2.

7 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.

VIDHU LESSONS
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.

A medium of exchange is anything that sets the standard of value satisfactory to all parties in a transaction. Money
solved a problem with the old system of barter. It makes it easier to barter for items of unequal value. It is generally
backed by the government and has anti-counterfeit measures providing confidence to all parties about its value.

Money includes notes, coins, and deposits in savings and current accounts. An important distinction should be made to
debit and credit cards which provide access to your accounts but are not in themselves considered money.

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.

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

VIDHU LESSONS
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.

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Pay and tax calculations
Pay and tax
Description
term
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.

Income tax, national insurance and pension contributions come out of an employees wages before they receive
Deductions
them.

National
This is an amount paid by workers towards the cost of state benefits.
insurance

A pension is a fund that you pay into regularly while you are working and when you retire you receive the money
Pension
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.

VIDHU LESSONS
The myth about higher income and higher tax
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.

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