Demand for labour is how many workers employers want to hire at each wage. Supply of labour is how many workers are willing and able to work at each wage. Where the two quantities match is the equilibrium wage.
You meet this in table and diagram questions inside labour and wages, and it reuses the logic from supply and equilibrium.
How does the labour market work, step by step?
- Firms are the demanders. Their demand is derived demand: they want workers because customers want the product.
- Households are the suppliers. At a higher wage more people are willing to take the job.
- Wage is the price. It goes on the vertical axis, with the number of workers on the horizontal axis.
- Equilibrium is the wage at which the number of workers demanded equals the number supplied.
- A shift needs a cause other than the wage itself.
Worked example
The fictional Roti Pelangi bakery chain hires bakers in the town of Kuala Senja. The daily wage and workers demanded or supplied are:
| Daily wage (RM) | Bakers demanded | Bakers supplied |
|---|---|---|
| 40 | 12 | 3 |
| 50 | 10 | 5 |
| 60 | 8 | 8 |
| 70 | 6 | 10 |
| 80 | 4 | 13 |
Step 1, equilibrium: at RM 60 both quantities are 8, so the equilibrium wage is RM 60 with 8 bakers employed.
Step 2, other wages: at RM 50 demand is 10 and supply is 5, a shortage of 5. At RM 70 demand is 6 and supply is 10, a surplus of 4.
Step 3, a shift: a new bakery opens and wants 4 more bakers at every wage. Demand becomes 16, 14, 12, 10 and 8.
Step 4, new equilibrium: at RM 60, demand 12 against supply 8 is a shortage of 4. At RM 70, demand 10 equals supply 10. The new equilibrium is RM 70 with 10 bakers.
Step 5, describe: the rise in wage from RM 60 to RM 70 is 10 ÷ 60 = 16.7%. Employment rises from 8 to 10. The wage change is a consequence of the demand shift. Supply did not shift: the extra bakers came from a movement along the supply curve as the wage rose.
The mistake to watch for
Mistaken answer: “The wage rose to RM 70, so demand for bakers increased.”
This reverses the cause: demand shifted because of the new bakery, so the wage rose as a result. A change in the wage alone only moves you along a curve. The correction is to state the shift’s cause first, then the new equilibrium, then the movement along the supply curve that follows.
Check yourself
Use the bakery table above.
1. At RM 50 in the original market, what is the shortage?
Show answer
Demand 10, supply 5, so the shortage is 10 − 5 = 5 bakers.
2. At RM 80 in the original market, is there a shortage or surplus, and how large?
Show answer
Demand 4, supply 13, so there is a surplus of 9 bakers, because 13 − 4 = 9.
3. A new training course raises the number of qualified bakers. Which curve shifts, and what happens to the equilibrium wage and employment, with everything else unchanged?
Show answer
The supply curve shifts right. With more workers available at every wage, the equilibrium wage falls and the number employed rises.
Where this leads next
Next, look at what makes a worker worth more to an employer in interpret a productivity change. The demand, supply and shift explorer lets you move a fictional market and watch the equilibrium change, and the percentage-base explorer checks the wage percentages.
If the diagram steps feel right in class but wobble in a timed paper, our teachers can work through them with you in online one-to-one Economics tuition. You can also practise in the labour and wages set.