Edexcel A-Level Economics A (9EC0) · Theme 3
Specification points
- The demand for and supply of labour; wage determination.
- Elasticity of demand and supply of labour.
- Labour market imperfections: monopsony, trade unions and the minimum wage.
Demand and supply of labour
- Demand for labour is a derived demand — it depends on demand for the product and on labour productivity (the marginal revenue product, MRP).
- Supply of labour depends on the wage rate, the size and skills of the workforce, migration, and the non-monetary characteristics of jobs.
The equilibrium wage is where labour demand equals labour supply.
Key definitions
| Term | Definition |
|---|---|
| Derived demand | Demand for a factor that stems from demand for the product it makes. |
| MRP | Marginal revenue product — the extra revenue from employing one more worker. |
| Monopsony | A single dominant buyer of labour. |
| Minimum wage | A legal wage floor set above the market rate. |
Elasticity in the labour market
Demand for labour is more elastic when labour is a large share of costs, when the product is price-elastic, and when it is easy to substitute capital for labour. Supply is more elastic when little training is required.
Imperfections
- Monopsony — a single dominant employer can pay below the competitive wage and hire fewer workers.
- Trade unions — bargain collectively for higher wages; in a competitive market this may cost jobs, but against a monopsony a union can raise *both* wages and employment.
- Minimum wage — raises low pay and can reduce exploitation; critics warn it may cause unemployment if set above the equilibrium.
Worked example
A large employer dominates a rural labour market (monopsony) and pays below the competitive wage. A trade union or minimum wage can push the wage up *towards* the competitive level and increase employment, because the monopsonist was previously restricting hiring — an important exception to the usual minimum-wage criticism.
Common exam mistakes
- Forgetting labour demand is derived from product demand.
- Assuming a minimum wage always raises unemployment (not against a monopsony).
- Confusing monopsony (buyer power) with monopoly (seller power).
Exam technique
Use labour demand/supply diagrams, apply MRP, and evaluate wage policies differently in competitive versus monopsonistic markets.
Quick revision
- Labour demand = derived demand; based on MRP.
- Monopsony pays below competitive wage.
- Minimum wage/unions can raise wages *and* jobs against a monopsony.