How are wages determined, and what makes some jobs pay more than others?
The role and operation of the labour market, how wages are determined by the demand for and supply of labour, and the factors that affect each.
An OCR J205 answer on how the labour market works: the demand for and supply of labour, how they set wages, and why some occupations pay more than others.
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What this dot point is asking
OCR wants you to explain how the labour market works: how the demand for and supply of labour interact to set wages, and why some jobs pay more than others. The same demand and supply model from goods markets applies, with workers and employers as the two sides.
What the labour market is
A key idea is that the demand for labour is a derived demand: firms want workers not for their own sake but because workers produce goods and services that earn the firm money. If demand for a firm's product rises, its demand for the workers who make it rises too.
The demand for labour
Factors that raise the demand for labour include rising demand for the firm's product, higher worker productivity, and labour being cheaper relative to machines.
The supply of labour
Jobs that need long training or rare talents have a low supply of suitable workers; jobs that almost anyone can do have a high supply.
How wages are set
The wage is the equilibrium in the labour market: where the demand for labour equals the supply of labour. If the wage is above equilibrium, more workers want the job than there are vacancies (a surplus of labour), pushing wages down; if below, firms cannot fill vacancies (a shortage), pushing wages up.
This explains wage differentials (why pay differs between jobs):
- High pay comes from low supply (rare skills, long training) meeting high demand (valuable, productive work). Surgeons, pilots and top lawyers are examples.
- Low pay comes from high supply (little training needed) so that even real demand does not push wages far up. Many entry-level service jobs are examples.
Other influences on wages
Wages are also affected by factors outside pure demand and supply:
- The National Minimum Wage / National Living Wage sets a legal floor below which employers cannot pay.
- Trade unions can bargain collectively to raise members' wages.
- Discrimination can cause unfair wage gaps unrelated to productivity, which is illegal.
Try this
Q1. Explain what is meant by the demand for labour being a derived demand. [3 marks]
- Cue. Firms demand workers not for their own sake but to produce goods and services that earn the firm money.
Q2. State two factors that affect the supply of labour to an occupation. [2 marks]
- Cue. The training or qualifications needed, and how attractive or well-paid the work is compared with other jobs.
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 J205/01 20194 marksExplain how the demand for and supply of labour determine the wage in an occupation.Show worked answer →
A 4 mark Explain question using demand and supply applied to labour.
The demand for labour comes from employers and depends on how productive and valuable workers are. The supply of labour comes from workers and depends on the number willing and able to do the job. The wage is set where the demand for labour equals the supply of labour, just like a price in a goods market.
Markers reward applying the demand and supply model to labour, with demand from firms and supply from workers meeting to set the equilibrium wage.
OCR J205/01 20226 marksExplain why a surgeon is usually paid much more than a cleaner.Show worked answer →
A 6 mark question on wage differentials using demand and supply.
Supply of surgeons is low because the job needs years of training and rare skills, so few people can do it. Demand for surgeons is high because their work is highly valued and productive. Low supply and high demand mean a high equilibrium wage.
For cleaners, supply is high (little training is needed, so many can do the job) and demand, while real, does not push wages up as far. High supply and lower relative demand mean a lower wage. Markers reward using the supply of and demand for each type of labour, especially the role of skills and training in limiting supply.
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Sources & how we know this
- OCR GCSE (9-1) Economics J205 specification — OCR (2017)