living Wage(NLW) for older workers. These specify the minimum amount that firms can pay workers.

Analyse the effect of a rise in the NMW and NLW on the market for minimum wage workers. (6 marks)

Sample answer:

As the minimum wage rises people on minimum wage earn more money{AO1} which may attract more people who are not currently working to work or those working to work more hours{AO2} because they can now earn enough more than benefits that it is worthwhile to more workers.{AO3a} Meaning a right shift in supply of labour.{AO3a}.

As the minimum wage rises it is a higher cost for firms{AO2} so firms will be likely to demand less labour.{A03a}