Cambridge O Level Economics: Workers, wages and specialisation (2281)

This guide covers section 3.3 (Workers) of the Cambridge O Level Economics 2281 syllabus for examination in 2026: 3.3.1 choice of occupation, 3.3.2 wage determination, 3.3.3 reasons for differences in earnings and 3.3.4 division of labour and specialisation. The syllabus is not tiered. Every country, firm and figure below is invented for practice. Check your progress with the revision notes and the practice questions, then try a free diagnostic. The course hub and printable checklist show the rest of the syllabus, and the Topic 3 overview puts workers alongside banks, households, unions and firms. Demand and supply are explained in the allocation of resources.

What you must be able to do

Section	Outcome	Where
3.3.1	Wage and non-wage factors that influence a person’s choice of job	Part 1
3.3.2	How the wage is set by demand and supply, relative bargaining power and government policy, including the minimum wage	Part 2
3.3.3	Why earnings differ between skilled and unskilled, primary, secondary and tertiary, male and female, private and public sector workers, through demand and supply, bargaining strength, discrimination and government policy; defining, drawing and reading labour market diagrams	Part 3
3.3.4	Gains and drawbacks of division of labour and specialisation for workers, firms and the economy	Part 4

Part 1: Choice of occupation (3.3.1)

An occupation is the kind of work a person does. People choose by weighing the whole package, not pay alone.

Wage factors are the money rewards: the basic wage or salary, overtime pay, bonuses and commission, and benefits such as a pension, health cover or a company car. Lasting pay growth in a career also matters.

Non-wage factors are everything else: job security, working hours and flexibility, working conditions and safety, the length of the journey to work, training and promotion prospects, job satisfaction, status and the qualifications needed. Personal factors such as family ties and interests also count.

Worked example: pay per hour committed

In Country A, Job A pays 2,640 a month. The worker works 22 days of 8 hours and spends 2 hours a day commuting. Job B pays 2,420 a month for 22 days of 8 hours, with a half-hour commute.

• Time committed, Job A: (8 + 2) × 22 = 220 hours. Pay per hour committed: 2,640 ÷ 220 = 12.00.
• Time committed, Job B: (8 + 0.5) × 22 = 187 hours. Pay per hour committed: 2,420 ÷ 187 = 12.94.
• Job A’s headline pay is higher by (2,640 − 2,420) ÷ 2,420 × 100 = 9.1%.

A worker who values free time may still choose Job B. Another worker may accept the long journey for the higher pay. Both choices are rational because people value non-wage factors differently.

Evaluation: the weight given to each factor depends on age, family situation and how easily a person can find other work. A person with few qualifications may have to take the wage on offer.

Part 2: Wage determination (3.3.2)

Demand and supply

In the labour market diagram, the vertical axis shows the wage rate and the horizontal axis shows the quantity of labour (workers employed or hours worked).

• Demand for labour slopes downward. It is a derived demand: firms hire workers only because consumers buy what the workers produce. At a lower wage, hiring is cheaper, so firms employ more.
• Supply of labour slopes upward. At a higher wage, more people are willing and able to do the job, including people from other occupations.
• The equilibrium wage is where the curves cross.

Illustrative market for tailors in Town X (wage per hour in units):

Wage	6	8	10	12	14
Demand (workers)	840	720	600	480	360
Supply (workers)	240	420	600	780	960

Equilibrium: wage 10, with 600 tailors employed. At a wage of 8, demand (720) exceeds supply (420), so the wage is pushed up.

Shifts. Demand for labour shifts right if demand for the product rises, if workers become more productive or if capital equipment becomes dearer. Supply shifts right if more people qualify, if the population grows or migration rises, or if other occupations become less attractive.

Worked example. Suppose demand for tailors rises by 120 at every wage. New demand: 960, 840, 720, 600, 480. The demand curve now has equation Qd = 1,320 − 60W and supply has Qs = −300 + 90W. Setting them equal: 1,620 = 150W, so W = 10.8 and Q = 672. The wage rises 8% and employment 12%.

Bargaining power

Wages in practice are often bargained. A group has stronger relative bargaining power when its skills are scarce, when many workers belong to a trade union, when the employer cannot easily replace them or when unemployment is low. A group is weaker when many people can do the job, when workers are unorganised or when a large employer has few rivals to hire from.

Government policy and the minimum wage

A minimum wage is a legal lowest wage. It only changes the market if it is set above equilibrium.

Worked example (tailors). A minimum wage of 12:

• Demand is 480 and supply is 780, so a surplus of labour of 780 − 480 = 300 appears.
• Employment falls from 600 to 480, a fall of 20%. That is 120 jobs lost.
• The 480 still employed gain 2 each (960 in total). The 120 who lose their jobs lose 10 each (1,200). The total wage bill falls from 10 × 600 = 6,000 to 12 × 480 = 5,760.
• A minimum wage of 8, below equilibrium, changes nothing: the market wage stays at 10.

Evaluation: the effect depends on how far the minimum lies above equilibrium and on how responsive firms’ demand for labour is. If the rise is small or demand is inelastic, few jobs are lost and low-paid workers gain. Firms may pass costs on in higher prices, mechanise or hire fewer new workers. Higher pay can also raise motivation and lower staff turnover. A minimum wage is hard to enforce where much work is informal.

Other policies: equal pay laws, subsidised training (which raises supply of skilled labour), taxes on earnings and the government’s own pay decisions for public employees.

Part 3: Why earnings differ (3.3.3)

Four forces explain every pair below: demand and supply, bargaining strength, discrimination and government policy.

Skilled and unskilled workers

Skilled work needs long training, so supply is small and costly to increase, while demand is high because skilled workers produce more value per hour. Unskilled supply is large and easily replaced, so the wage is low. Government policy can narrow the gap: a minimum wage lifts the lowest pay, and subsidised training raises the supply of skilled labour, which lowers their wage.

Worked example. An unskilled worker in Country A earns 9,000 a year. Training takes 3 years with no earnings and costs 6,000 in fees. A skilled worker then earns 15,000 a year.

• Cost of training: 3 × 9,000 + 6,000 = 33,000.
• Extra earnings: 15,000 − 9,000 = 6,000 a year.
• Payback: 33,000 ÷ 6,000 = 5.5 years.

Skilled workers earn 66.7% more, which compensates for the cost, delay and effort of training. Without the gap, too few people would train.

Primary, secondary and tertiary workers

The primary sector extracts natural resources (farming, fishing, mining). The secondary sector manufactures and builds. The tertiary sector provides services.

Sector (Country A, illustrative)	Average annual earnings (thousands)
Primary	6.0
Secondary	9.0
Tertiary	12.6

Tertiary workers earn (12.6 − 6.0) ÷ 6.0 = 110% more than primary workers, but primary workers earn (12.6 − 6.0) ÷ 12.6 = 52.4% less than tertiary workers. The base of the percentage decides the answer.

Likely reasons: primary work often needs fewer qualifications, so supply is large; output prices of raw materials may be low; and workers may be unorganised or seasonal. Tertiary pay is lifted by high skills and high value added. Differences are not universal: dangerous or specialist work in any sector can pay well, and the pattern differs across countries.

Male and female workers

A gender pay gap can arise from:

• Discrimination: employers pay women less, or exclude them from better jobs, for reasons unrelated to ability.
• Supply and demand: women may be crowded into fewer occupations, which raises supply and lowers pay there.
• Hours and career breaks: more part-time work and interruptions for caring reduce earnings and promotion.
• Bargaining: lower union coverage in some female-dominated jobs.
• Policy: equal pay legislation narrows the gap; its absence or weak enforcement widens it.

Crowding diagram (wage on the vertical axis, quantity of labour on the horizontal axis, demand D downward-sloping):

Feature	Before	After extra entrants
Supply curve	S0	S1, to the right of S0
Equilibrium wage	W0	W1, lower than W0
Employment	Q0	Q1, higher than Q0

Worked example. Men average 14.0 an hour and women 11.9. The gap is (14.0 − 11.9) ÷ 14.0 × 100 = 15.0% of male pay, so women earn 85% of men’s. A gap does not prove discrimination: part may reflect hours and occupation.

Private and public sector workers

Public sector pay is set by the government through pay scales, so it is less responsive to local supply and demand. Private firms pay what profit and competition allow. The public sector often offers non-wage advantages such as job security and pensions, and often has higher union membership.

Worked example. Public: 2,100 plus a pension contribution of 12% = 2,352. Private: 2,300 plus 4% = 2,392. The private package is better by 40, or 1.7%, even though the public pension is larger. Compare packages, not basic pay alone.

Part 4: Division of labour and specialisation (3.3.4)

Division of labour means breaking a job into stages, with each stage given to a different person. Specialisation is when a worker, firm or country focuses on the activity it does best.

Worked example. A shirt workshop has 6 workers paid 40 a day each (wage bill 240).

• Working alone, each worker makes 10 shirts a day: output 60, so labour cost per shirt = 240 ÷ 60 = 4.00.
• With two workers on each of cutting, stitching and finishing, output is 120: 20 shirts per worker and 240 ÷ 120 = 2.00 per shirt. Output per worker doubles and unit labour cost halves.
• Risk: if one stitcher is absent, stitching capacity halves and output falls to 60, a 50% fall caused by losing 16.7% of staff.

Group	Advantages	Disadvantages
Workers	Faster skill, higher productivity, possibly higher pay	Boredom, loss of wider skills, less job satisfaction, easier to replace
Firms	Higher output, lower unit cost, shorter training, less time switching tasks	Absence disrupts production, errors if workers do not see the whole, high staff turnover
Economy	Greater output, lower prices, more exports	Structural unemployment if a specialism declines, dependence on narrow industries, workers may find it hard to move occupations

Evaluation: the gains are largest in repetitive tasks and large markets. They are smaller when the market is small or when quality and variety matter more than speed.

Common errors

• Writing “wages” for non-wage factors. Pay is a wage factor; security and hours are not.
• Drawing a demand curve for labour with the wrong axes. Wage goes on the vertical axis.
• Saying a minimum wage always causes unemployment. It does so only above equilibrium.
• Mixing up the base of a percentage difference (110% more versus 52.4% less).
• Giving an earnings gap as a fact about all countries. Say “tends to” and give reasons.

Official syllabus

Cambridge O Level Economics 2281, syllabus for examination in 2026, version 2, section 3.3 (Workers), Cambridge Assessment International Education, part of Cambridge University Press & Assessment.