The labour market is determined by the forces of demand and supply.
The demand for labour
- The demand for labour comes from businesses because in order to produce goods and services they need labour.
- The demand curve for labour is determined by the combined behaviour of individual businesses and their approach to employing workers.
- If businesses intend to employ extra staff, they have to make sure that the costs of employing this extra staff are lower than the extra revenue they generate.
- With higher wages, companies will employ fewer employees.
Certain factors can increase or decrease the demand for labour:
- Changes in labour productivity – if workers are able to improve their productivity, the business is more likely to employ extra workers.
- Demand for the product – the demand for labour is a derived demand for the products or services that businesses produce. For example a design company may employ extra workers as a result of growing demand for promotions.
The supply curve of labour shows the amount of labour which is supplied to the market at a particular wage rate.
- For an individual worker the supply of labour is the number of hours that he/she is prepared to work.
- As the real wage rate rises, a worker is likely to want to work longer hours.
- The real wage shows what the wage of the worker can actually buy, so it takes into account the changes in prices of goods.
- Above a certain real wage rate the number of hours worked will decrease.
Supply to an industry
- The higher the real wage rate is, the more workers are prepared to offer their services to the labour market.
What can lead to changes in the supply of workers to businesses?
- Improvements in geographical mobility – businesses can attract new employees from other parts of the country.
- Occupational mobility – how easy it is to move from one type of job requiring certain skills to another type of job requiring another skills.
- The availability of training schemes
Total supply depends on:
- Birth and death rates
- The age distribution of the population
- The number of people physically capable of working
Wage and employment determination
- In competitive labour markets the price of labour is determined by the interaction of the demand curve for and the supply curve of labour.
- Equilibrium price: the point at which the demand and supply intersect/meet.
Labour market conditions and business
Different conditions can influence the demand for and supply of labour:
- Government intervention in the labour market – governments usually intervene in the labour market in order to reach social aims, for example to ensure that all employees are paid at least a minimum amount or to prevent discrimination.
- Trade unions and professional groups – these organizations’ task is to protect the interests of their members. They usually attempt to increase or maintain the pay levels of their members. Their aim can be also to restrict the supply to a particular market.
- The amount of unemployment – at higher levels of unemployment businesses are able to recruit from a larger pool of labour, and the increased supply may force down the equilibrium rate. Labour shortages are likely to have the opposite effect.