Chapter 09: The Labour Market
Explainer, notes, worksheet and data.
Explainer
What you'll learn in this chapter
- distinguish a goods & services market from a factor market (derived demand)
- outline the four factors of production (land, labour, capital, enterprise)
- analyse labour demand and labour supply (and why the curves slope the way they do)
- use MPP and MRP to explain hiring decisions
- find labour market equilibrium and show the impact of government intervention (e.g. minimum wage, taxation)
- explain wage differentials (why some workers earn more than others)
Core ideas
This chapter is about factor markets — markets for inputs (especially labour). The key idea is derived demand: firms demand labour because consumers demand the output labour helps produce.
You’ll link wages to productivity using MPP (extra output from one extra worker) and MRP (extra revenue from one extra worker), then apply supply & demand to explain wages and employment outcomes.
Exam focus
- graph questions: labour market equilibrium + a policy wedge (minimum wage / tax on labour)
- short answers: define derived demand, MPP, MRP, wage differentials
- applied evaluation: minimum wage pros/cons, and how it can create excess supply of labour
Interactive: Labour Market
The labour market works like any market, with firms demanding labour (MRP) and workers supplying it. A minimum wage set above equilibrium creates unemployment — explore the effects below.
When a wage floor is set above equilibrium, Ls > Ld — more workers want to work at the higher wage than firms are willing to hire, creating unemployment.