Labour Market Diagrams

Drawing and interpreting labour market diagrams

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

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

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