The wage is the price of labour, set where the demand for labour from firms meets the supply of labour from workers.
In a labour market, firms demand workers and people supply their labour. The wage rate is the price of labour. Like any price, it settles where demand equals supply.
The demand for labour is a derived demand: firms want workers because consumers want the goods they make. Demand for labour rises when demand for the product rises, when workers become more productive, or when machines that could replace workers become dearer.
The supply of labour to a job rises when more people have the right skills. It also rises when the job becomes more attractive, or when more people can reach the workplace. It falls when training takes many years or the work is unpleasant or risky.
A rise in demand for labour raises the wage and employment. A rise in supply lowers the wage and raises employment.
- Wage rate
- The price of labour.
- Derived demand
- Firms demand labour because consumers demand the product.
- Raises labour demand
- More product demand, higher productivity, dearer machines.
- Raises labour supply
- More skilled people, better conditions, easier access.
Worked example: Why app developers' wages rose
Suppose demand for mobile apps grows quickly.
- Derived demand: firms need more developers to build apps, so demand for developers rises.
- Supply: training a skilled developer takes years, so supply rises slowly.
- Result: demand shifts right against a slow-moving supply, so the wage rises.
- Over time: high wages attract more people into training, increasing supply.
Watch out for this
The demand for labour comes from workers who want jobs.
Workers supply labour. Firms demand it, because they need workers to produce goods for their customers.
Check your understanding
New rail links let many more people reach a business park. What happens in its labour market?
- Supply of labour rises: the wage falls and employment rises.
- Demand for labour rises: the wage rises.
- Supply of labour falls: the wage rises.