OCR A Level Economics: Labour market issues, inequality and intervention (H460) – Revision Notes

All figures here are invented and illustrative. These notes condense the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), first assessment 2021: the topics “Labour market issues and themes” and “Government intervention” in Component 1, Microeconomics. The whole specification is A Level. For full explanations read the study guide, then test yourself with the practice questions.

Use the course hub and checklist to track what you have covered, and the free diagnostics to find weak areas.

Key measures

Term	Meaning	Formula
Labour force	Employed plus unemployed people seeking work	Employed + unemployed
Working population	People of working age (check your textbook’s usage)	Age band, such as 16 to 64
Participation rate	Share of working-age people in the labour force	Labour force / working-age population × 100
Dependency ratio	Non-working-age people per working-age person	(Young + old) / working-age × 100
Replacement ratio	Out-of-work income relative to in-work income	Benefits / net pay × 100
Unemployment rate	Share of the labour force without work	Unemployed / labour force × 100

Method in steps.

1. Write the age bands and add them to check the total population.
2. Divide by the working-age group, not the whole population.
3. Compare the result with an earlier year or another country before judging.

Reminder. Population 20.0m: under 16, 3.0m; 16 to 64, 12.0m; 65 and over, 5.0m. Dependency = 8/12 = 66.7%. If the labour force is 9.0m, participation = 9/12 = 75%. Benefits £5,400 against net pay £9,000 give a replacement ratio of 60%.

Wage controls

	Minimum wage	Maximum wage	Living wage
Diagram	Price floor above equilibrium	Price ceiling below equilibrium	Floor, if legal; voluntary if not
Result	Excess supply of labour	Excess demand for labour	Depends on coverage
Gainers	Workers who keep jobs	Employers, possibly consumers	Workers in signed-up firms
Losers	Workers priced out, small firms	Workers, firms short of staff	Possibly some employers

Method. Set demand equal to supply for equilibrium. Substitute the controlled wage into both equations. The gap is unemployment (floor) or shortage (ceiling). Employment is the demand figure for a floor and the supply figure for a ceiling.

Reminder. Ld = 90 − 4w and Ls = 10 + 4w. Equilibrium is w = £10, L = 50. A floor of £12 gives demand 42, supply 58 and 16 unemployed; employment falls 16% as the wage rises 20%.

Evaluation points.

• How elastic is labour demand? The less elastic, the fewer jobs lost.
• Size of the floor relative to the equilibrium wage.
• Productivity and motivation effects that offset costs.
• Firm size, profit margins and ability to raise prices.
• Time period: firms adjust more in the long run.
• Monopsony may make a floor raise employment.
• Effects on poverty depend on whether low-paid workers live in low-income households.

Flexibility and mobility

• Wage flexibility: pay responds to market conditions.
• Numerical flexibility: firms vary headcount or hours.
• Functional flexibility: workers switch tasks.
• Occupational mobility: movement between jobs or industries.
• Geographical mobility: movement between areas.

Chain. Fewer barriers, so unemployed workers fill vacancies elsewhere, so structural unemployment falls, so output and tax receipts rise. Barriers: skills gaps, house prices, ties to family and school, information gaps, transport costs.

Evaluate. Flexibility cuts costs and unemployment but can mean insecurity, less training and lower spending power. Mobility raises output but can leave declining areas with fewer working-age people.

Bargaining and unions

Type	Who negotiates	Typical effect
Individual	Worker and employer	Pay reflects skill scarcity
Collective	Union and employer	Higher pay, voice, less turnover
Productivity	Union and employer	Pay linked to output gains

Reminder. Pay +5% and output per hour +2%: labour cost per unit rises 1.05/1.02 − 1 = 2.9%. The deal is not self-financing.

Union effects can include a pay premium, lower pay gaps, better conditions and training, and strikes. Possible costs are fewer jobs for outsiders and higher prices. Strength depends on membership, labour demand elasticity and legal limits.

Migration, discrimination, demographics, incentives

• Migration: shifts labour supply right, so wages tend to fall and employment rises. Check the skill sub-market, fiscal effects, remittances and source-country effects.
• Discrimination: pay or hiring differences not linked to productivity. Gap example: mean £20.00 against £17.00 is £3.00, or 15% of £20.00. Separate the explained part from the unexplained part.
• Demographic change: an ageing population raises the dependency ratio, cuts labour supply and increases pension and care costs. Responses: higher participation, later retirement, migration.
• Incentives: high replacement ratios and steep benefit withdrawal weaken the case for working. Marginal effective tax rate example: extra £100 gross, tax 25% leaves £75, benefits cut by 60% of that (£45), leaving £30. The rate is 70%.

Informal labour markets

Unrecorded work: cash-in-hand jobs, unpaid household work, illegal work. Benefits: income for the poor, flexibility, lower recorded unemployment. Costs: lost tax, no protection or pension, unfair competition for compliant firms, data that misstate output and unemployment. Significance rises with its size and with a high tax burden.

Policies and effectiveness

Policy	Aim	Main limit
Retraining	Occupational mobility	Slow; must match demand
Housing and relocation help	Geographical mobility	Housing supply
Job information services	Both	Helps frictional more than structural
Weaker protection	Flexibility	Insecurity
Childcare support	Participation	Cost to government

Inequality and intervention

Distinction. Income is a flow per period. Wealth is the value of assets held. Wealth is normally more unequal than income, and it generates income.

Intervention	Labour market effect	Evaluation
Pensions and pension age	Retirement and supply of older workers	Saves cost; hits those in poor health
Migration rules	Supply and skills mix	Fills gaps; wage and housing pressure
Education and training	Human capital, productivity	Slow and costly; long run gains
Legislation	Protection, equal treatment, minimum pay	Fairness against labour costs
Participation age	Entry into work later, more skills	Delayed earnings
Tax and benefits	Redistribution, incentives	Equity against work disincentives

Examples to know: the National Minimum Wage Act, the Equality Act and EU working-time rules. Check which rules apply now.

Worked reminders

Migration. Demand L = 120 − 6w and native supply L = 6w (thousands). Equilibrium is w = £10, L = 60. Migrants add 12 at every wage, so supply becomes L = 6w + 12 and 120 − 6w = 6w + 12 gives w = £9, L = 66. Wages fall 10% and employment rises 10%. Natives hold 54 jobs, down from 60, and the total wage bill moves from £600 to £594. Your answer should then ask whether the skills are complements or substitutes.

Training. A course costs £4,000 and lifts pay by £1,600 a year, so it pays back in 4,000/1,600 = 2.5 years. A 25% subsidy cuts the cost to £3,000 and the payback to 1.9 years. A longer payback weakens the private incentive to train, which supports intervention.

Informal work. Recorded output of 400 with informal activity at 10% of it means 40 is unrecorded. At an average tax rate of 25%, up to 10 of tax is lost. This is an upper limit, because much informal work would shrink if it had to be declared.

Quick self-test

1. Under 16, 4.0m; 16 to 64, 16.0m; 65 and over, 6.0m. Find the dependency ratio.
2. A labour force of 12.8m in a working-age population of 16.0m: find the participation rate.
3. Benefits £6,000, net pay £15,000: find the replacement ratio.
4. Ld = 90 − 4w, Ls = 10 + 4w. Find equilibrium and the effect of a £12 minimum wage.
5. In the same market, find the result of a £8 maximum wage.
6. Pay +5%, productivity +2%: find the change in labour cost per unit.
7. Mean pay is £20.00 and £17.00 for two groups. State the gap as a percentage.
8. Extra £100 gross, tax 25%, benefits cut by 60% of the post-tax gain. Find the marginal effective tax rate.
9. Distinguish income inequality from wealth inequality.
10. Name two barriers to geographical mobility.

Answers

1. (4.0 + 6.0)/16.0 = 62.5%.
2. 12.8/16.0 = 80%.
3. 6,000/15,000 = 40%.
4. Equilibrium w = £10, L = 50. At £12: demand 42, supply 58, so 16 unemployed.
5. At £8: demand 58, supply 42, a shortage of 16; employment is 42.
6. 1.05/1.02 − 1 = 2.9% rise.
7. 3.00/20.00 = 15%.
8. Keep 75, lose 45 in benefits, keep 30: rate = 70%.
9. Income inequality concerns the spread of flows over a period; wealth inequality concerns the spread of asset holdings at a point in time.
10. For example high house prices and family ties.

Where marks are usually lost

• Using the whole population as the denominator for participation or dependency.
• Reading unemployment off the supply curve alone after a minimum wage.
• Showing a ceiling and calling the result unemployment instead of a shortage.
• Giving one-sided answers on unions or flexibility.
• Calling every pay gap discrimination.
• Writing policy lists with no verdict on effectiveness.
• Mixing up stocks and flows in inequality answers.
• Ignoring time lags and cost in training and education policy.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), first assessment 2021.