What decides how much different jobs are paid, and why do some workers earn far more than others?
Explain how the demand for and supply of labour determine wages, why wages differ between occupations, and the effects of trade unions and a national minimum wage on the labour market.
A CCEA GCSE Economics answer on the labour market, covering how the demand for and supply of labour set the wage rate, the reasons wages differ between occupations, the role of trade unions, and the effects of a national minimum wage on pay and employment.
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What this dot point is asking
The labour market is just another market, but the "good" being traded is work and the "price" is the wage. CCEA expects you to explain how the demand for and supply of labour set the wage rate, why wages differ so much between jobs, and how two interventions, trade unions and a national minimum wage, affect pay and employment. This is the second half of Section 2 and applies the demand-and-supply model from Section 1 to a new and important market.
Wages as the price of labour
The labour market works like any other market, with two sides. The demand for labour comes from employers who want workers to produce goods and services; it is a derived demand, because firms only want labour to make products that can be sold. The supply of labour comes from workers willing and able to do the job at a given wage.
The equilibrium wage is set where the demand for labour equals the supply of labour, just as a product price is set where demand meets supply. A higher wage attracts more workers (supply rises) but makes firms want fewer (demand falls), and the market settles where the two balance.
Why wages differ between occupations
The same demand-and-supply logic explains why some jobs pay far more than others. Wages are high where demand for the labour is high and the supply is low, and low where demand is low and supply is high.
- Skills and qualifications. Jobs needing rare skills or long training, such as surgeons or pilots, have a small supply, so wages are high. Jobs needing little training have a large supply, so wages are low.
- The value of the work. Workers who add a lot of value, or whose output sells for a high price, are in high demand and paid more.
- Danger and unpleasantness. Some dangerous or unpleasant jobs pay more to attract enough workers.
- Trade union strength and qualifications barriers. Where entry is restricted, supply is limited and pay is higher.
Trade unions and the national minimum wage
Two forces can push wages away from the simple market outcome.
A trade union is an organisation that represents workers and bargains with employers on their behalf. By negotiating collectively, and sometimes threatening industrial action, a union can raise its members' wages and improve conditions above what individual workers could achieve. The risk is that a wage pushed above the equilibrium can reduce the number of jobs employers offer.
A national minimum wage is a legal floor below which employers may not pay. Set above the equilibrium wage, it raises the pay of the lowest paid and can reduce poverty and reliance on benefits. But because it is above equilibrium, the quantity of labour supplied exceeds the quantity demanded, so it can cause unemployment as firms cut jobs or hours, especially if it is set too high. If demand for labour is inelastic, the job losses may be small.
Why this matters
The labour market decides incomes, which is one of the most important questions in economics: it explains inequality, poverty and the "for whom" question of who gets the goods produced. It links to unemployment and government objectives in the national economy, and the minimum wage is a classic evaluation topic that uses the demand-and-supply diagram. Examiners reward candidates who explain pay differences with both demand and supply, and who can weigh the gains and the job-loss risks of intervention.
Exam-style practice questions
Practice questions written in the style of CCEA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
CCEA-style6 marksExplain why a surgeon is usually paid more than a cleaner.Show worked answer →
Wages are set by the demand for and supply of labour in each occupation.
The supply of surgeons is low because the job needs years of training and rare skills, so few people can do it. The supply of cleaners is high because the job needs little training, so many people can do it. Award marks for the supply argument.
The demand for surgeons is high and their work is highly valued (it can save lives), which also raises their pay, while the value added by a cleaner per hour is lower. Award marks for the demand argument.
Putting them together: high demand and low supply give surgeons a high equilibrium wage, while lower demand and high supply give cleaners a low wage. The best answers use both demand and supply, not just one.
CCEA-style8 marksEvaluate the effects of introducing a national minimum wage above the equilibrium wage.Show worked answer →
A national minimum wage is a legal wage floor; set above the equilibrium it raises pay for low-paid workers.
Benefits: it raises the incomes of the lowest paid, can reduce poverty and in-work benefits, and may increase worker motivation and productivity. Award marks for these advantages with explanation.
Costs: because it is above equilibrium, the quantity of labour supplied exceeds the quantity demanded, so it can cause unemployment as firms cut jobs or hours; it may also raise firms' costs and prices. Award marks for the unemployment argument, ideally with reference to a labour demand and supply diagram showing excess supply.
A strong evaluation judges the size of the effect, noting that if demand for labour is inelastic the job losses may be small, so the policy can raise pay with limited unemployment, but the outcome depends on how high the wage is set.
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Sources & how we know this
- CCEA GCSE Economics specification (7510) — CCEA (2017)
- CCEA GCSE Economics specification (Standard PDF) — CCEA (2017)