Cambridge A Level Economics: Imperfect labour markets, wage gaps and economic rent (9708) – Revision Notes

These notes condense outcomes 8.3.8 to 8.3.10 of the Cambridge International AS and A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 8 is A Level content. For full explanations and longer worked examples, read the study guide. Then try the practice set, tick off the checklist, see the course hub and use the free 10-minute diagnostics. Perfect-market labour theory (outcomes 8.3.1 to 8.3.7) is in the perfect markets guide.

All figures here are invented for illustration and are not real statistics.

Definitions to learn word for word

Term	Definition
Trade union	An organisation of workers that bargains collectively over pay and conditions
National minimum wage	A legal wage floor, set by government, below which employers cannot pay
Monopsony	A labour market with a single buyer (or dominant buyer) of labour
Wage differential	A difference in pay between occupations, industries or individuals
Transfer earnings	The minimum payment needed to keep a factor in its present use; its opportunity cost
Economic rent	Payment to a factor above its transfer earnings

Key relationships

Idea	Rule
MRP	Marginal physical product × marginal revenue (equals price in a competitive product market)
Competitive wage	Wage = MRP
Monopsony hiring rule	Employ up to MC of labour = MRP, then read the wage from the supply curve
Wage elasticity of demand for labour	% change in employment ÷ % change in wage
Economic rent	Earnings − transfer earnings (triangle between wage line and supply curve)

Trade unions: method in steps

1. Find the competitive equilibrium (demand = supply).
2. Take the union wage. Employment is read from demand.
3. Excess supply = supply at the union wage − demand at that wage.
4. Compute the elasticity and the change in the wage bill.
5. Evaluate with elasticity, union density and productivity effects.

Worked reminder (invented weavers). Demand L = 720 − 20W, supply L = 40W.

• Equilibrium: 720 = 60W, so W = 12, L = 480. Wage bill = 5,760.
• Union wage 15: L = 720 − 300 = 420; supply = 600; excess supply = 180.
• Employment −12.5%, wage +25%, elasticity = −0.5 (inelastic). The wage bill rises to 6,300.
• Inelastic demand means most members gain, and fewer jobs are lost.

Evaluation checklist: elastic or inelastic demand for labour; elasticity of demand for the product; share of workers unionised; possibility of capital replacing labour; productivity deals shifting MRP; insiders against outsiders; effect on the firm’s costs and prices; countervailing power against a monopsony.

National minimum wage: method in steps

1. Find equilibrium. 2. Compare the NMW with it. 3. If the NMW is at or below equilibrium, nothing changes. 4. If above, employment is read from demand and excess supply from supply.

Worked reminder (invented). Demand L = 500 − 20W, supply L = 30W − 100.

• Equilibrium: 600 = 50W, so W = 12, L = 260.
• NMW of 14: demand = 220, supply = 320, excess supply = 100.
• Jobs lost = 40, which is −15.4%. Wage +16.7%. Elasticity = −0.92.

Evaluation: size of the NMW relative to equilibrium; elasticity of labour demand; whether low-paid workers gain on average; effects on productivity, spending and the cost to firms; impact on unemployment, youth workers and small firms; enforcement and compliance.

Monopsony

Diagram in words: vertical axis wage, horizontal axis workers. Supply curve (average cost of labour) slopes up. MC of labour is above and steeper. MRP slopes down. Employment is where MC meets MRP. The wage is on the supply curve at that employment. The gap between MRP and the wage is the amount workers are paid less than their MRP.

Worked reminder (invented). Supply W = 4 + 0.05L, so MC of labour = 4 + 0.1L. MRP = 22 − 0.05L.

• MC = MRP: 4 + 0.1L = 22 − 0.05L, so L = 120. Wage = 4 + 6 = 10. MRP = 16, so workers are paid 6 below MRP.
• Competitive benchmark: 4 + 0.05L = 22 − 0.05L, so L = 180 and W = 13.
• Wage bill: 120 × 10 = 1,200 against 180 × 13 = 2,340.

Minimum wage in this monopsony:

NMW	Supply at NMW	Workers wanted	Employment
10	120	240	120 (no effect: already paid 10)
11	140	220	140 (up)
13	180	180	180 (maximum)
16	240	120	120 (back to start)
19	300	60	60 (down)

Must-know: a NMW above the monopsony wage and up to the competitive wage raises employment, with the peak at the competitive wage (13 here). Above it employment falls, and once the NMW passes MRP at the original employment (16 here) it is below the starting level.

Evaluation: is the employer truly a monopsony; how mobile are workers; where is the NMW set; the same NMW in a competitive market costs jobs; unions may achieve a similar result through bargaining.

Wage differentials

Why gaps exist:

• Demand: MRP differs. Worked reminder: a firm sells at 8. Worker A makes 9 units an hour, so MRP = 72. Worker B makes 5 units, so MRP = 40. A’s MRP is 80% higher.
• Supply: training length, scarce skills and entry barriers shift supply to the left and raise the wage.
• Compensating differentials: extra pay for danger, shift work or poor conditions.
• Non-monetary benefits: attractive jobs can pay less.
• Imperfections: unions, discrimination, immobility and poor information.

Worked reminder: a fall in the supply of an occupation raises its wage from 24 to 36, a 50% rise. Its gap over every other occupation widens.

Transfer earnings and economic rent

Individual: a worker earns 36, next best pays 28. Transfer earnings 28, rent 8.

Market (invented): supply W = 6 + 0.1L, demand W = 26 − 0.1L.

• 20 = 0.2L, so L = 100, W = 16. Earnings = 1,600.
• Transfer earnings = 100 × 6 + ½ × 100 × 10 = 1,100.
• Rent = ½ × 100 × 10 = 500 (and 1,600 − 1,100 = 500).

Factors:

Factor	Effect on rent
Supply more inelastic	Rent share rises (all rent if perfectly inelastic)
Supply more elastic	Rent share falls (none if perfectly elastic)
Better alternative job	Higher transfer earnings, less rent
Highly specific skill	Low transfer earnings, more rent
Higher demand	Higher wage, more rent
Greater mobility	Less rent

Chains of reasoning to rehearse

Union, competitive market: union bargains a wage above equilibrium, so pay per worker rises. Firms move up the labour demand curve and hire fewer workers. The loss of jobs is smaller where demand for labour is inelastic. Members in work gain, some members and outsiders lose. Judgement: how elastic is demand, and could higher productivity offset the cost?

NMW, competitive market: a binding floor raises the wage above equilibrium, creating excess supply of labour. Employment falls along demand. Judgement: the lower the elasticity and the closer the floor to equilibrium, the smaller the damage.

Monopsony: the employer sees that hiring one more worker raises the wage for all, so MC of labour exceeds the wage. It stops hiring early. A floor or a union wage up to the competitive level makes the marginal cost flat, so hiring more is profitable. Judgement: the answer depends on where the floor is set.

Wage gap: a skill needs years of training, so few can supply it, and the wage in that occupation is bid up. Judgement: part of the gap may be compensation for cost, part may be rent.

Rent: a rare talent has inelastic supply, so most of the pay is above the next best alternative. Judgement: the share of rent falls when substitutes appear or workers can move in from other jobs.

Must-know distinctions

• Union wage rise (above equilibrium, job loss) against monopsony wage rise (can lift jobs).
• Average cost of labour (supply) against marginal cost of labour.
• Transfer earnings (opportunity cost) against economic rent (surplus).
• Differences explained by MRP and supply against differences explained by imperfections.

Quick self-test

1. Define transfer earnings.
2. Define economic rent.
3. A pilot earns 90 and the next best job pays 62. State the economic rent.
4. Wages rise 8% and employment falls 6%. Calculate the wage elasticity of demand for labour.
5. Equilibrium wage is 12; a NMW of 10 is introduced. State the effect in a competitive market.
6. A worker makes 7 units an hour and each sells for 9. Calculate MRP.
7. State the condition for profit-maximising employment by a monopsony.
8. In the market where supply is W = 6 + 0.1L, wage is 16 and 100 are employed, what is economic rent?
9. State one reason why a NMW could raise employment.
10. State what happens to economic rent if supply is perfectly elastic.

Answers

1. The minimum payment needed to keep a factor in its present use (its opportunity cost).
2. The payment to a factor above its transfer earnings.
3. 90 − 62 = 28.
4. −6 ÷ 8 = −0.75.
5. No effect: the NMW is below equilibrium and non-binding.
6. 7 × 9 = 63.
7. MC of labour = MRP.
8. ½ × 100 × (16 − 6) = 500.
9. A monopsony pays below MRP; a NMW up to the competitive wage removes its reason to restrict hiring.
10. It is zero, because all earnings are transfer earnings.

Where marks are usually lost

• Drawing the union wage below equilibrium.
• Forgetting that a NMW below equilibrium does nothing.
• Reading the monopsony wage off the MC curve.
• Giving the wage elasticity without the sign or without saying whether demand is elastic.
• Calling all high pay economic rent.
• Evaluation that lists points without saying which matters most and why.
• Not naming axes and curves on a described diagram.

Official syllabus

Cambridge International AS & A Level Economics 9708, syllabus for examination in 2026, 2027 and 2028, Cambridge University Press & Assessment. Outcomes 8.3.8 to 8.3.10.