OCR GCSE Economics: The labour market, wages, pay, money and interest rates (J205) – Revision Notes

These notes condense topics 2.7 (the labour market) and 2.8 (the role of money and financial markets) from the OCR GCSE (9-1) Economics (J205) specification, Version 2.0 (June 2026), for first assessment in 2019. The specification has no tiers. For full explanations and longer worked examples, read the study guide. To test yourself, use the practice questions. Course pages: OCR GCSE Economics hub, the printable checklist and the free diagnostics. Wider topic notes: Markets and Money revision notes. The figures below are made up for illustration.

2.7 Labour market: key ideas

Term	Meaning
Labour market	Where workers sell their work and employers buy it
Supply of labour	Workers willing and able to work at each wage; slopes upwards
Demand for labour	Workers employers want to hire at each wage; slopes downwards
Derived demand	Demand for a worker that follows from customers wanting what the worker helps to produce
Equilibrium wage	Wage where workers wanted equal workers available
Shortage	Demand for workers exceeds supply, which pulls the wage up
Surplus	Supply of workers exceeds demand, which pushes the wage down

Interaction: employers offer jobs, pay and conditions; workers apply, accept, negotiate or look elsewhere. Each side responds to the other’s offer.

Factors that shift each curve

Demand for labour shifts when	Supply of labour shifts when
Demand for the product changes	Skills, qualifications or training needed change
Worker productivity changes	Size of the working-age population changes, including migration
Cost or capability of machinery changes	Pay in similar jobs changes
	Working conditions or non-wage benefits change

A change in the wage itself is a movement along a curve, not a shift.

Method: wage question in steps

1. Draw or picture the starting equilibrium: wage on the vertical axis, workers on the horizontal.
2. Name the cause. Decide which curve moves and whether it goes left or right.
3. State the new equilibrium wage and number employed.
4. Say who gains and who loses, with a sentence of judgement.

Small worked reminder

Hourly wage £6, £7, £8, £9. Demand: 90, 70, 50, 30 workers. Supply: 10, 30, 50, 70.

Equilibrium: £8 with 50 workers
Supply rises by 40 at every wage -> 50, 70, 90, 110
New equilibrium: £7 with 70 workers (demand 70 = supply 70)
Wage falls 1/8 = 12.5%; employment rises 20/50 = 40%

Why wages differ: a high wage goes with scarce skills, long training and high-value work. A low wage goes with plentiful workers and easy entry.

Gross and net pay

Item	Rule
Gross pay	Pay before any deduction
Net pay	Gross pay - income tax - national insurance - pension contributions
Deductions	Income tax and national insurance go to government; pension goes into the worker’s retirement saving
Net as % of gross	net / gross × 100
Overtime	hours × (hourly rate × multiplier); time and a half is × 1.5

Method: net pay in steps

1. Find gross pay (basic plus overtime or bonus).
2. Work out each deduction. If a rate applies only above an allowance, subtract the allowance first.
3. Add the deductions.
4. Subtract the total from gross pay.
5. Check that net is less than gross and that units are right (weekly, monthly or annual).

Worked reminder. Illustrative rules: income tax 20% above £150 a week; national insurance 8% above £120 a week; pension 3% of gross. Worker earns £9.80 an hour for 30 hours.

Gross        = 30 × 9.80                  = £294.00
Income tax   = (294 - 150) × 0.20         = £28.80
NI           = (294 - 120) × 0.08         = £13.92
Pension      = 294 × 0.03                 = £8.82
Deductions   = 28.80 + 13.92 + 8.82       = £51.54
Net pay      = 294.00 - 51.54             = £242.46

Going backwards: gross = net + all deductions. A deduction as a percentage of gross = deduction / gross × 100.

2.8 Money and the financial sector

• Money is anything generally accepted in payment. Used as a medium of exchange, it avoids the double coincidence of wants that barter needs. It speeds up trade, supports specialisation and makes prices comparable.
• Banks: deposits, loans, accounts, payments.
• Building societies: owned by members; savings and mortgages.
• Insurance companies: premiums from many, payments to the few who claim; risk is shared.

Importance of the sector (evaluation frame)

For	Why it matters	Counter-point
Consumers	Safe saving, credit, mortgages, cover for loss	Debt can become unaffordable
Producers	Loans to invest; payments; cover for stock	Loans need repaying; firms can be refused credit
Government	Can borrow; channel for interest rate policy; payments system	Large borrowing means repayments later; failure of an institution harms everyone

Judgement stems: “most important because…”, “depends on…”, “less important if…”.

Interest rates

Rate rises	Rate falls
Saving up, because reward is higher	Saving down
Borrowing down, because cost is higher	Borrowing up
Investment down, because fewer projects beat the loan cost	Investment up

Simple interest for one year: interest = amount × rate. Change in interest = amount × change in rate. Monthly figure = annual figure / 12.

Worked reminders:

Saving 2,000 at 3% = 60; at 4% = 80; gain 20
Loan 9,000 at 8% = 720; at 10% = 900; extra cost 180 a year = 15 a month
Investment test: return = extra profit / cost of project × 100.
Invest only if return is above the interest rate on the loan.

For compound interest, multiply by (1 + rate) once per year: balance = amount × (1 + rate)^years.

Must-know distinctions

• Movement versus shift: a new wage moves you along a curve; a new cause (product demand, training needed) moves the whole curve.
• Gross versus net: gross is earned, net is received. Comparing a gross figure with a net figure gives a wrong answer.
• Saving versus borrowing: the same rate rise helps savers and hurts borrowers.
• Bank versus building society: both take deposits and lend, but a building society is owned by its members.
• Insurance versus saving: insurance pays out only if a loss happens; savings are yours to withdraw.

Quick self-test

1. Gross pay is £1,750 a month. Deductions are income tax £190, national insurance £115 and pension £70. Find net pay.
2. Net pay is £1,320. Tax is £150, national insurance £90, pension £60. Find gross pay.
3. A saver has £4,200. Find the extra interest in one year if the rate rises from 2.5% to 3.5%.
4. A borrower owes £12,000 at 7%. Find the extra interest in one year if the rate goes to 9%.
5. £2,500 is saved at 4% with interest added each year. Find the balance and interest after 2 years.
6. A worker earns £14 an hour for 38 hours plus 4 hours’ overtime at time and a half. Find gross pay.
7. A £30,000 machine adds £1,800 profit a year. Find the return, then say whether it is worth buying with a loan at 4% and with a loan at 7%.
8. State two factors that would shift the supply of labour to the right.
9. Pension contributions are £55 on gross pay of £1,100. Find the percentage.
10. A wage rises from £10 to £12 an hour. Find the percentage rise.
11. Why is demand for labour called a derived demand?
12. Explain how money solves the problem of barter.

Answers

1. 190 + 115 + 70 = 375; 1,750 - 375 = £1,375.
2. 150 + 90 + 60 = 300; 1,320 + 300 = £1,620.
3. 4,200 × 0.025 = £105; 4,200 × 0.035 = £147; extra £42 (or 4,200 × 0.01).
4. 12,000 × 0.07 = £840; 12,000 × 0.09 = £1,080; extra £240.
5. 2,500 × 1.04² = £2,704; interest £204.
6. Overtime rate £21; 4 × 21 = £84; basic 38 × 14 = £532; gross £616.
7. 1,800 / 30,000 × 100 = 6%. At 4% the loan costs £1,200, leaving £600, so worth buying. At 7% it costs £2,100, a loss of £300, so not worth buying.
8. Any two: more people qualify or train; working-age population grows (including migration); pay in similar jobs falls; conditions or benefits improve.
9. 55 / 1,100 × 100 = 5%.
10. 2 / 10 × 100 = 20%.
11. A firm takes on staff because buyers want its output, so the demand for staff is derived from the demand for the goods.
12. Barter needs each side to want what the other holds. With money, a seller accepts payment and spends it anywhere, so no matching of wants is needed.

Where marks are usually lost

• Subtracting only some of the deductions, or giving gross pay when net is asked for.
• Applying a tax rate to all pay when an allowance should come off first.
• Mixing weekly, monthly and annual figures.
• Moving a whole curve when the question only changes the wage.
• Giving the direction of a wage change but not the change in employment.
• Writing “the rate goes up so people save” with no mention of borrowing and investment.
• Listing financial institutions without saying what each does.
• Stopping at a one-sided answer to an evaluate question; weigh both sides and reach a supported judgement.

Official syllabus

OCR, Cambridge OCR Level 1/Level 2 GCSE (9-1) in Economics (J205), Version 2.0 (June 2026), first assessment 2019: topics 2.7 and 2.8.