AQA GCSE Economics: The labour market: wages, differentials and gross and net pay (8136) – Revision Notes

These notes condense section 3.1.5.4, The labour market, in AQA’s GCSE Economics (8136) specification, which was first taught from September 2017. The specification has no tiers. For full explanations read the study guide. Then use the practice questions, the AQA GCSE Economics hub, the printable checklist and our free 10-minute diagnostics. All figures here are invented.

Key definitions

Term	Meaning
Labour market	Where workers sell their labour and employers buy it
Wage	The price of labour
Derived demand	Firms’ need for workers, which exists only because buyers want what the workers help produce
Equilibrium wage	The wage where workers wanted equal workers willing
Wage differential	A difference in pay between occupations or within one
Gross pay	Total pay before deductions (basic, overtime, bonus, commission)
Net pay	Take-home pay: gross pay minus deductions
Deductions	Items such as income tax, National Insurance and pension contributions

Role of the labour market

• It brings workers and employers together, so jobs are filled.
• The wage acts as a signal. A high wage tells workers a job is scarce and attracts them; a low wage tells them it is not.
• It sets incomes for most households, which they then spend in other markets.
• It works through demand and supply, but wages can be slow to adjust, and workers cannot always move between areas or jobs.

Demand and supply of labour

	Demand for labour	Supply of labour
Comes from	Firms	Workers
Slope	Down: higher wage, fewer workers hired	Up: higher wage, more willing
Shifts right if	Product demand rises, productivity rises, machines become dearer	More people trained, migration in, other jobs pay less, better conditions
Shifts left if	Product demand falls, productivity falls, machines become cheaper	Fewer trained, longer training, other jobs pay more, worse conditions

Remember the exam rule: a change in the wage moves you along a curve; a change in anything else shifts the curve.

Method: finding and changing a wage

1. Find equilibrium: set Qd equal to Qs and solve for W, then put W back into one equation for Q.
2. For a shift, change the equation by the amount given at every wage, then solve again.
3. For a shortage or surplus at a wage, work out Qd and Qs at that wage and subtract.
4. State what the wage does: shortage pushes it up, surplus pushes it down.

Worked reminder. Town B (illustrative): Qd = 180 − 6W, Qs = 4W − 20, W in pounds an hour.

• Equilibrium: 180 − 6W = 4W − 20, so 200 = 10W. W = £20, Q = 180 − 120 = 60.
• At £16: Qd = 180 − 96 = 84; Qs = 64 − 20 = 44. Shortage of 40.
• Demand falls by 20 at every wage: Qd = 160 − 6W. Then 180 = 10W, W = £18, Q = 52. Wage and employment fall.
• Supply rises by 30 at every wage: Qs = 4W + 10. Then 170 = 10W, W = £17, Q = 78. Wage falls, employment rises.

Diagram in words: the up-and-down axis shows the hourly wage and the left-to-right axis shows the number of workers. The demand line falls and the supply line climbs; where they meet is the equilibrium. A shift right of either curve moves the crossing point to the right.

Summary of effects:

Change	Wage	Employment
Demand curve moves right	Higher wage	More workers hired
Demand curve moves left	Lower wage	Fewer workers hired
Supply curve moves right	Lower wage	More workers hired
Supply curve moves left	Higher wage	Fewer workers hired

Wage differentials

Between occupations	Within an occupation
Skills and qualifications	Experience and seniority
Training time and cost	Performance, bonus, commission
Risk, stress, unsocial hours	Extra qualifications, responsibility
Revenue each worker brings in	Location

Chain of reasoning: a scarce skill means low supply, strong demand means high demand, so the wage is high. Always end with the wage.

Written answer pattern (explain a differential): name the cause, say whether it affects supply or demand, say which way the curve shifts, then state the effect on the wage. For example, a long training period means fewer qualified people, so supply is lower, and the wage is higher.

Evaluation: differentials persist if training is long, people cannot easily move, or jobs are chosen for non-pay reasons.

Percentage gap method. Gap = higher − lower. Percentage = gap ÷ the pay you are comparing against × 100.

Example: Job P pays £15 an hour and Job R pays £24.

• R pays (24 − 15) ÷ 15 × 100 = 60% more than P.
• P pays (24 − 15) ÷ 24 × 100 = 37.5% less than R.

The gap is the same £9 each time; the base changes.

Gross and net pay

Item	Rule
Gross pay	Basic pay + overtime + bonus + commission
Overtime pay	Hours × normal rate × the multiplier (time and a half is 1.5)
Deduction	Tax, National Insurance, pension (use the rates the question gives)
Net pay	Gross pay − all deductions

Method in steps

1. Work out each part of gross pay and add.
2. Apply each rate. If an allowance is given, apply the rate only to pay above it.
3. Add the deductions and subtract from gross.
4. Check: net must be smaller than gross.

Worked reminder: weekly pay. A worker is paid £14 an hour for 30 hours, plus a £60 bonus. Tax is 20% and National Insurance is 8%, each on gross pay above £100 a week.

• Gross: 14 × 30 = 420; 420 + 60 = £480.
• Pay above £100: 380. Tax: 0.20 × 380 = £76. National Insurance: 0.08 × 380 = £30.40.
• Net: 480 − 76 − 30.40 = £373.60.

Worked reminder: annual pay. A salary of £24,000. Tax is 20% above a £9,000 allowance, National Insurance is 6% of gross, and the pension is 2.5% of gross.

• Tax: 0.20 × 15,000 = £3,000. National Insurance: £1,440. Pension: £600.
• Deductions: £5,040. Net: 24,000 − 5,040 = £18,960 a year, so 18,960 ÷ 12 = £1,580 a month.
• Deductions are 5,040 ÷ 24,000 = 21% of gross.

Total income means adding every source, using net amounts for work income: net pay + second job (net) + interest + other payments received.

Must-know distinctions

• Shortage versus surplus. Below equilibrium: shortage. Above: surplus.
• Shift versus movement. Only a wage change is a movement.
• Between versus within an occupation. Name which one a question asks for.
• Gross versus net. Gross is before deductions; net is after.
• Gross rise versus net rise. A pay rise in gross terms gives a smaller percentage rise in net when an allowance is fixed.

Quick self-test

1. Explain in one sentence why demand for labour is described as derived.
2. State two factors that shift the supply of labour to the left.
3. Using Qd = 180 − 6W and Qs = 4W − 20, state the shortage at a wage of £14.
4. A shop expands and raises demand for staff at every wage. State the effect on the wage and employment.
5. Give two reasons why an experienced worker may be paid more than a trainee in the same job.
6. Job A pays £10 an hour and Job B pays £12.50. Calculate how much more B pays, as a percentage of A.
7. Define net pay.
8. Name two deductions from gross pay.
9. Pay is £9 an hour for a 40-hour week. Four extra hours are worked at time and a half. Calculate gross pay for the week.
10. Gross pay is £2,000 a month and deductions are £430. Calculate net pay and deductions as a percentage of gross.

Answers

1. Firms hire only because customers want what the workers help to make.
2. Any two: more training needed, rival jobs pay more, fewer qualified people, worse conditions, fewer migrants.
3. Qd = 180 − 84 = 96; Qs = 56 − 20 = 36; shortage = 60.
4. Demand shifts right: wage rises and employment rises.
5. Any two: more productive, greater skill, seniority or responsibility, performance pay.
6. (12.50 − 10) ÷ 10 × 100 = 25%.
7. Pay left after deductions such as tax, National Insurance and pension contributions; take-home pay.
8. Any two of income tax, National Insurance, pension contributions.
9. 9 × 40 = 360; overtime 9 × 1.5 = 13.50 × 4 = 54; gross = £414.
10. Net = 2,000 − 430 = £1,570; 430 ÷ 2,000 = 21.5%.

Where marks are usually lost

• Drawing or describing a wage change as a shift in the curve when the wage itself changed.
• Shifting supply when the cause is a change in demand for the product.
• Stating a differential without linking it to supply or demand.
• Using the wrong base in a percentage gap.
• Applying a tax rate to the whole of gross pay when an allowance is given.
• Treating net pay as larger than gross pay.
• Forgetting the overtime multiplier.
• Leaving out units: pounds, hours or workers.
• Finishing an evaluation answer without a judgement.

Next steps

Work through the study guide for anything unclear, then try the practice questions and a free diagnostic.

Official syllabus

Source: AQA, GCSE Economics (8136) specification, Version 1.0, for first teaching from September 2017. Content follows 3.1.5.4, The labour market.