Labour Market Diagrams (Cambridge (CIE) IGCSE Economics): Revision Note

Drawing and interpreting labour market diagrams

• The labour market is a type of factor market  

• Factor markets follow exactly the same rules as product markets

  • They are affected by changes to price, demand and supply

  • They are affected by the price elasticity of demand and supply

• Labour market equilibrium occurs where the demand for labour (D_L) is equal to the supply of labour (S_L)

  • The D_L is the demand by firms for workers

    • Firms demand more labour as the wage rate decreases, which results in a downward-sloping demand curve

  • The S_L is the supply of labour by workers

    • Workers supply more labour as the wage rate increases, which results in an upward-sloping supply curve

• Individual firms are price takers in the labour market, as they have to accept the wage rate that workers are being paid in the industry

  • If they offer a lower wage, they will likely struggle to recruit workers

  • If they offer a higher wage, there will be a large number of workers applying to work there

Diagram analysis

• The market for graphic designers is in equilibrium where D_L = S_L 

• The equilibrium wage is W and the quantity of labour is Q

• There is no excess supply of labour

• There is no excess demand for labour

Changes in demand and supply in the labour market

1. Increase in demand for labour

• Cause

  • Economic growth, increased demand for goods and services, higher labour productivity

• Effect on diagram

  • Labour demand curve shifts right (D1 → D2)

• Result

  • Higher equilibrium wage rate (W1 → W2) and more labour employed (Q1 → Q2)

2. Increase in supply of labour

• Cause

  • Immigration, higher working‑age population, more flexible working patterns

• Effect on diagram

  • Labour supply curve shifts right (S1 → S2)

• Result

  • Lower equilibrium wage rate (W1 → W2) and more labour employed (Q1 → Q2)

3. Decrease in demand for labour

• Cause

  • Recession, automation replacing workers, falling demand for goods

• Effect on diagram

  • Labour demand curve shifts left (D1 → D2)

• Result

  • Lower equilibrium wage rate (W1 → W2) and less labour employed (Q1 → Q2)

4. Decrease in supply of labour

• Cause

  • Ageing population, emigration, higher welfare benefits reducing incentives to work

• Effect on diagram

  • Labour supply curve shifts left (S1 → S2)

• Result

  • Higher equilibrium wage rate (W1 → W2) and less labour employed (Q1 → Q2)

Analysing the PED and PES of labour

  Price inelastic demand and supply

• Consider the labour market for NBA basketball players

• In 2022, LeBron James received a salary of $45m

   Diagram analysis

• D_L is the demand for labour from the basketball clubs

• S_L is the supply of labour by the basketball players

• The demand for highly skilled players is very price inelastic

  • Clubs want the very best players, almost irrespective of what they cost

• The supply of highly skilled players is also very price inelastic 

  • A significant increase in price will have little impact on the quantity of labour supplied in the market, as it takes years to develop LeBron James-type skills

• The market equilibrium is found at W₁Q₁ - a high price and relatively low quantity  

Price elastic demand and supply

• Consider the labour market for labourers on a building site

Diagram analysis

• D_L is the demand for labour from the building company for labourers

• S_L is the supply of labour by people willing to work on a building site

• The demand for workers is very price elastic

  • If wages dropped a little, then firms would respond quickly by employing more workers

• The supply of workers is also very price elastic 

  • Due to it being an unskilled job, there would quickly be an increase in the supply of labour if wages were to increase

• The market equilibrium is found at W₁Q₁ - a low price and relatively high quantity