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The labour market
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Wages are set in the labour market, by the demand for workers and the supply of workers.
Demand for labour
Labour is a derived demand: firms want workers because there is demand for the products they make.
Demand for labour depends on: demand for the final product, the availability of substitutes such as machines, and the productivity of workers.
Demand for labour depends on: demand for the final product, the availability of substitutes such as machines, and the productivity of workers.
Supply of labour
Supply depends on: population size, migration, the age distribution of the population, the retirement age and school-leaving age, female participation in the workforce, skills and qualifications, and how mobile workers are (able to move between areas or types of job).
Labour market diagrams
On a labour market diagram, the wage rate is on the vertical axis and the quantity of labour on the horizontal axis.
The equilibrium wage is where demand for labour equals supply.
Increased demand for labour raises wages and employment. Increased supply of labour lowers wages and raises employment.
The equilibrium wage is where demand for labour equals supply.
Increased demand for labour raises wages and employment. Increased supply of labour lowers wages and raises employment.
Demand for electric cars rises sharply. What happens in the market for electric car engineers?
- Labour is a derived demand.
- Demand for engineers increases (shifts right).
Answer: Wages and employment of engineers rise.
Labour demand is derived from product demand, and depends on substitutes and productivity. Supply depends on population, migration, ages, participation, skills and mobility. Equilibrium wage is where they meet.
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