Wage determination through the demand for and supply of labour, labour market issues, the national minimum wage and the effects of migration.

What this dot point is asking

WJEC wants you to explain how wages are set by the demand for and supply of labour, and to analyse labour market issues: the national minimum wage, trade unions, labour market failures and the effects of migration.

The answer

How wages are determined

In a competitive labour market the equilibrium wage is set where demand equals supply. Labour demand shifts right if the price or demand for the product rises, or if workers become more productive; it shifts left if productivity or product demand falls. Labour supply shifts right with population growth, migration, better training or lower benefits, and left with the reverse. Wages differ between occupations because of differences in marginal revenue product, the skills and qualifications required, the unpleasantness of the work (compensating differentials), and barriers to entry.

The national minimum wage and trade unions

The UK's National Minimum Wage and National Living Wage are designed to reduce in-work poverty and exploitation. In the simple competitive model a binding floor causes some job losses, but two factors soften this: many low-paid markets have monopsony power, and demand for low-skilled labour is often inelastic, so employment falls little. UK evidence has generally found small employment effects. Trade unions raise wages by restricting labour supply or by collective bargaining; this can create unemployment in a competitive market but may raise both wages and employment where it offsets employer monopsony power.

Labour market failure and migration

Labour markets fail when there is occupational and geographical immobility (workers cannot move between jobs or areas), imperfect information about vacancies, or discrimination, all of which prevent the market clearing efficiently and can entrench unemployment and inequality. Migration increases the supply of labour: net inward migration shifts the labour supply curve right, which can lower wages in some sectors but also fills shortages, raises output and may shift labour demand right by increasing total spending in the economy. The net effect depends on the skills of migrants and how complementary they are to existing workers.

Examples in context

Example 1. The UK National Living Wage. Since its introduction, the UK's statutory minimum (the National Living Wage for older workers) has risen substantially relative to median pay, yet large-scale job losses predicted by the simple model have largely not materialised. Economists attribute this to monopsony power in low-paid sectors such as care and retail, inelastic demand for low-skilled labour, and firms absorbing costs through lower profits or higher productivity. It is a textbook case of why labour market structure, not just the competitive model, determines the outcome.

Example 2. Migration and UK sectoral shortages. Inward migration has filled labour shortages in sectors such as agriculture, hospitality, construction and the NHS. By increasing labour supply, migration can moderate wage growth in those sectors, which benefits employers and consumers but concerns some existing workers. Because migrants also consume goods and services, total demand and so labour demand rise too, which is why empirical studies generally find small net effects on average wages and employment, concentrated in particular low-skilled segments.

Try this

Q1. Explain what is meant by saying the demand for labour is a derived demand. [2 marks]

• Cue. Labour is demanded not for itself but for the output and revenue it produces, so labour demand depends on the demand for the final product.

Q2. Explain one reason why a national minimum wage might not reduce employment as much as the competitive model predicts. [3 marks]

• Cue. Where an employer has monopsony power it was previously holding the wage below the competitive level, so a minimum wage can raise both the wage and employment; alternatively, inelastic labour demand means quantity demanded falls little.