Labour demand is derived from the product. Supply depends on population, taxes and benefits. They set the wage. Where markets fail, through power, immobility…
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6.1
Labour markets and government intervention
Pearson Edexcel International A Level Economics (WEC13), specification Issue 2,
June 2018. This topic covers spec sections 3.3.4–3.3.5 in full: labour
markets (four rows) and government intervention in product and labour markets
(two rows) — 19 lettered objectives. The labour model is shared with the
existing sheet 5.2 monopsony numbers: supply $W = 4 + 0.02L$, demand (MRP)
$W = 16 - 0.04L$, equilibrium $L = 200$, $W = 8$.
Must-know for this topic:
Family
Relationship
labour demand
derived from the product: MRP = MP × product price
min wage 9 → $L_d$ 175 vs $L_s$ 250 (75 unemployed); max wage 6 → $L_d$ 250 vs $L_s$ 100 (shortage 150)
intervention
product-market measures (six families) with five impact axes and four limits
6.1
The demand for and supply of labour
The demand for labour in an occupation is a derived demand 派生需求 — it follows
demand for the final product; it also follows labour PRODUCTIVITY, the price
of the product, and the wage rate relative to the price of capital
(3.3.4.1a). The ELASTICITY of labour demand depends chiefly on the
elasticity of demand for the product, the proportion of labour in costs, the
substitutability of capital, and time (3.3.4.1b). The SUPPLY of labour to an
occupation responds to the size of the population, net migration, income tax
rates, the level of welfare benefits, government regulations and trade unions 工会
(3.3.4.2c); its elasticity depends on the time period, the
vocationalness of skills, and geographic and occupational mobility
(3.3.4.2d).
Original model: supply W = 4 + 0.02L, demand W = 16 − 0.04L, equilibrium (200, 8).
Competitive equilibrium sets the wage where supply meets demand: $4 + 0.02L =
16 - 0.04L$ gives $0.06L = 12$, so $L = 200$ workers and $W = 8$ per hour
(3.3.4.3a). A shift in EITHER curve moves the equilibrium: product demand up
shifts MRP right (higher wage AND employment); migration or benefit reform
shifts supply (3.3.4.3b). In the PUBLIC SECTOR, wages are often set by
bargaining and budget formulas rather than the market — a pay review body
can leave public wages above or below market-clearing levels (3.3.4.3c).
Market failure: geographical immobility 地域流动性不足 (housing costs, family ties, region
information) leaves unemployment in one region beside vacancies in another;
occupational immobility 职业流动性不足 (training costs, skill specificity, discrimination)
traps workers in declining occupations — both cause persistent mismatch
unemployment (3.3.4.4).
The case for intervention (3.3.5.1a): market power (monopoly and monopsony
from topics 2 and 5), externalities, information gaps and equity. To control
MONOPOLIES AND MERGERS (3.3.5.1b): price regulation (RPI − X caps), profit
regulation, quality standards, performance targets, referral to regulatory
authorities, and merger-control legislation. To promote COMPETITION AND
CONTESTABILITY (3.3.5.1c): tax incentives and grants for small businesses and
FDI, deregulation, privatisation 私有化, competitive tendering for public contracts,
and trade liberalisation. To protect SUPPLIERS AND EMPLOYEES (3.3.5.1d):
local sourcing rules, employment legislation against exploitation, barriers
to foreign entrants, restrictions on monopsony power, and nationalisation 国有化.
Each measure moves PRICE, PROFIT, EFFICIENCY, QUALITY and CHOICE
(3.3.5.1e) — the five impact axes examiners want addressed. LIMITS to
intervention (3.3.5.1f): regulatory capture 监管俘获 (the regulator serves the
regulated), asymmetric information, inadequate resources, and lack of
regulatory power.
The case (3.3.5.2a): monopsony exploitation (wages below MRP), in-work
poverty, immobility, discrimination and exploitation. The instruments
(3.3.5.2b): maximum wage 最高工资 controls (rare — public-sector pay caps: a max wage
of 6 in our model leaves demand 250 against supply 100, a shortage of 150 —
vacancies unfilled); minimum wage 最低工资 (a floor of 9 lifts Ls to 250 but cuts Ld
to 175: 75 workers unemployed, though each employed worker earns more and
poverty may fall); direct taxes such as national insurance and corporation
tax (raise the cost of employing); measures to reduce immobility (training,
relocation grants, housing supply — attacking the root causes of section
3.3.4.4); and anti-discrimination and anti-exploitation law.
Original model: at the 9 floor, Ls 250 against Ld 175 — 75 unemployed workers.Original model: at the 6 cap, Ld 250 against Ls 100 — a shortage of 150 workers.
Extract. In 2021 the UK ran short of heavy goods vehicle (HGV) drivers, and some petrol stations and supermarkets ran out of stock. The Road Haulage Association estimated a shortage of about 100,000 drivers. Many drivers from other EU countries had left during the pandemic and after Brexit, and tens of thousands of driving tests were cancelled during lockdowns. A new driver needs a special licence, which takes several months and can cost several thousand pounds to obtain. Employers raised pay and some supermarkets offered joining bonuses of £1,000 or more. In September 2021 the government offered 5,000 temporary visas for foreign HGV drivers and increased the number of driving tests.
Questions
(a) Using the extract, explain two factors that reduced the supply of HGV drivers in the UK. [4]
(b) Suppose the average HGV driver's annual pay rose from £32,000 to £36,000, while the number of drivers employed rose from 300,000 to 306,000. Calculate the elasticity of labour supply and comment on your answer. [4]
(c) With the help of a labour market diagram, explain the effect of the shortage on drivers' wages and employment. [6]
(d) Examine two causes of labour immobility in the market for HGV drivers. [8]
(e) Evaluate whether temporary visas for foreign workers are a better solution to labour shortages than training more domestic workers. [12]
Model answers
(a) Migration: many EU drivers left the UK during the pandemic and after Brexit, so fewer workers were available. Barriers to qualifying: driving tests were cancelled in lockdowns, so fewer new drivers could get licences; the licence also takes months and costs thousands of pounds. Both shift the supply of labour to the left.
(b) $\%\Delta$ pay $= \tfrac{36{,}000 - 32{,}000}{32{,}000} \times 100 = 12.5\%$; $\%\Delta$ employment $= \tfrac{306{,}000 - 300{,}000}{300{,}000} \times 100 = 2\%$. Elasticity of labour supply $= \tfrac{2}{12.5} = 0.16$. Supply is very inelastic in the short run: a large pay rise attracts few extra drivers, because new drivers need time and money to qualify.
(c) The labour market diagram shows the wage on the vertical axis and the number of drivers on the horizontal axis. The supply of labour shifts left (fewer EU drivers, fewer new licences). At the old wage there is excess demand for drivers (the shortage), so employers bid up wages. The new equilibrium has a higher wage and fewer drivers employed. Because supply is inelastic, the wage rises a lot. Demand for drivers is derived from demand for goods deliveries, which stayed high, so demand did not fall to ease the shortage.
(d) Occupational immobility: workers in other jobs cannot quickly become HGV drivers because they need a special licence, training and a test, which cost time and money. Geographical immobility and working conditions: long hours away from home, poor roadside facilities and the high cost of housing near distribution centres discourage some workers from taking the jobs. Evaluation: occupational barriers fall over time as tests catch up; poor conditions are harder to fix and keep pushing workers out of the job.
(e) For visas: they add qualified workers quickly, which matters in a crisis when shelves are empty and supply is very inelastic. They cost the government little.
Against visas: only 5,000 visas were offered against a shortage of about 100,000, and temporary visas attracted few applicants because drivers were also scarce in other European countries. Relying on migrant workers may keep wages and conditions low, so domestic workers continue to leave. Visas do not fix the underlying causes.
For training: more test capacity and funded training raise the long-run supply of labour and make supply more elastic. Higher pay and better conditions keep drivers in the job. Domestic workers gain jobs and skills.
Against training: it takes months, so it cannot solve an immediate shortage, and it has a cost for the government or firms. Some trained drivers leave because of poor conditions.
Judgement: temporary visas can only ease the short-run crisis, and here they were too few to matter much. Training, faster testing and better pay and conditions are the better long-run solution, because they increase supply permanently. The best policy combines a short-run boost with long-run training, and depends on how quickly the shortage must be filled.
What examiners reward: supply factors tied to the extract, a correct elasticity calculation with interpretation, a labour market diagram with the supply shift and the new wage, causes of immobility that are examined (not just listed), and a time-based judgement.
6.1 6.2
Checklist
Labour demand as derived demand with its four influences; its elasticity factors (3.3.4.1).
Labour supply with its six influences; elasticity of supply (3.3.4.2).
Competitive equilibrium (200, 8) from the model; shift analysis; public-sector wage setting (3.3.4.3).
Geographical and occupational immobility: causes and consequences (3.3.4.4).
The case for product-market intervention; the six monopoly-control, five competition-promotion and five supplier/employee-protection measures; the five impact axes; the four limits incl. regulatory capture (3.3.5.1).
Labour-market intervention: maximum wage 6 (shortage 150), minimum wage 9 (75 unemployed), direct taxes, mobility measures, anti-discrimination (3.3.5.2).
Boundary notes: WEC13 essays carry 12 KAA + 8 evaluation marks with level
caps for missing diagrams or named groups. Wage-control answers must show
BOTH quantities and the gap, and minimum-wage evaluation should weigh the
unemployment count against the distributional gain (and note that with a
MONOPSONIST employer, a well-placed minimum can RAISE employment). Worked
numbers are original on the model shared with sheet 5.2.
This package now covers the full IA2 targets of specification sections 3.3.4 and 3.3.5 (17 objectives: 3.3.4.1a–b, 3.3.4.2c–d, 3.3.4.3a–c, 3.3.4.4a–b, 3.3.5.1a–f, 3.3.5.2a–b), grounded in specification pages 41–42 and the WEC13 January 2024 and June 2023 papers and mark schemes. Read the native introduction first.
Key terms
marginal revenue product 边际收益产品; wage floor 工资下限; derived demand 派生需求; elasticity of demand for labour 劳动需求弹性; net migration 净移民; trade union 工会; minimum wage 最低工资; maximum wage 最高工资; deregulation 放松管制; privatisation 私有化; nationalisation 国有化; regulatory capture 监管俘获.
Supported explanation
Labour demand is derived from the output workers help produce. In the simplified price-taking output model, marginal revenue product (MRP) equals additional physical output times the constant selling price. Compare it with the relevant additional employment cost over the same time period. A wage difference alone does not establish a productivity difference: scarce skills, job conditions, bargaining and discrimination can also matter.
A union can bargain collectively for pay or conditions. Its effect depends on bargaining strength, employer response and the labour-market setting. A minimum wage is a legal wage floor. In the simple competitive model a binding floor can increase labour supplied relative to labour demanded; it does not imply the same employment response under every institutional setting. Competition policy addresses restrictions on competition through investigation and enforceable responses; it cannot be evaluated solely by counting large firms. For each policy identify the objective, mechanism, affected people and a material limitation. These are introductory distinctions, not a substitute for the held detailed wage-setting and competition-policy targets.
Worked case
One additional worker produces eight saleable units per day, each adding 12 currency units of revenue. The wage is 80 currency units/day and additional administration costs 10/day. Calculate the additional contribution before other costs and state a hiring condition.
MRP = 8 units/day × 12 currency units/unit = 96 currency units/day. Additional employment cost = 80 + 10 = 90 currency units/day. The model's additional contribution is 96 − 90 = 6 currency units/day, before any other relevant costs. Hiring is supported only if the output can actually be sold at that marginal revenue and the full additional cost does not exceed the additional revenue. If marginal revenue falls, a constant-price calculation may overstate MRP. This is not an instruction to equate a person's worth with revenue.
Independent transfer
A union negotiates training and a higher wage. A newspaper predicts employment must fall. Evaluate the prediction and distinguish this from a competition-policy decision.
Checked original model
The higher wage raises cost, while useful training may raise saleable output or quality and therefore MRP. The employment effect needs the sizes, timing, product demand and actual employer response. Training attendance alone does not establish a productivity gain. Compare outcomes for workers retained, applicants and consumers. A competition investigation instead needs evidence of restrictive behaviour, entry and alternatives; a wage agreement alone does not establish product-market abuse. The full monopsony, wage-setting and competition-policy models are now taught in the sections below and in topic 5's supplement.
The demand for labour
Labour demand is a derived demand: a firm wants workers only because of the goods or services they produce. The demand curve for an occupation is its marginal revenue product (MRP) — the extra revenue one more worker adds. Demand for labour in an occupation rises when demand for the final product rises, when labour productivity rises, when the product's price rises, and when the wage falls relative to the price of capital (machines become relatively expensive, so firms substitute labour for capital).
The elasticity of demand for labour measures how strongly employment responds to a wage change. Demand is more elastic when capital can easily replace labour, when labour is a large share of total costs, when demand for the final product is price-elastic (a wage rise passed into prices loses many sales), and over longer time periods (firms can reorganise production). A workforce that cannot easily be replaced by capital faces inelastic demand — in the January 2024 WEC13 paper this explained why the elasticity of demand for construction workers was estimated at only −0.18.
The supply of labour
The supply of labour to a particular occupation depends on: the size of the working-age population; net migration (immigration minus emigration); income-tax rates (higher marginal rates can reduce the incentive to work or to enter a profession); the level of welfare benefits (generous out-of-work benefits can lower labour supply); government regulations (licences, qualifications, retirement rules); and trade unions (which can restrict entry or bargain over pay and conditions).
The elasticity of supply of labour to an occupation is higher when entry needs few qualifications and little training, when skills transfer from other jobs, and when workers are geographically mobile. Supply is inelastic for occupations needing long, specific training — surgeons cannot be trained in a month — so wage changes move employment little in the short run.
Wage determination
In a competitive labour market the equilibrium wage and employment sit where labour demand (MRP) meets labour supply. Shifts move both: higher productivity or product demand shifts demand right (higher wage and employment); net migration or lower income tax shifts supply right (lower wage, higher employment). Always read both the wage and the employment change, and say which curve shifted and why.
Wage setting in the public sector and state-owned enterprises 国有企业 works differently: the government is the employer, so pay is set through budgets, national pay scales and independent pay-review bodies rather than by MRP alone. Governments weigh recruitment and retention needs against the opportunity cost of tax revenue, comparability with private-sector pay, and fairness between regions and occupations.
Labour immobility as market failure
Geographical immobility 地理不可流动性 means workers cannot or will not move to where jobs are: causes include housing cost differences, family and social ties, poor transport, and lack of information about distant vacancies. Occupational immobility 职业不可流动性 means workers' skills do not match the jobs on offer: declining industries release workers whose specific skills are not wanted elsewhere, and retraining takes time and money. The consequences are structural unemployment (unfilled vacancies and jobless workers at the same time), persistent regional or occupational wage differences, wasted output, and higher welfare spending.
Government intervention in product markets
The case for intervention rests on market power, inefficiency and unfair outcomes. To control monopolies and mergers, governments use price regulation (such as RPI − X caps that force real price falls), profit regulation, quality standards, performance targets, referral of mergers and conduct to regulatory authorities, and legislation blocking anti-competitive takeovers. To promote competition and contestability they use tax incentives and grants for small businesses and foreign direct investment, deregulation (removing entry rules), privatisation (moving state firms into private ownership), competitive tendering 竞争性招标 for public contracts, and trade liberalisation 贸易自由化 (opening markets to foreign firms). To protect suppliers and employees they can require local sourcing, pass employment-protection legislation, restrict entry of foreign firms, restrict the monopsony power of large buyers, or nationalise a firm.
Each measure must be traced to its effect on price, profit, efficiency, quality and choice — regulation can lower prices and protect quality, but may cut profit-funded investment; privatisation may raise efficiency or may create a private monopoly. And intervention has limits: regulatory capture (the regulator comes to serve the industry it regulates), asymmetric information and information gaps, inadequate resources for enforcement, and weak legal powers. These limits are the bridge to government failure.
Government intervention in labour markets
The case for intervention includes exploitation by powerful employers, inequality, discrimination and immobility. Measures include minimum and maximum wage controls, direct taxes (income tax, national insurance contributions paid by employers and employees, and corporation tax on profits), measures to reduce geographical and occupational immobility (retraining grants, relocation support, better job information), and anti-discrimination and anti-exploitation legislation.
A minimum wage is a legal wage floor. Binding means above the free-market equilibrium. In the model above, demand W = 12 − 0.04L meets supply W = 2 + 0.04L at L$_e$ = 125, W$_e$ = 7. Raising the floor to W$_min$ = 9 contracts the quantity of labour demanded to 75 and extends the quantity supplied to 175: unemployment of 100, shown by the gap, not by the old equilibrium. Note what the examiners demand: when a rate rises, the diagram must show the increase, with a contraction of demand and an extension of supply — not the introduction of a brand-new floor. Employment loss is not automatic in reality: inelastic demand for labour (the construction example above), higher motivation and productivity, and monopsony labour markets all soften it; the January 2024 mark scheme credits exactly these reservations.
A maximum wage is a legal wage ceiling, binding below the equilibrium.
The model predicts a labour shortage — employers want 175 workers at W$_max$ = 5 but only 75 are willing — plus weaker incentives, emigration or resignation of high earners (in Egypt's 2015 public-sector cap, examined in June 2023, banking executives resigned), and evasion through non-pay benefits. Evaluation weighs the fairness aim against these distortions.
Direct taxes work through incentives and costs: employer national-insurance contributions raise the cost of hiring (labour demand falls); income tax affects the return to work (labour supply); corporation tax leaves less profit to fund wages and investment. Mobility measures and anti-discrimination laws attack the immobility and fairness failures directly, but all intervention faces the same government-failure limits listed for product markets.
WEC13 assessment demand for this topic
Section B is a 34-mark source-based question on a supplied figure and extracts: a 2-mark calculation from the data, a 4-mark explanation of a defined term, an 8-mark examine question requiring a diagram (with up to 2 marks of evaluation), a 6-mark analyse question marked 2 knowledge + 2 application + 2 analysis where application means citing the extract's own figures, and a 14-mark discuss question marked 8 (levels) + 6 evaluation (levels). Section A multiple choice has tested the determinants of labour-demand elasticity and the definition of limit pricing. Section C essays (20 marks, 12 + 8 as certified for topic 5) have set maximum-wage and nationalisation evaluations, both requiring diagrams.
Source boundary
XEC11/YEC11, 2018 specification, Issue 2. Evidence: specification pages 41–42 (sections 3.3.4–3.3.5), WEC13 January 2024 QP/MS (Section A Q5–6, Section B Q7 with Figure 1 and Extracts A–B) and WEC13 June 2023 QP/MS (Section C Q8–9). Local authored marking guidance is not an official qualification scheme.
Interactive lessons on this topic
Work through it step by step, with instant-check exercises.
