What decides how much workers are paid?
The demand for and supply of labour, how the equilibrium wage is set, why wages differ between jobs, and the meaning of derived demand in the labour market.
A focused answer for AQA GCSE Economics on the demand for and supply of labour, how the equilibrium wage is set, why wages differ between jobs, and the meaning of derived demand.
Reviewed by: AI editorial process; not yet individually human-reviewed
Have a quick question? Jump to the Q&A page
Jump to a section
What this dot point is asking
AQA wants you to explain the demand for and supply of labour, show how the equilibrium wage is set where they meet, explain why wages differ between jobs, and define derived demand. The labour market uses the same demand-and-supply tools as any market, but the price is the wage and the quantity is the number of workers.
The demand for labour
The demand for labour slopes downwards: at a higher wage, labour costs more, so firms hire fewer workers. Demand for labour rises (shifts right) when:
- Demand for the product rises, so more output and more workers are needed.
- Workers become more productive, so each worker adds more value.
- Capital becomes more expensive relative to labour, so firms use more workers instead of machines.
The supply of labour
The supply of labour to a particular job depends on:
- The wage on offer compared with other jobs.
- The skills and training (qualifications) needed, which limit how many people can do the job.
- Non-wage factors such as working hours, conditions, job security and location.
- The size of the working population and how mobile workers are.
A job that needs years of training, like a doctor, has a low supply of able workers; a job needing little training, like shelf-stacking, has a high supply.
How the equilibrium wage is set
Why wages differ between jobs
Wages differ mainly because demand and supply differ across jobs:
- Low supply and high demand (surgeons, software engineers) gives high wages.
- High supply and lower demand (cleaners, general labourers) gives low wages.
Other reasons include differences in skills and qualifications, dangerous or unpleasant conditions (which may need a higher wage to attract workers), the strength of trade unions, government rules such as the national minimum wage, and discrimination, which can hold some groups' wages below the level their skills deserve.
Worked example
Try this
Q1. Define the supply of labour. [2 marks]
- Cue. The number of workers willing and able to work at each wage; it rises as the wage rises.
Q2. Explain one reason why two jobs might pay very different wages. [3 marks]
- Cue. Different supply: a job needing rare skills has a low supply of able workers, so with strong demand the equilibrium wage is high, unlike a job many people can do.
Exam-style practice questions
Practice questions written in the style of AQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AQA 20196 marksExplain why a surgeon is usually paid more than a cleaner.Show worked answer →
A 6 mark question that wants the demand and supply of labour applied to a wage difference.
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.
The demand for surgeons is high and they add a lot of value, so hospitals will pay more to attract them. With low supply and high demand, the equilibrium wage for surgeons is high. With high supply relative to demand, the equilibrium wage for cleaners is low.
A strong answer uses the words supply and demand for labour, links the long training to low supply, and concludes that low supply with high demand pushes the surgeon's wage up. Markers reward the supply-and-demand reasoning rather than just saying one job is harder.
AQA 20214 marksExplain what is meant by the derived demand for labour.Show worked answer →
A 4 mark explain question that needs the term defined and applied.
Derived demand means the demand for labour comes from (is derived from) the demand for the goods or services that labour helps to produce. Firms do not want workers for their own sake; they want them because customers want the output.
For example, if demand for new houses rises, builders take on more construction workers, so the demand for that labour rises with the demand for houses. Markers reward defining derived demand and giving a clear example linking product demand to labour demand.
Related dot points
- The four factors of production (land, labour, capital and enterprise), the rewards to each factor, and how the quantity and quality of factors affect what an economy can produce.
A focused answer for AQA GCSE Economics on the four factors of production, the reward earned by each, and how factor quantity and quality determine an economy's productive potential.
- The objectives of firms, fixed, variable and total costs, average cost, total and average revenue, and how profit is calculated and why it matters for producers.
A focused answer for AQA GCSE Economics on the objectives of firms, fixed, variable, total and average cost, total and average revenue, and how profit is calculated and why it guides production.
- The law of demand, why the demand curve slopes downwards, the difference between a movement along and a shift of demand, and the factors that shift demand.
A focused answer for AQA GCSE Economics on the law of demand, the downward-sloping demand curve, movements versus shifts, and the non-price factors that shift demand.
- The law of supply, why the supply curve slopes upwards, the difference between a movement along and a shift of supply, and the factors that shift supply.
A focused answer for AQA GCSE Economics on the law of supply, the upward-sloping supply curve, movements versus shifts, and the non-price factors that shift supply.
- Production and productivity, the division of labour and specialisation, the advantages and disadvantages of specialising, and the role of exchange in a specialised economy.
A focused answer for AQA GCSE Economics on production and productivity, the division of labour, specialisation by workers, firms and countries, its advantages and disadvantages, and why exchange is needed.
Sources & how we know this
- AQA GCSE Economics (8136) specification — AQA (2017)