Lesson preview · Workers and wages
Wages, skills and trade unions
~7 min · Free to read
Imagine a city where coffee suddenly becomes fashionable. Cafés fill up, and owners put up “staff wanted” signs. Nobody passed a law about baristas. The cafés want more staff because their customers want more coffee.
This is the labour market, where people sell their time and skills and employers buy them. The wage is the price of labour.
Key Term
Derived demand
Firms hire workers to make things customers will buy. So the demand for workers comes from the demand for what they make. This is derived demand. If people buy more coffee, cafés want more baristas. If they stop, the barista jobs go too.
The extra money from sales one more worker brings in, before their wage is paid, is their marginal revenue product (MRP).
Key Term
Supply, demand and the wage
Employers are the buyers of labour: they make up labour demand. Workers are the sellers: they make up labour supply.
- At a higher wage, employers want fewer workers, because each costs more.
- At a higher wage, more people want the job.
The equilibrium wage is where the number of workers employers want equals the number who want the work. Above it, job-seekers outnumber jobs, and the wage tends to fall. Below it, employers compete for scarce staff, and the wage tends to rise.
A skill shortage (too few people with a skill employers need) pushes pay up for the same reason.
More demand raises pay and jobs together. More supply adds jobs but lowers pay. So a skill that customers value and few people have is the recipe for a high wage.
Key Term
Why wages differ
Each job has its own labour market, so pay differs:
- Training. Jobs that take years of study have few qualified people, so they tend to pay more.
- Danger and discomfort. Fewer people will do risky or unpleasant work, so employers often pay extra.
- Unsociable hours. Night and weekend shifts often pay more for the same reason.
- How many can do it. Many people could stack shelves; very few could play top-level football.
Trap · Common Misconception
"The boss decides what a job pays"
Employers write the wage on the advert, within any legal minimum. But offer too little and too few people apply. Where many employers compete for workers, supply and demand push pay towards equilibrium.
So pay is not a reward for hard work or for doing important work. It depends on how much employers value a skill and how many people can do the job.
Key Term
Workers on the move
Suppose many trained nurses leave a country for better pay abroad. At home, labour supply shifts left (fewer nurses at each wage), so nurses’ wages tend to rise. Where they arrive, supply shifts right, so pay there tends to fall. A country losing many of its most skilled workers this way suffers a brain drain.
Key Term
Trade unions
A trade union is an organisation of workers that bargains with employers as a group (collective bargaining). One worker asking for a pay rise is easy to refuse; a whole workforce is not.
Unions push for higher pay, safer workplaces and shorter hours. As a last resort, members may strike (all stop work).
In 2025, about 22 in every 100 UK employees belonged to a union. In Australia, in August 2024, it was about 13 in every 100, down from 40 in 1992.
Trap · Warning
Pay or jobs? It depends on the market
Many employers. If a union wins a wage above equilibrium, employers want fewer workers. Those who keep their jobs gain, but some jobs go. That is the union’s trade-off.
One big employer. Imagine a town where one hospital or mine hires almost everyone. This is a monopsony: a market with one main buyer of labour. Workers have few other options, so the employer can pay less than competing employers would. It also hires fewer, because attracting one more worker means raising everyone’s pay.
If a union fixes the wage, one more worker costs just that wage, with no rise for anyone else. More people also want the job at the higher wage. So, unless the union wage is above what competing employers would pay, the employer may hire more people, not fewer.
Check yourself · no marks
Back to the baristas: 300 are in work at 25 dollars an hour. Their union wins a wage of 30 dollars. At that wage, cafés want only 200 baristas, but 400 people want the job. Who gains and who loses?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 6
Economists say the demand for workers is a derived demand. What does that mean?
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