How are wages determined, and how do monopsony, trade unions and the minimum wage change the outcome?
The labour market: the demand for and supply of labour, wage determination in competitive labour markets, wage differentials, monopsony and trade unions, and the effects of a national minimum wage.
An Eduqas A520 answer to the labour market, covering the derived demand for labour and its determinants, the supply of labour, wage determination in a competitive market, wage differentials, the effects of monopsony and trade unions, and the impact of a national minimum wage on pay and employment.
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What this dot point is asking
Eduqas wants you to explain the demand for and supply of labour, determine the wage in a competitive labour market, account for wage differentials, analyse how monopsony and trade unions change the outcome, and evaluate the effects of a national minimum wage. This applies the demand-and-supply model to a factor market and is a favourite essay context.
The demand for labour
The demand for labour rises with the productivity of workers and the price of the product, and shifts if the price of substitute capital changes. Demand for labour is more elastic when labour is a large share of costs, when capital can easily substitute for it, and over a longer time period.
The supply of labour
For an individual, a higher wage usually raises hours offered, but at very high wages the supply curve can bend backward as workers take more leisure (the income effect outweighing the substitution effect).
Wage determination and differentials
Monopsony and trade unions
A trade union is an organisation that bargains collectively for its members. It can raise wages by collective bargaining, by restricting the supply of labour (closed shops, qualifications), or by raising the demand for labour (productivity deals). In a competitive market a union wage above equilibrium creates a trade-off: higher pay for those in work but lower employment. In a monopsony, however, a union can act as a countervailing power and raise both the wage and employment, the bilateral-monopoly case.
The national minimum wage
Examples in context
- Footballers and surgeons. Very high marginal revenue product and scarce talent or qualifications explain large positive wage differentials.
- The NHS as monopsony. As the dominant employer of nurses and doctors, it can hold pay below a competitive level, the textbook monopsony.
- The UK National Living Wage. Its rises have raised low pay with limited measured job losses, consistent with monopsony power in low-wage sectors.
Try this
Q1. Explain why a more productive worker tends to command a higher wage in a competitive labour market. [4 marks]
- Cue. Higher marginal physical product raises marginal revenue product (MRP = MPP times MR), and firms hire where the wage equals MRP, so a higher MRP supports a higher wage.
Q2. Explain one reason why a national minimum wage might not reduce employment. [4 marks]
- Cue. In a monopsony it can raise both wage and employment; or higher pay may raise productivity and cut turnover, offsetting the cost to employers.
Exam-style practice questions
Practice questions written in the style of WJEC Eduqas exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Eduqas Component 1 20182 marksExplain what is meant by the statement that the demand for labour is a derived demand.Show worked answer →
A 2-mark explain question. One mark for the idea, one for development.
The demand for labour is a derived demand because labour is not wanted for its own sake but for the goods and services it helps to produce. Development: if demand for a firm's product rises, the firm needs more workers to make it, so the demand for that labour rises too.
Markers reward the link from product demand to labour demand. Simply saying "firms need workers" without the derived idea earns one mark.
Eduqas Component 3 (micro) 202112 marksEvaluate the view that a national minimum wage inevitably causes unemployment among low-paid workers.Show worked answer →
A levels-of-response essay. Knowledge and application: in a competitive labour market, a minimum wage set above the equilibrium creates excess supply of labour (the quantity of labour supplied exceeds the quantity demanded), so it can cause unemployment. Draw the diagram showing the minimum wage above equilibrium and the resulting excess supply.
Analysis: develop the size of the effect, linking it to the elasticity of labour demand and supply.
Evaluation: weigh the opposite case. In a monopsony labour market, a minimum wage can raise both the wage and employment, because it removes the monopsonist's incentive to restrict hiring. The effect also depends on how far above equilibrium the wage is set, productivity gains, and reduced labour turnover. Conclude with a supported judgement, for example that a minimum wage need not cause unemployment, especially in monopsonistic low-pay markets, if set sensibly.
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Sources & how we know this
- Eduqas A Level Economics Specification (A520) — Eduqas (2015)