Why is the demand for labour called a derived demand?

It depends on the demand for the product the workers make. Firms hire workers in order to make things they can sell.

The demand for a firm's product falls. What happens to its demand for labour?

It decreases. Fewer goods to make means fewer workers are needed.

Which would increase the supply of labour in a country?

immigration of people of working age. More people are available for work.

The supply of nurses decreases while demand is unchanged. What happens to nurses' wages and employment?

wages rise, employment falls. A leftward shift in supply raises the wage and lowers the quantity of labour.

Which is likely to raise a firm's demand for labour?

a rise in the productivity of its workers. More productive workers earn the firm more, so it wants to hire more of them. A rise in the wage causes a contraction, not an increase.

The labour market: how wages are set · Cambridge IGCSE Economics

In plain words

A wage is a price: the price of an hour of someone's work. Like any price, it is set by demand and supply. Firms demand labour, and workers supply it.

Where workers are scarce and firms badly want them, wages are high. Where many people can do a job, wages are low.

4 things to know

The demand for labour is a derived demand: firms want workers only because consumers want what the workers make.
Demand for labour rises when demand for the product rises, when workers become more productive, or when machines that could replace them become dearer.
The supply of labour to a job depends on the wage, the skills and qualifications needed, the working conditions, and the size of the working population (which depends on migration, the school-leaving age and the retirement age).
The equilibrium wage is where the demand for labour equals the supply of labour. On the diagram, the wage rate goes on the vertical axis and the quantity of labour on the horizontal axis.

Worked example

More people shop online, so firms need more delivery drivers. What happens to drivers' wages?

Demand for deliveries has risen, so the derived demand for drivers increases.
The demand curve for drivers shifts to the right.
The equilibrium wage rises, and so does the number of drivers employed.

Tips and tricks

In the labour market the roles are reversed: firms are the buyers (demand) and households are the sellers (supply).
Label the axes "wage rate" and "quantity of labour", not "price" and "quantity". Examiners look for it.

5 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

The labour market: how wages are set: 5 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

Why is the demand for labour called a derived demand?
- Workers demand jobs.
- It depends on the demand for the product the workers make. (the answer)
- It is set by the government.
- It depends on the supply of labour.
Firms hire workers in order to make things they can sell.
The demand for a firm's product falls. What happens to its demand for labour?
- It increases.
- It decreases. (the answer)
- It stays the same.
- It becomes perfectly elastic.
Fewer goods to make means fewer workers are needed.
Which would increase the supply of labour in a country?
- raising the school-leaving age
- lowering the retirement age
- immigration of people of working age (the answer)
- a fall in the population
More people are available for work.
The supply of nurses decreases while demand is unchanged. What happens to nurses' wages and employment?
- wages rise, employment falls (the answer)
- wages rise, employment rises
- wages fall, employment rises
- wages fall, employment falls
A leftward shift in supply raises the wage and lowers the quantity of labour.
Which is likely to raise a firm's demand for labour?
- a fall in the price of machines that do the same work
- a rise in the productivity of its workers (the answer)
- a fall in demand for its product
- a rise in the wage rate
More productive workers earn the firm more, so it wants to hire more of them. A rise in the wage causes a contraction, not an increase.

5 questions

Tap an answer and you’ll see straight away whether it’s right, and why.

Worksheet

3 questions, 8 marks. Write your answers on paper, then check them.

The labour market: how wages are set

Cambridge IGCSE Economics 0455 · 8 marks · papermunch.org

Name ______________________________ Date ______________

Explain what is meant by saying that the demand for labour is a derived demand.[2]
Show answerHide answer
Labour is not wanted for its own sake. It is demanded because of the demand for the goods and services that it produces.
I got this one
Explain why surgeons are paid more than cleaners.[3]
Show answerHide answer
The supply of surgeons is low, because the job needs many years of training and high qualifications, while demand for them is high. Many people are able to work as cleaners, so the supply is large and the wage is low.
I got this one
Many workers move abroad from a country. Explain the effect on wages in that country.[3]
Show answerHide answer
The supply of labour decreases, so the supply curve shifts left. The equilibrium wage rises and the quantity of labour employed falls.
I got this one

Answers: The labour market: how wages are set

1. Labour is not wanted for its own sake. It is demanded because of the demand for the goods and services that it produces.
2. The supply of surgeons is low, because the job needs many years of training and high qualifications, while demand for them is high. Many people are able to work as cleaners, so the supply is large and the wage is low.
3. The supply of labour decreases, so the supply curve shifts left. The equilibrium wage rises and the quantity of labour employed falls.