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

Every figure below is invented and illustrative. This guide follows the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), first assessment 2021. It covers the topics “Labour market issues and themes” and “Government intervention” in the Labour market area of study within Component 1, Microeconomics. The whole specification is A Level. Demand for labour, productivity and unit labour costs, and supply of labour, economic rent and wage models, have their own pages, so this guide stays on the issues, the policies and inequality.

Track progress with the OCR A Level Economics hub and the printable checklist. Companion pages: revision notes and practice questions. To find weak spots first, try the free diagnostics.

What this unit covers

Specification outcome	Section
Labour force, working population, dependency ratio, participation rate, replacement ratio	1
Maximum wages, minimum wages, the living wage (diagram)	2
Labour market flexibility; occupational and geographical mobility	3
Individual, collective and productivity bargaining; trade unions	4
Migration, discrimination, demographic change, incentives	5
Informal labour markets	6
Policies to reduce immobility and raise flexibility	7
Income and wealth inequality and their distinction	8
Government intervention: pensions, migration, education and training, legislation, participation ages, tax and benefits	9

1. Measuring the labour market

• Labour force: everyone in work plus everyone unemployed but available for and seeking work.
• Working population: people of working age. Books differ on whether it means working age or the labour force, so say which you use.
• Participation rate: labour force as a percentage of the working-age population.
• Dependency ratio: people outside working age (children and retirees) as a percentage of the working-age population.
• Replacement ratio: income out of work (benefits) as a percentage of income in work.

Worked example (Country A, illustrative). Population 50.0m: under 16, 9.0m; aged 16 to 64, 31.0m; aged 65 and over, 10.0m. In work 24.8m; unemployed 1.2m.

• Labour force = 24.8 + 1.2 = 26.0m.
• Participation rate = 26.0/31.0 × 100 = 83.9%.
• Dependency ratio = (9.0 + 10.0)/31.0 × 100 = 61.3%.
• Unemployment rate = 1.2/26.0 × 100 = 4.6%.
• Benefits of £9,000 against net pay of £18,000 give a replacement ratio of 50%. If net pay is only £12,000 the ratio is 75%, and work pays less relative to benefits.

2. Maximum wages, minimum wages and the living wage

Diagram in words. Draw a labour market with the wage (£ per hour) on the vertical axis and workers on the horizontal axis. Labour demand slopes down, labour supply slopes up and they cross at the equilibrium wage. A minimum wage is a price floor: drawn above the equilibrium, it leaves quantity supplied above quantity demanded. A maximum wage is a price ceiling drawn below it, leaving demand above supply.

Worked example. Market for bakery assistants (thousands of workers, w in £ per hour): demand L = 100 − 5w, supply L = −20 + 10w.

• Equilibrium: 100 − 5w = −20 + 10w gives w = £8 and L = 60.
• Minimum wage of £10: demand = 50, supply = 80. 50 hold jobs and 30 are unemployed. Employment falls 16.7% while the wage rises 25%.
• Arc elasticity of demand for labour from £8 to £10: (−10/55) ÷ (2/9) = −0.82. This is inelastic, so the wage bill rises from £480 to £500 (thousand per hour).
• Maximum wage of £6: demand = 70, supply = 40, a shortage of 30, and employment is only 40.

Evaluation chain. Effect on employment depends on how elastic labour demand is. If demand is inelastic few jobs are lost, and the workers who stay gain. Employers face higher costs, which may mean higher prices, lower profit, automation or fewer hours. A rise can raise productivity through better motivation and lower turnover. If a single employer has market power over wages, a minimum wage may even raise employment, a case covered in the page on wage models. A wage set below equilibrium is not binding. Government gains from higher tax and lower benefit spending but loses if jobs disappear. A maximum wage, for example a cap on pay in a public body, risks shortages, difficulty recruiting skilled staff, emigration and under-the-table payments. It may be defended on fairness grounds.

The living wage. The term is used two ways: a statutory higher minimum for older workers, and a voluntary rate set from an estimate of living costs that employers choose to pay. The voluntary version avoids a legal job-loss effect but covers only those employers who sign up.

3. Flexibility and mobility

Flexibility is how easily labour markets adjust to change. Common types are wage flexibility, numerical flexibility (temporary, part-time and zero-hours work, easy hiring and firing) and functional flexibility (workers able to do several jobs).

• Gains: firms adjust to demand, lower unemployment and costs, and faster growth.
• Costs: insecure incomes, less training, less loyalty, lower spending in a downturn and in-work poverty.

Mobility. Occupational mobility is moving between jobs or industries. Geographical mobility is moving to work in another area. Low mobility causes structural unemployment, with vacancies and unemployment existing side by side.

Worked example. Region X: labour force 2.0m, unemployed 0.18m, so 9%. Region Y: labour force 3.0m, unemployed 0.09m, so 3%. Overall: 0.27/5.0 = 5.4%. Region Y has 0.07m vacancies. If 0.07m workers could move, unemployment in X would fall from 0.18m to 0.11m, but only if their skills match, housing in Y is affordable and families can move.

Barriers: skills mismatch, high house prices, family ties, poor information, transport costs, qualifications that are not recognised. Greater mobility reduces structural unemployment and wage gaps but can drain declining regions.

4. Bargaining and trade unions

• Individual bargaining: a worker negotiates alone. It suits scarce skills, but most workers have less power than the employer.
• Collective bargaining: a union negotiates for many. It raises bargaining power, pay and conditions, and gives workers a voice and less turnover.
• Productivity bargaining: higher pay in exchange for productivity gains or changed working practices.

Worked example. A deal gives pay +4% per hour and output per hour +6%. Labour cost per unit changes by 1.04/1.06 − 1 = −1.9%. Pay rises yet unit costs fall.

Evaluation. Unions can raise pay above the competitive level, which can reduce employment, or help insiders at the cost of outsiders. They can lower pay gaps, improve safety, and raise productivity through training and cooperation. Strikes cost output. The effect depends on membership, how elastic labour demand is, the strength of the firm’s product market and law on industrial action.

5. Migration, discrimination, demographics and incentives

Migration worked example. Fruit picking: demand L = 180 − 10w, native supply L = 10w (thousands). Equilibrium w = £9, L = 90. Migrants add 20 at each wage, so supply L = 10w + 20. New equilibrium: w = £8, L = 100. The wage falls 11.1% and employment rises 11.1%. Only 80 are native workers, down from 90. The wage bill falls from £810 to £800, so employers keep more of the surplus. Evaluation: effects differ by skill sub-market. Migration can fill shortages, add tax revenue and demand, and sometimes raise capital use. It can also depress wages for close substitutes, add pressure on housing, and drain the source country of skilled people, offset by remittances.

Discrimination. Employers treat workers differently for reasons unrelated to productivity. Mean pay is £15.00 for Group P and £13.50 for Group Q, a gap of 10%. If £0.90 is explained by experience and hours, then £0.60 (40% of the gap, 4% of £15) is unexplained and may reflect discrimination. Effects: wasted talent, lower output, income inequality and under-use of skills. Not all gaps are discrimination, and the explained part may itself come from earlier unequal access.

Demographic change. Country A in 20 years: under 16, 8.0m; 16 to 64, 29.0m; over 65, 14.0m. Dependency ratio = 22/29 = 75.9% (from 61.3%). Workers per pensioner fall from 3.1 to 2.07. Smaller labour supply, higher pension costs and skills shortages follow. If participation among the 16 to 64 group rises from 83.9% to 86%, the labour force is 0.86 × 29.0 = 24.94m instead of 0.839 × 29.0 = 24.3m, a partial offset. Longer-term, birth rates, migration and retirement ages all matter.

Incentives. Out-of-work benefits that are high compared with pay weaken the incentive to work. An unemployed person offered £10,500 net pay on benefits of £9,000 has a replacement ratio of 85.7%. The gain is £1,500, or £600 after £900 work costs. A poverty trap arises when extra earnings are taxed and benefits withdrawn. Gross rise £200: income tax at 20% takes £40 and national insurance at 8% takes £16, leaving £144. Benefits are cut by 55% of this, £79.20, so only £64.80 is kept. The marginal effective tax rate is (200 − 64.80)/200 = 67.6%.

6. Informal labour markets

These are work and pay outside official records: cash-in-hand jobs, unpaid household work and illegal activity.

Worked example. Recorded GDP in Country B is 800 (illustrative units) and informal activity is 15% of that, so 120 is unrecorded. At an average tax rate of 30%, the maximum lost revenue is 36. If 0.3m of the 1.2m officially unemployed in Country A work informally, true unemployment is 0.9/26.0 = 3.5%, not 4.6%.

Significance depends on size. Informal work gives income and flexibility to the poor and lowers recorded unemployment. It also means no pension or protection, lost tax, unfair competition, distorted statistics and weaker policy targeting.

7. Policies to reduce immobility and increase flexibility

Policy	Targets	Evaluation
Training and retraining grants	Occupational	Slow, costly, depends on matching skills to demand
Relocation grants, social housing, transport	Geographical	Housing supply is the real limit
Job-matching and information services	Both	Cheap, helps frictional more than structural unemployment
Weaker employment protection, lower benefits	Flexibility	Lower costs, but insecurity and lower training
Childcare support	Participation	Raises supply of parents but costs money

Effectiveness depends on cost, time lags, who it reaches, and what the labour market needs.

8. Income and wealth inequality

Income is a flow received over a period (wages, rent, interest, benefits). Wealth is the value of assets owned on a given date (property, savings, pension rights). Wealth earns income, so the two are linked, but wealth is usually distributed more unequally than income. Illustrative Country A: the top 10% receive 30% of income but hold 52% of wealth. The bottom half receive 22% of income but hold 6% of wealth.

9. Government intervention in the labour market

• Pensions: a state pension supports retirees, and raising the pension age keeps people working. Delaying a pension for a cohort of 0.8m people paid £10,000 saves up to £8bn a year, before extra benefits and health costs.
• Migration: quotas, visas and skill criteria shift labour supply. EU rules gave free movement of workers between member states; check which rules apply now.
• Education and training: raises human capital. A £6,000 course lifting pay by £2,500 a year pays back in 2.4 years; a 50% subsidy cuts that to 1.2. Requiring young people to stay in education or training until 18 (a participation age) delays labour market entry but raises skills.
• Legislation and regulation: examples are the National Minimum Wage Act, the Equality Act and working-time rules from the EU. Gains: fairness and protection. Costs: higher labour costs and less flexibility. Check which rules currently apply.
• Tax and benefits: progressive taxes and benefits cut inequality but can create work disincentives and traps.

Judge each intervention by who gains, the size of the effect, the time lag, the cost, the unintended effects and the choice between equity and efficiency.

Common errors

• Treating participation rate and employment rate as the same.
• Placing a wage floor under the equilibrium wage and still showing job losses.
• Assuming minimum wages always cut jobs without mentioning elasticity.
• Mixing up income and wealth.
• Listing policies without judging their effectiveness.

Official syllabus

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