Workers and the labour market
Workers provide labour to firms and are paid for their work. The labour market is where employers demand workers and individuals supply their labour. Wage rates and employment depend on demand for labour, supply of labour and other factors such as bargaining power and minimum wage laws.
1. Factors affecting an individual’s choice of occupation
People do not choose jobs for only one reason. Their decision is usually affected by both wage factors and non-wage factors.
Wage factors
| Wage factor | Meaning | Simple example |
|---|---|---|
| Wages | Payment usually based on hours worked. | A shop assistant paid per hour. |
| Salary | A fixed amount paid weekly, monthly or yearly. | A teacher paid a monthly salary. |
| Piece rate | Payment based on the number of units produced. | A worker paid for each item assembled. |
| Commission | Payment linked to the value or number of sales made. | A salesperson earning 5% on each sale. |
| Bonus | An extra payment for good performance or meeting targets. | A manager receiving a year-end bonus. |
| Profit-related pay | Payment linked to the profits of the firm. | Staff receiving an extra payment when the company makes high profits. |
Non-wage factors
- Level of challenge: some people prefer jobs that are interesting and mentally demanding.
- Career prospects: jobs with promotion opportunities are often more attractive.
- Level of danger involved: risky jobs may discourage some workers unless the pay is high.
- Length of training required: some jobs need years of study and training, which can affect choice.
- Time commitment / duration required: some occupations involve long hours or irregular shifts.
- Personal satisfaction: people may choose a job because they enjoy helping others or using their talents.
- Recognition in the job: some occupations bring social respect and status.
Money matters
Many people compare wages, salary, bonuses and commission before choosing a job.
Future matters
Promotion, experience and long-term career growth are also very important.
Job satisfaction matters
A person may accept slightly lower pay if the job is safer, more enjoyable or more respected.
2. Wage determination
Wages are mainly determined by the interaction of demand for labour and supply of labour. However, bargaining power and government policy can also affect wages.
Demand for labour
The demand for labour shows how many workers employers are willing and able to hire at different wage rates. The demand curve slopes downward because when wages fall, firms can afford to employ more workers; when wages rise, firms employ fewer workers.
How to read the graph: when the wage rate falls from W₁ to W₂, the number of workers demanded rises from N₁ to N₂. So lower wages usually lead to a greater demand for labour.
Supply of labour
The supply of labour shows how many workers are willing and able to work at different wage rates. The supply curve slopes upward because a higher wage usually encourages more people to work or to work longer hours.
How to read the graph: when the wage rate rises from W₁ to W₂, the number of workers supplied rises from N₁ to N₂. So higher wages usually encourage more people to offer their labour.
Why labour supply differs between countries
- Labour force participation rate: countries with more people of working age in jobs or seeking jobs have a larger labour supply.
- Availability and level of welfare benefits: generous benefits may reduce the need for some people to work, while low benefits may encourage more people to seek employment.
- Changing social attitudes: attitudes towards female employment, retirement age and part-time work can affect labour supply.
Equilibrium wage rate
The equilibrium wage rate is the wage at which the number of workers demanded equals the number of workers supplied. At this point, the labour market is in balance.
How to read the graph: the demand for labour curve and supply of labour curve meet at one point. This gives the equilibrium wage rate Wₑ and the equilibrium number of workers employed Nₑ.
Relative bargaining power
Relative bargaining power means the strength of workers compared with employers when negotiating wages. Workers may have stronger bargaining power if they are highly skilled, scarce, unionised, or difficult to replace. Employers may have stronger bargaining power when unemployment is high or when many workers can do the same job.
Minimum wage
A minimum wage is the lowest legal wage rate that employers are allowed to pay. Governments introduce it to protect low-paid workers.
How to read the graph: the minimum wage is set above the equilibrium wage. At this wage, more workers are willing to work, but firms demand fewer workers. This can create unemployment because labour supplied is greater than labour demanded.
3. Reasons for differences in earnings
| Difference | Why earnings may differ |
|---|---|
| Skilled and unskilled workers | Skilled workers often earn more because they have more training, qualifications and productivity, and their labour is usually less easy to replace. |
| Primary, secondary and tertiary sector workers | Earnings differ because jobs vary in demand, working conditions, training needs and productivity. For example, some tertiary sector jobs such as finance or medicine may be highly paid. |
| Male and female workers | Differences may be caused by discrimination, occupational segregation, part-time work, career breaks or unequal promotion opportunities. |
| Private and public sector workers | Private sector jobs may offer higher performance-related pay, while public sector jobs may offer more job security, pensions and standardised pay scales. |
4. Division of labour and specialisation of labour
Division of labour means breaking production into a number of small tasks, with each worker doing one task. Specialisation of labour means workers concentrate on the job or task they do best.
Advantages
- Higher productivity: workers become faster and more efficient when they repeat the same task.
- Better skills: workers gain expertise in a particular job, which can improve quality.
Disadvantages
- Boredom: repeating the same task may reduce job satisfaction.
- Lack of flexibility: workers may be too specialised and may not be able to do many different jobs.
Quick check
- A job choice depends on both wage and non-wage factors.
- Labour demand slopes downward, while labour supply slopes upward.
- The equilibrium wage rate is where labour demand equals labour supply.
- A minimum wage set above equilibrium can create unemployment.
- Division of labour raises productivity, but it can also cause boredom.