How are wages set by the demand for and supply of labour, and how do monopsony, trade unions and the minimum wage change the outcome?
1.4 The labour market: the demand for and supply of labour, wage determination in competitive labour markets, monopsony, trade unions, and the effect of a national minimum wage.
An OCR H460 answer to the labour market, covering the derived demand for and supply of labour, wage determination in a competitive labour market, monopsony employers, trade unions and collective bargaining, and the employment effects of a national minimum wage.
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What this dot point is asking
OCR wants you to explain the demand for and supply of labour, how wages are set in a competitive labour market, how a monopsony employer changes the outcome, the role of trade unions, and the employment effects of a national minimum wage in both competitive and monopsony markets.
The demand for labour
Labour demand shifts with the demand for the final product, labour productivity, and the price of substitutes such as capital. It is more wage-elastic when labour is a large share of costs, when the final product's demand is elastic, and when capital can easily substitute for workers.
The supply of labour
The supply of labour to an occupation depends on the wage rate, the size and skills of the available workforce, the non-wage benefits of the job, the difficulty of acquiring the necessary skills (which limits supply for skilled roles), and migration. It generally slopes upward: a higher wage attracts more workers. Supply is more inelastic where long training or rare skills are required (surgeons), so such workers command higher wages.
Wage determination in a competitive labour market
Monopsony
This matters for policy: against a monopsony, a trade union or a minimum wage can raise the wage and employment, because the employer was deliberately restricting hiring to keep wages down. This is the key evaluation point on minimum-wage questions.
Trade unions and the minimum wage
- Trade unions are organisations that bargain collectively for better pay and conditions. In a competitive labour market, pushing the wage above equilibrium tends to reduce employment (a movement up the labour demand curve), creating a trade-off between wages and jobs. Against a monopsony, a union can raise both the wage and employment.
- A national minimum wage is a wage floor. Above the competitive equilibrium it creates excess supply (unemployment) in a competitive market, with the size depending on labour-demand elasticity, but it can raise employment under monopsony. It also reduces in-work poverty and may raise productivity (the efficiency-wage effect) and worker motivation.
Examples in context
- The UK National Living Wage. Successive rises have raised pay for low earners; evidence of large job losses has been limited, consistent with monopsony power in some low-wage labour markets.
- Footballers and surgeons. Very high pay reflects high marginal revenue product (footballers) or scarce skills and long training that keep supply inelastic (surgeons).
- Single-employer towns. A dominant local employer can act as a monopsonist, holding wages below the competitive level.
Try this
Q1. Explain why the demand for labour is a derived demand. [3 marks]
- Cue. Firms hire workers to produce goods; demand for labour depends on demand for the final product.
Q2. Explain why a minimum wage might raise employment in a monopsony labour market. [4 marks]
- Cue. The monopsonist restricted hiring to hold wages down; a floor removes that incentive, so it can employ more at the higher set wage.
Exam-style practice questions
Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
OCR H460/01 20214 marksIn a competitive labour market, labour demand is and labour supply is , where is the hourly wage in pounds. Calculate the equilibrium wage and level of employment.Show worked answer →
A short calculate question. At equilibrium the quantity of labour demanded equals the quantity supplied, so set .
. Collecting terms: , so and per hour.
Substitute back: workers (check: ). So the equilibrium wage is and employment is 420 workers. Markers reward setting the equations equal, solving for , and finding employment with units.
OCR H460/01 202312 marksEvaluate the likely effects of a significant rise in the national minimum wage on employment.Show worked answer →
A levels-of-response question. Knowledge and application: explain that in a competitive labour market a minimum wage above equilibrium acts as a price floor, raising the wage but reducing labour demand and raising supply, creating excess supply (unemployment). Draw the diagram.
Analysis: develop the size of the effect, linking it to the elasticity of labour demand.
Evaluation: in a monopsony, a minimum wage can raise both wages and employment, because the employer was previously restricting employment to hold wages down. Other points: firms may absorb costs, raise prices or productivity; effects depend on how far above equilibrium the wage is and on demand elasticity. Conclude with a supported judgement that the employment effect is ambiguous and depends on market structure and elasticity.
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Sources & how we know this
- OCR A Level Economics (H460) Specification — OCR (2023)