Cambridge International AS and A Level Economics: Imperfect labour markets, wage gaps and economic rent (9708)

This guide covers 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: wage determination in imperfect labour markets, wage differentials, transfer earnings and economic rent. Topic 8 is A Level content, so it is not examined at AS. The syllabus states that AS content is assumed knowledge for the A Level papers.

All firms, markets and figures below are invented for illustration. They are not real statistics. Wages are in currency units (cu) per hour and labour is counted in workers.

Related pages: the Cambridge A Level Economics hub, the printable checklist, the revision notes, the practice set, the guide to labour demand, supply and wages in perfect markets (outcomes 8.3.1 to 8.3.7, assumed here) and the free 10-minute diagnostics.

What this unit covers

Outcome	What you must be able to do
8.3.8	Explain how trade unions, a national minimum wage and monopsony employers affect the wage and employment in a labour market
8.3.9	Explain how labour market forces determine wage differentials
8.3.10	Define transfer earnings and economic rent, and explain the factors affecting them in an occupation

8.3.8 Trade unions

A trade union bargains collectively for its members. In a market that would otherwise settle at the equilibrium wage, a union that wins a higher wage faces the labour demand curve: a higher price of labour means fewer workers are wanted.

Worked example 1 (invented market of dock loaders). Demand is L = 880 − 25W and supply is L = 60W − 480.

• Equilibrium: 880 − 25W = 60W − 480, so 1,360 = 85W and W = 16. Then L = 880 − 400 = 480 workers. Wage bill = 16 × 480 = 7,680.
• The union secures W = 20. Employment (demand side) = 880 − 500 = 380. At that wage 60 × 20 − 480 = 720 workers want jobs, so excess supply is 720 − 380 = 340.
• Employment falls by 100, which is −20.8%. The wage rises by 25%. Wage elasticity of demand over this range = −20.8 ÷ 25 = −0.83.
• Wage bill = 20 × 380 = 7,600, a fall of 80.

Now suppose demand is steeper: L = 640 − 10W, which also gives W = 16 and L = 480. At W = 20, L = 440 (−8.3%), elasticity = −8.3 ÷ 25 = −0.33, and the wage bill rises from 7,680 to 8,800.

Chain of reasoning: the union raises the wage above equilibrium, so employment falls along the demand curve. The size of the fall depends on how elastic labour demand is. Where demand is inelastic, most members gain and few jobs go. Where it is elastic, the loss of jobs can outweigh the wage gain.

Evaluation points:

• Union power depends on membership share, the elasticity of demand for the product (a firm selling an inelastic product can pass costs on), and how easily capital can replace labour.
• Insiders gain and outsiders lose: the 340 people in excess supply are not employed.
• A union can instead raise the demand curve if bargaining cooperation lifts productivity and so MRP.
• Against a monopsony, a union can push the wage up with little or no loss of jobs (see below).

8.3.8 National minimum wage (NMW)

A national minimum wage is a legal wage floor set by government. It only changes the outcome if it is set above the equilibrium wage.

Worked example 2 (invented market of cafe staff). Demand is L = 800 − 30W and supply is L = 50W − 400.

• Equilibrium: 1,200 = 80W, so W = 15 and L = 350. Wage bill = 5,250.
• NMW of 12 (below equilibrium): at 12, demand is 440 and supply is 200. The market wage stays at 15, so the NMW has no effect.
• NMW of 18: demand = 800 − 540 = 260; supply = 900 − 400 = 500. Excess supply = 240.
• Jobs lost = 350 − 260 = 90, which is −25.7%. Wage rise = +20%. Elasticity = −25.7 ÷ 20 = −1.29. Wage bill falls from 5,250 to 4,680.
• Of the 240 in excess supply, 90 are displaced workers and 150 are new entrants attracted by the higher wage.

Evaluation points: the effect on employment depends on the elasticity of labour demand and on how far the NMW lies above equilibrium. Workers who keep their jobs gain, those who lose them are worse off, and low-paid workers may gain overall if demand is inelastic. A higher NMW can raise labour productivity or consumer spending, shifting demand. In a monopsony market the result differs, as the next section shows.

8.3.8 Monopsony

A monopsony is a market with a single buyer of labour, or one dominant employer. Because it is the only buyer, it faces the whole upward-sloping supply curve of labour. To hire one more worker it must pay a higher wage, and, unless it can wage-discriminate, it must pay that higher wage to everyone it already employs. So the extra cost of each additional worker (the marginal cost of labour, MC of labour) sits above the supply curve, which shows the average cost of labour.

Worked example 3 (invented sole mill in a remote town; the product market is competitive so MRP is the demand for labour). Supply: W = 2 + 0.01L. Total cost = WL = 2L + 0.01L², so MC of labour = 2 + 0.02L. MRP = 14 − 0.01L.

• Monopsony profit-maximising rule: employ up to the point where MC of labour = MRP. 2 + 0.02L = 14 − 0.01L, so L = 400.
• Wage read from the supply curve: W = 2 + 4 = 6. At L = 400, MRP = 10 and MC of labour = 10.
• Competitive benchmark: wage = MRP. 2 + 0.01L = 14 − 0.01L, so L = 600 and W = 8.
• The monopsonist employs 200 fewer workers (−33.3%) at a wage 2 lower (−25%). Wage bill: 400 × 6 = 2,400 against 600 × 8 = 4,800.
• Workers are paid 4 less than the value they add (MRP 10, wage 6).

Sketch in words: vertical axis is the wage, horizontal axis is workers. The supply curve slopes up; the MC curve is steeper and above it; the MRP curve slopes down. The MC and MRP curves cross at 400 workers; drop to the supply curve to read the wage of 6.

How a minimum wage behaves in this market (same numbers):

NMW	Supply at that wage	Workers the firm wants	Employment
8	600	600	600 (up from 400)
9	700	500	500 (up)
10	800	400	400 (no change; 400 in excess supply)
12	1,000	200	200 (down)

Up to the competitive wage of 8, the NMW removes the incentive to restrict hiring because MC of labour becomes flat at the minimum. Employment and the wage both rise. Above 10 employment falls below the original 400.

Evaluation: the gain depends on setting the NMW in the right range, on whether the employer really is a monopsony, on how easily workers can move to other employers, and on whether the minimum is set close to the wage that competition would give.

8.3.9 Wage differentials determined by labour market forces

A wage differential is a difference in pay between occupations, industries or workers. Market forces explain much of it through demand and supply for each type of labour.

• Demand side: a worker’s MRP (marginal physical product × marginal revenue). Higher productivity, or a higher price for the product, raises MRP and the wage firms will pay.
• Supply side: occupations that need long training or scarce skills have fewer people able to supply labour, so the supply curve lies further left and the wage is higher. Unpleasant, risky or antisocial work needs a compensating differential to attract workers. Non-wage benefits such as job satisfaction can allow lower pay.
• Imperfections: unions, discrimination, poor information and geographical or occupational immobility can widen or narrow gaps beyond what MRP and skill explain.

Worked example 4 (two invented occupations). Skilled technicians X: demand L = 480 − 5W, supply L = 5W. General helpers Y: demand L = 1,200 − 20W, supply L = 30W.

• X: 480 = 10W, so W = 48, L = 240. Y: 1,200 = 50W, so W = 24, L = 720. Technicians earn twice as much as helpers.
• MRP check: if a technician makes 12 units an hour and a helper 6, and each unit sells for 4, MRP is 48 and 24, which matches the equilibrium wages.
• A longer qualification period cuts technician supply to L = 3W: 480 = 8W, so W = 60, L = 180. The differential rises from 2 times to 2.5 times (24 against 60).

8.3.10 Transfer earnings and economic rent

Transfer earnings: the minimum payment needed to keep a factor of production in its present use. This equals its opportunity cost, the earnings in its next best alternative use.

Economic rent: the payment to a factor over and above its transfer earnings.

Individual example. A coach is paid 90 a session. The best alternative job pays 55. Transfer earnings = 55; economic rent = 90 − 55 = 35, which is 38.9% of earnings.

Market example (invented). Supply of an occupation is W = 10 + 0.1L; demand is W = 50 − 0.1L.

• Equilibrium: 40 = 0.2L, so L = 200 and W = 30. Total earnings = 6,000.
• Transfer earnings = area under the supply curve up to 200 workers = 200 × 10 + ½ × 200 × 20 = 2,000 + 2,000 = 4,000.
• Economic rent = the triangle between the wage and the supply curve = ½ × 200 × 20 = 2,000. Check: 6,000 − 4,000.
• Demand rises to W = 60 − 0.1L. Then 50 = 0.2L, so L = 250 and W = 35. Earnings = 8,750. Transfer earnings = 250 × 10 + ½ × 250 × 25 = 5,625. Rent = 3,125, up by 1,125.

Factors affecting transfer earnings and rent in an occupation:

• Elasticity of supply: the more inelastic supply is (rare talent, long training, few substitutes), the larger the share of earnings that is rent. If supply is perfectly inelastic, all earnings are rent. If supply is perfectly elastic, all earnings are transfer earnings and rent is zero.
• Alternative uses: the better the next best job, the higher transfer earnings. Highly specific skills have a low value elsewhere, so transfer earnings are low and rent is high.
• Mobility: high occupational and geographical mobility makes supply more elastic and reduces rent.
• Demand: with supply given, higher demand raises the wage and so the rent.
• Non-monetary benefits: workers who enjoy a job may accept lower transfer earnings.

Common errors

• Drawing a minimum wage below equilibrium and still showing unemployment.
• Reading the monopsony wage from the MC curve instead of dropping down to the supply curve.
• Calling the whole wage of a star performer economic rent when the person has a real alternative job.
• Describing a union gain without mentioning the elasticity of labour demand.
• Giving the wage differential without saying whether demand or supply causes it.

Next: test yourself with the practice set and use the revision notes.

Official syllabus

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