OxfordAQA International GCSE Economics: The labour market and wage determination (9214)

This guide is aligned to the OxfordAQA International GCSE Economics (9214) specification, first teaching September 2023, first examined May/June 2025. It covers section 3.1.5.4, The labour market, which sits in the content for Paper 1: How markets work. The other parts of 3.1.5 (market structures, competitive and non-competitive markets) are covered elsewhere.

Related pages: revision notes, practice questions, How markets work, the course hub, the printable checklist and the free 10-minute diagnostics.

All figures below are invented for teaching. The towns, occupations and currency units (cu) are illustrative, not real statistics.

What this unit covers

Specification content	Skills to show
The role and operation of the labour market	Explain what the labour market is, who demands and supplies labour, and what it does
Determination of wages through supply and demand	Find a wage and employment level from demand and supply, and show how changes move them
Wage differentials within and between occupations	Explain why pay differs between jobs and between workers in the same job

The role and operation of the labour market

The labour market is where labour is bought and sold. Firms (and the government as an employer) demand labour. Households supply it. The price of labour is the wage, usually quoted per hour or per year.

The market does three jobs:

• It sets wages, so workers know what each job pays.
• It sets employment, so the number of jobs filled depends on wages and demand.
• It allocates workers to jobs. High wages attract workers into occupations where labour is scarce, and low wages push them elsewhere.

Labour is the factor of production workers provide. Its market differs from a market for a good because the “product” is a person’s time and effort, so workers care about more than the wage: hours, location, safety and security.

Demand for labour

Firms demand labour to produce goods and services. Labour demand is therefore a derived demand: it depends on the demand for what the workers make. If customers stop buying a product, the firm needs fewer workers.

The demand curve for labour slopes downward. At a high wage a firm hires fewer workers, because each worker adds to costs and the firm may swap towards machines. At a low wage it hires more.

If the wage itself changes you slide along the curve. If any other condition changes, the whole curve moves:

• Demand for the product: a rise shifts labour demand right.
• Productivity: workers who produce more, perhaps after training or with better tools, are worth more to the firm.
• The price of substitutes such as machines: cheaper machines can reduce demand for workers.
• The number of firms hiring: a new factory raises market demand for labour.

Supply of labour

The supply curve for labour in one occupation slopes upward. Higher wages attract people from other jobs, bring in people who were not working and persuade existing workers to offer more hours.

Again, the wage itself only moves you along the curve. The curve shifts when these change:

• Wages in other jobs: if similar jobs pay more, workers leave and supply shifts left.
• Qualifications and training needed: more training places raise supply.
• The size of the working-age population and migration: more workers can shift supply right.
• Non-wage factors: working conditions, hours, status, and risk.

Wage determination using demand and supply

The equilibrium wage is the one at which firms want exactly as many workers as are willing to work. Here is a labour market for delivery drivers in an illustrative Town X, where demand is 200 minus 10 times the wage and supply is 10 times the wage minus 40, with employment in workers.

Wage (cu per hour)	Demand (workers)	Supply (workers)	Gap (supply minus demand)
6	140	20	-120
8	120	40	-80
10	100	60	-40
12	80	80	0
14	60	100	+40
16	40	120	+80

Equilibrium is at a wage of 12 cu with 80 drivers employed. Check: 200 - 10 × 12 = 80 and 10 × 12 - 40 = 80. The total wage bill is 12 × 80 = 960 cu per hour.

A sketch in words: label the vertical axis with the hourly wage (cu) and the horizontal axis with the number of workers. The demand curve is a downward-sloping line through the points (140 workers, 6 cu) and (20 workers, 18 cu). The supply curve is an upward-sloping line through (20 workers, 6 cu) and (140 workers, 18 cu). The two lines cross at the equilibrium point (80 workers, 12 cu). Label both axes and the point where the curves cross.

When wages are not at equilibrium

At a wage below equilibrium, demand exceeds supply. At 10 cu there are 100 vacancies and only 60 willing workers: a shortage of 40, so firms compete and the wage is pushed up. At a wage above equilibrium, supply exceeds demand. At 14 cu, 100 want work but firms want 60: a surplus of 40, which is unemployment in this occupation. A wage held above equilibrium by a union deal or a legal minimum has this effect. The wage rises 16.7% (from 12 to 14) but employment falls 25% (from 80 to 60).

Shifts in demand

Suppose demand for deliveries rises, so firms want 30 more drivers at every wage. New demand is 230 - 10W. Setting 230 - 10W = 10W - 40 gives 20W = 270, so W = 13.5 cu and employment = 95. Wage rises 12.5% and employment rises 18.75%. The wage bill becomes 13.5 × 95 = 1,282.5 cu.

Shifts in supply

Suppose a training scheme adds 20 drivers at every wage. New supply is 10W - 20. Then 200 - 10W = 10W - 20 gives W = 11 cu and employment = 90. The wage falls 8.3% while employment rises 12.5%. A fall in supply does the reverse: if 20 drivers leave at every wage, the wage rises to 13 cu and employment falls to 70.

Chain of reasoning for an answer: change in a condition → which curve shifts and which way → new equilibrium wage and employment → consequence for workers and firms.

Wage differentials between occupations

A wage differential is a gap between two pay rates. Between occupations the same model explains it: each occupation has its own demand and supply.

Illustrative Country A has two markets. For qualified electricians, demand is 300 - 5W and supply is 5W - 100, giving W = 40 cu and 100 workers. For unskilled packers, demand is 160 - 6W and supply is 6W + 40, giving W = 10 cu and 100 workers. Employment is the same, but electricians earn 30 cu more per hour, which is 300% more (four times as much).

Why? On the supply side, electricians need years of training, a licence and sometimes face danger, so fewer people can or will do the job: supply is lower at each wage. On the demand side, a skilled electrician produces output of high value, so firms will pay more. Packers need little training, so supply is large and wages stay low.

Reasons for differentials between occupations:

• Skills and qualifications: costly or long training restricts supply.
• Productivity and the value of output.
• Risk, unpleasant or unsocial work, which workers must be paid extra to accept.
• Trade union strength, which can lift pay above the market level.
• Barriers to entry such as licences.
• Immobility: workers cannot easily move between jobs or areas, so wage gaps persist. Occupational immobility means lacking the skills for other jobs. Geographical immobility means being unable or unwilling to move.

Wage differentials within occupations

Two workers with the same job title can earn different amounts because of:

• Experience or length of service.
• Qualifications beyond the minimum, or extra responsibility.
• Performance, through bonuses, commission or piece rates.
• Location: an area with high living costs or labour shortages pays more.
• Hours and shifts, including overtime and night work.
• The employer: sector, size and profitability.
• Discrimination, where pay differs for reasons unrelated to ability.

Worked example: A driver on 12 cu per hour for a 40-hour week earns 12 × 40 = 480 cu. After the demand rise above, the same week pays 13.5 × 40 = 540 cu.

Evaluating the simple model

The demand and supply model is a starting point. Judge it by asking:

• Are workers identical? Real workers differ in skills, so one wage per occupation is a simplification.
• Do workers and firms know all wages and vacancies? Often they do not.
• Are unions or a dominant employer present? Unions can raise wages; one large employer can hold them down.
• Do government rules such as a minimum wage change the outcome?
• How long does adjustment take? Training an electrician takes years, so supply responds slowly and shortages can last.

A sound evaluation answer weighs which factor matters most in the case given and says why.

Common errors

• Shifting the wrong curve: a rise in wages is a movement along the curve, not a shift.
• Calling the wage the price of the product: it is the price of labour.
• Saying a wage above equilibrium causes a shortage: it causes a surplus of workers.
• Treating differentials as purely demand or purely supply: use both.
• Forgetting to quote the new wage and employment after a shift.

Official syllabus

OxfordAQA International GCSE Economics (9214), version 1.0, for exams May/June 2025 onwards, published by OxfordAQA. Section 3.1.5.4, The labour market. Check the full specification at oxfordaqa.com/9214.