Wage rates: a) Factors that influence the supply of and demand for labour

The idea

The demand for labour is a derived demand, meaning it depends on the demand for the final goods or services the workers produce. Factors influencing labour demand include worker productivity, the cost of capital substitutes, and the overall state of the economy. The supply of labour is influenced by demographic changes, migration, the level of welfare benefits, and non-monetary factors such as working conditions. For instance, an increase in the retirement age expands the macroeconomic labour supply, while higher wages in a specific industry will attract workers, increasing the occupational supply of labour. Understanding these factors is crucial for analysing how wage rates are determined in competitive and non-competitive markets.

What earns the marks

• Identify derived demand as the primary determinant of the demand for labour.
• Explain how changes in labour productivity affect the demand for workers.
• Analyse how demographic factors, such as an ageing population or net migration, influence the total supply of labour.
• Evaluate how non-pecuniary benefits and working conditions affect the supply of labour to a specific occupation.

Common mistakes and how to put them right

• Treating the demand for labour as a direct demand rather than a derived demand.

  Put it right: Link the demand for workers to the demand for the product or service they are producing.

• Confusing the macroeconomic supply of labour with the supply of labour to a specific firm or industry.

  Put it right: Distinguish between factors that change the total workforce (e.g. migration) and those that shift workers between sectors (e.g. relative wages).

• Assuming that higher wages always lead to an increase in the supply of labour.

  Put it right: Recognise the backward-bending supply curve of labour, where at very high wage rates, workers may choose more leisure time over extra work.

Exam tips

• Always explicitly state that the demand for labour is a derived demand when answering questions on wage determination.
• When evaluating changes in labour supply, consider both monetary factors (wages, bonuses) and non-monetary factors (job security, flexible hours).
• Use supply and demand diagrams for the labour market to illustrate how changes in these factors impact the equilibrium wage rate and employment level.