Labour Markets
Labour Markets
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EXAM RESOURCES
PREMIUM
Firms want workers for the goods they make, so the number of workers they want follows the demand for those goods.
Lorun is a country where most people earn fairly low incomes. Its garment workshops make shirts that are sold abroad. The shirts are sewn by garment machinists: workers who sew clothes on large sewing machines built for factories. The pay for an hour of work is called the wage rate: the price of labour.
This season, buyers abroad order more shirts. The wage rate has not changed, yet every workshop now wants more machinists to sew them.
Demand for labour: the number of workers that firms are willing and able to employ at each wage rate in a given period of time.
Put simply, it is a list of how many machinists Lorun's workshops would employ at $8 an hour, at $10, at $12, and so on. Each number on the list is the quantity of labour demanded at that wage. Drawn on a graph with the wage rate on the vertical (up-and-down) axis, the list is the demand curve for labour. Labour is a factor of production: one of the resources, with land, capital and enterprise, that are used to produce goods and services.
Derived demand: the demand for a factor of production, such as labour, that comes from the demand for the good or service it helps to produce.
Put simply, no workshop employs a machinist just to have her. It employs her because people want the shirts she sews. So the demand for machinists rises and falls with the demand for shirts.
More machinists are now employed, so why is this a shift of the curve and not a movement along it? If the wage rose from $10 to $12, the quantity of labour demanded would fall from 40,000 to 36,000 machinists: the workshops would move to another point on the same curve. That is a movement along the curve. Here the wage has not changed, but the quantity of labour demanded is higher at every wage. At $12 it rises from 36,000 to 48,000 machinists, and at $10 from 40,000 to 52,000. So the whole curve shifts to the right. Any other change that alters the quantity of labour demanded at each wage shifts the curve.
Now reverse the change: buyers abroad order fewer shirts. The workshops need fewer hours of sewing, so the quantity of labour demanded is lower at every wage. At $12 it falls from 36,000 to 24,000 machinists, and at $10 from 40,000 to 28,000. The demand for labour shifts to the left.
A firm hires one more worker only while what she adds to its output sells for at least her wage.
Mirelo is a shirt workshop in Lorun, one of many. It sells every shirt at $3, the price shirts sell for across the market. How many machinists should it hire? A worker's extra output is the number of extra shirts an hour the workshop makes when it hires her. The last column shows what those extra shirts are worth: the money they bring in when sold at $3 each.
Each machinist adds less than the one before. The machinists are all equally skilled. Each adds less because Mirelo's machines and floor space stay the same: every new machinist shares them with more workers, so she has less equipment to work with. This is called diminishing returns.
Mirelo wants to make as much profit as it can (profit is the money left after its costs are paid). So it compares the money the extra shirts bring in with the wage each machinist costs. Mirelo is only one of many workshops, so its extra shirts are too few to change the market price: it can sell every extra shirt at $3. So: worth of the extra output = extra output × price of the product.
So at $15 Mirelo employs 5 machinists, at $12 it employs 6, and at $9 it would employ 7. These are points on Mirelo's demand curve for labour. Why does the curve slope down? Each extra machinist adds less than the one before. Her extra output and the price of shirts have not changed; only the wage has. So when the wage falls, one more machinist's extra output is now worth at least the wage, and Mirelo hires her. A change in the wage moves Mirelo along its demand curve for labour.
Anything that raises the worth of a worker's extra output raises the quantity of labour demanded at every wage.
Mirelo, a shirt workshop in Lorun, sells every shirt at $3 and pays its machinists $12 an hour. At that wage it employs 6. Then a training course lets every machinist sew 1 more shirt an hour.
Productivity of labour: the output per worker in a given period of time.
Put simply, it is how many shirts each machinist sews in an hour. Training, better machines or a better arrangement of the workshop can raise it.
Training and a higher shirt price are different causes. Why do they have the same result? The worth of a worker's extra output is the shirts she adds times the price of each shirt. Training raises the first number, and a higher price raises the second. When either number rises, more machinists are worth hiring at every wage, not only at $12. At a wage of $15, for example, Mirelo hires 5 before the training and 6 after it, because the 6th machinist now adds 5 shirts, worth $15. The same is true at any other wage: each machinist's extra output is now worth more, so more machinists are worth at least the wage. So the quantity of labour demanded is higher at every wage, and the demand curve for labour shifts to the right.
A fall in either number shifts the curve to the left. If the price of a shirt fell from $3 to $2, the 5th machinist's 5 shirts would be worth only $10, less than the $12 wage. Mirelo would hire only 4 instead of 6, because the 4th machinist's 6 shirts are still worth 6 × $2 = $12, and the 5th's are not. Only a change in the wage itself moves Mirelo along the curve.
A firm uses a machine instead of workers when the machine does the same work for less.
Mirelo, a shirt workshop in Lorun, could buy an automatic cutter to do the work of 4 machinists. The cutter is capital: a machine used to make other goods. The price of capital is what it costs to buy or run a machine. This cutter costs $44 an hour to run.
Mirelo compares what the workers cost with what the machine costs, for the same work. This comparison is called the wage rate relative to the price of capital.
Suppose the cutter becomes cheaper to run, at $36 an hour, while the wage stays the same. The dividing line falls to $36 ÷ 4 = $9, so even at $10 the cutter is now cheaper than 4 machinists, who cost $40. At any wage between $9 and $11, the quantity of labour demanded is now lower. At $10, for example, Mirelo used to keep its 4 machinists and now replaces them with the cutter. The wage has not changed, so this is a shift of the demand curve for labour to the left, not a movement along it.
Now reverse the change. Suppose the cutter costs $52 an hour to run instead of $44, and the wage stays at $12. The dividing line rises to $52 ÷ 4 = $13. The 4 machinists cost $48, less than the cutter, so Mirelo now keeps them. At $12 the quantity of labour demanded is higher than before, so the demand for labour shifts to the right.
A rise in the wage is different. With the cutter's cost unchanged at $44, a rise from $10 to $12 moves Mirelo along its demand curve for labour: at $10 it keeps its 4 machinists, and at $12 it replaces them with the cutter.
Capital does not always replace workers. Some machines need people to run them, so a firm that buys more of them employs more operators. Others let each worker produce more, which raises the worth of each worker's extra output. In both cases the demand for those workers can rise.
Real Example: FairPrice, a supermarket chain in Singapore, began adding self-checkout counters in 2011. By 2016 it had about 280 of them in 55 stores. One staff member looks after six self-checkout counters, where six ordinary checkouts need six staff. So here capital replaces most of the checkout staff's work, but not all of it: the counters still need some staff.
Exam Matters: In a Calculate question, show the cost of each method for the same work side by side, then say which is cheaper and by how much, with its unit.
The same rise in the wage costs many jobs in some occupations and only a few in others.
Lorun's government is thinking about raising the pay of garment machinists. If the wage rises, how many jobs will be lost?
Elasticity of demand for labour: the responsiveness of the quantity of labour demanded to a change in the wage rate.
Put simply, responsiveness means how strongly one thing reacts to another. Here it compares two percentages: how far the number of workers firms want falls, against how far the wage rises.
The answer, −0.5, lies between 0 and −1. So the demand for machinists is inelastic: the quantity of labour demanded falls by a smaller percentage (10%) than the wage rises (20%). Had it fallen by 40% for the same 20% rise, the elasticity would be −2, beyond −1: demand would be elastic, with the quantity falling by a larger percentage than the wage rises. Four factors decide whether the demand for labour is elastic or inelastic:
Exam Matters: For each factor, give its reason: not just "substitutes", but "a machine can do the work for less, so firms switch to it when the wage rises".
A higher wage draws more people into a job: from other work, from study and from unpaid work at home.
Lorun's garment workshops pay machinists by the hour. At $12 an hour, 36,000 people are willing to work as machinists; at $14, 44,000 are. A kind of job, such as machinist or nurse, is called an occupation.
Supply of labour: the number of workers willing and able to work in an occupation at each wage rate in a given period of time.
Put simply, it lists how many people would do the job at each wage. Each number is the quantity of labour supplied at that wage, such as 36,000 machinists at $12. Drawn on a graph with the wage rate on the vertical axis, the list becomes the supply curve of labour.
Why are more people willing at $14 than at $12? A higher wage draws people from three places: other jobs that pay nearly as much, full-time study, and unpaid work at home, such as caring for a family. For some of them, the better rate is enough to make the job worth taking. So the quantity of labour supplied rises with the wage, and the curve slopes up: it rises from left to right.
Pay is not all that people weigh. Hours, safety and how hard the work is matter too, so two occupations on the same wage can attract very different numbers of workers.
A change in the wage is a movement along the curve. The curve already shows the quantity supplied at every wage, so a new wage only picks a different point on it, such as 44,000 at $14 instead of 36,000 at $12.
Anything else that changes the number willing and able to work at every wage shifts the whole curve. Suppose an electronics factory opens in Lorun and pays more for similar work. Some people who would have sewed choose it instead: at $12, 32,000 instead of 36,000 are willing to be machinists, and at $14, 40,000 instead of 44,000. The supply curve shifts 4,000 to the left. Safer workshops or shorter hours work the other way: they make the job more attractive at every wage, so the curve shifts right. A change in the number of people in the country shifts it too.
Exam Matters: Draw a shift as a new curve labelled S₁, and show a movement as an arrow along the old curve.
When more people live in a country, or arrive from abroad, more can do each job at every wage.
Lorun's population is young and growing: each year, more people leave school than retire (stop working because of their age). So the number of people of working age (old enough to work and not yet retired) rises. Some of them become machinists, so the quantity of labour supplied is higher at every wage, and the supply curve shifts to the right. The reverse happens in an ageing population, where older people make up a growing share. Each year more people retire than leave school, so the number of working age falls. The quantity of labour supplied is then lower at every wage, and the supply curve shifts to the left.
People also move between countries. Immigration is people coming to live in a country; emigration is people leaving it to live elsewhere.
Net migration: the number of people who come to live in a country (immigration) minus the number who leave it (emigration), over a period of time.
Put simply, it is arrivals minus departures. When more people arrive than leave, net migration is positive and adds workers. When more leave than arrive, it is negative and takes workers away.
People often migrate for better pay, and many go into particular occupations, such as building or nursing, where employers need their skills. So net migration can change the supply of labour to one occupation far more than to the whole workforce.
Suppose 12,000 more trained machinists (people who already have the skills) come to live in Lorun than leave it. At $12 an hour, the quantity of labour supplied is 48,000 instead of 36,000. At $14, it is 56,000 instead of 44,000.
It is 12,000 higher at every wage, so the supply curve shifts 12,000 to the right. Now reverse the case. If 12,000 more machinists left Lorun than arrived, net migration would be negative. The quantity of labour supplied would be 24,000 instead of 36,000 at $12, and 32,000 instead of 44,000 at $14. It is 12,000 lower at every wage, so the curve shifts 12,000 to the left.
People decide whether to work on the pay they keep, and on what they would receive without a job.
Two people in different countries are offered the same job at $12 an hour. In the first country, income tax (a tax on the money people earn) takes $2 of each hour, so the worker keeps $10. The second country charges no income tax, so the worker keeps $12. Pay after income tax is called take-home pay, and people weigh it when deciding whether to work.
A higher income tax rate lowers take-home pay at every wage. So at each wage fewer people find the job worth taking: the supply curve shifts left. Suppose a higher rate leaves about 6,000 fewer machinists willing and able to work at every wage: 30,000 instead of 36,000 at $12, and 38,000 instead of 44,000 at $14. A tax cut reverses each step: take-home pay is higher at every wage, so at each wage more people find the job worth taking, and the supply curve shifts right.
Welfare benefits are payments the government makes to people out of work or on low incomes. Someone who takes a job usually stops receiving the benefit. So the gain from working is the take-home pay minus the benefit given up.
How large each effect is cannot be known for certain. Some people work longer after a tax rise to keep their income, which works against the shift, and many would work whatever the benefit.
Real Example: The United Arab Emirates (UAE) does not charge income tax on people's pay. So a worker there keeps the whole wage in the contract as take-home pay. At the same wage, a job in the UAE leaves more take-home pay than one in a country that taxes income, which can raise the number of people willing to take it.
Rules on who may do a job, and for how many hours, change how many people can supply it.
Lorun's government brings in a new rule: every machinist must hold a safety licence (official permission to do the job, given after passing a test). For now, 12,000 machinists cannot pass the test, so they may not work as machinists at any wage.
The licence takes 12,000 out of the quantity of labour supplied at every wage: 24,000 instead of 36,000 at $12, and 16,000 instead of 28,000 at $10.
So the supply curve shifts 12,000 to the left. When the 12,000 pass the test, it shifts back to the right.
A licence is one kind of government regulation: a rule on who may work in an occupation, and on what terms. Four kinds act on the supply of labour. Supply can be counted in workers or in hours of work, and a rule can change either:
A licence limits who can work, but it also has benefits: it can protect the people who use the service and raise the standard of the work. So when judging a licence, the fall in the number of people able to work is weighed against these gains.
Real Example: From 1 January 2025, Singapore raised the lowest monthly pay that most new applicants for an Employment Pass (a work permit for a foreign professional) must be offered, to S$5,600 (Singapore dollars) from S$5,000. A professional offered S$5,300 a month met the old threshold but does not meet the new one, so cannot get the pass. A professional offered between S$5,000 and S$5,600 a month can no longer take these jobs. So the higher threshold can reduce the number of people from abroad who are able to supply their labour to them, just as fewer work permits would: it can shift that supply to the left.
Workers who act together can limit who may enter their occupation, so fewer people can supply it at every wage.
One machinist who asks for better pay can easily be replaced. Thousands of machinists who ask together cannot. So in many occupations, workers join an organisation that deals with employers for all of them.
Trade union: an organisation of workers that acts for its members to improve their pay and working conditions.
Put simply, a trade union lets workers bargain (discuss and agree terms) as one group instead of one by one. Most unions negotiate pay with employers: they meet them to agree the wage. This acts on the wage itself, not on the supply curve. But a union can also change the supply of labour, by controlling who may enter the occupation. This is called restricting entry.
A union restricts entry in three main ways:
Each rule means fewer people are willing and able to work at every wage.
Suppose Lorun's machinists' union brings in entry rules that keep out 6,000 people who would otherwise sew. Then 30,000 are willing and able to work as machinists at $12 instead of 36,000, and 38,000 at $14 instead of 44,000.
The supply curve shifts 6,000 to the left. If the union drops the rules, the 6,000 can enter again, and the curve shifts back to the right.
After a pay rise, some occupations soon attract many new workers, while others attract very few.
In Lorun, call centres and hospitals both raise pay by 10%. Within months many new call-centre agents (staff who answer customers' phone calls) start, because the job takes a few weeks to learn. Few new specialist doctors (doctors trained in one area of medicine, such as the heart) appear, because a specialist trains for many years.
Elasticity of supply of labour: the responsiveness of the quantity of labour supplied to a change in the wage rate.
Put simply, responsiveness means how strongly the quantity supplied reacts to the wage, measured by comparing two percentage changes. Supply is elastic, above 1, when the quantity supplied rises by a larger percentage than the wage, so a pay rise brings many extra workers. It is inelastic, below 1, when the quantity supplied rises by a smaller percentage, so few extra workers appear.
Four factors decide how elastic it is. Each works through how quickly new workers can appear:
The wage moves until the quantity of labour demanded equals the quantity of labour supplied.
Lorun's garment machinists work in a competitive labour market. This means many workshops hire machinists and many machinists look for work, so no single workshop or worker can set the wage. Here are both quantities at five wages:
At $12 an hour, the quantity of labour demanded and the quantity of labour supplied are both 36,000. Neither quantity is greater than the other, so nothing pushes the wage up or down.
Equilibrium wage rate: the wage rate at which the quantity of labour demanded equals the quantity of labour supplied, so there is no tendency for the wage to change.
Put simply, it is the wage the market settles at and stays at, until something shifts demand or supply. For Lorun's machinists, it is $12 an hour.
Suppose the wage is $10 an hour. The quantity of labour demanded is 40,000, but the quantity supplied is only 28,000. This is a shortage of labour (excess demand) of 12,000 machinists.
Above the equilibrium, each step happens the other way round. At $14 an hour, the quantity of labour supplied is 44,000, but the quantity demanded is only 32,000. This is a surplus of labour (excess supply) of 12,000. Machinists without a post offer to work for less, because some pay is better than none, and workshops can fill their posts at a lower wage, so the wage falls. As it falls, the quantity demanded extends, because each machinist costs less. The quantity supplied contracts, because some people choose other work at the lower wage. At $12, both are 36,000 again.
When the demand for labour increases, the wage and employment both rise; when it decreases, both fall.
This season, buyers abroad order more of Lorun's shirts. Workshops need more machinists to sew the extra shirts. So at every wage the quantity of labour demanded is 12,000 higher: 48,000 at $12 instead of 36,000, and 44,000 at $14 instead of 32,000. The demand curve shifts to the right: the old curve is D and the new one D₁. The supply of labour has not changed.
At the old wage of $12, the quantity of labour demanded is now 48,000, but the quantity supplied is still 36,000. This is a shortage of labour of 12,000, so workshops compete for machinists and push the wage up. As the wage rises, the quantity supplied extends along the unchanged supply curve, because higher pay draws people in. The quantity demanded contracts along D₁, from 48,000 at $12 to 44,000 at $14, because each machinist costs more. The shortage is gone at $14 an hour, where both quantities are 44,000. Employment is 44,000, not 48,000, because the higher wage reduces the quantity demanded. The wage and employment have both risen.
Now suppose orders fall instead. At every wage the quantity of labour demanded is 12,000 lower than at first: 24,000 at $12 and 28,000 at $10. The demand curve shifts left, from D to D₂.
At $12 the quantity supplied is still 36,000, so there is a surplus of labour of 12,000. Machinists without a post accept less, so the wage falls. As it falls, the quantity supplied contracts along the unchanged supply curve, from 36,000 to 28,000, because some people choose other work. The quantity demanded extends along D₂, from 24,000 to 28,000, because each machinist costs less. The new equilibrium is $10, where both quantities are 28,000. The wage and employment have both fallen.
In the fall, every change is the reverse of a change in the rise. The supply curve has not moved, and it slopes up, so a higher wage goes with a higher quantity supplied. This is why, after a shift in demand, the wage and employment move in the same direction as demand.
When the supply of labour changes, the wage and employment move in opposite directions.
Over a year, 12,000 more trained machinists come to live in Lorun than leave it: a net inflow. At every wage the quantity of labour supplied is 12,000 higher: 48,000 at $12 instead of 36,000, and 40,000 at $10 instead of 28,000. The supply curve shifts right, from S to S₁. The demand for labour has not changed.
At $12, 12,000 more machinists now offer to work than workshops will employ: a surplus of labour. Machinists without a post accept less, so the wage falls. As it falls, the quantity supplied contracts along S₁, from 48,000 to 40,000, and the quantity demanded extends along D, from 36,000 to 40,000. The new equilibrium is $10 an hour, with 40,000 employed. The wage has fallen, yet employment has risen. Why? The demand curve has not moved, so workshops move down along it: at a lower wage, more machinists are worth employing.
Now take a fall in supply. Lorun's government brings in a licence: every machinist must pass a safety test, and 12,000 cannot yet pass it. At every wage the quantity supplied is 12,000 lower than at first: 24,000 at $12 and 32,000 at $14. The supply curve shifts left, from S to S₂.
Workshops now have 12,000 posts at $12 that they cannot fill, a shortage of labour, so they offer more to fill them. As the wage rises, the quantity supplied extends along S₂, from 24,000 to 32,000, and the quantity demanded contracts along D, from 36,000 to 32,000. The new equilibrium is $14, with 32,000 employed. The wage has risen and employment has fallen, because workshops move up their demand curve: at a higher wage, fewer machinists are worth employing.
So after a shift in supply, the wage and employment move in opposite directions. How far employment changes depends on the elasticity of demand for labour: how strongly the quantity of labour demanded reacts to the wage. If demand is more elastic, a small change in the wage changes the quantity demanded a lot, so the wage has to move only a little to remove the surplus or shortage, and employment changes more. If demand is less elastic, the wage moves more and employment less.
Each occupation has its own demand and supply of labour, so pay differs when those curves differ.
In Lorun, hospital radiographers (staff trained to take X-ray and scan images) and garment machinists both earn $12 an hour, with 36,000 employed in each. Then the demand for each rises by 12,000 at every wage. Why does a radiographer end up earning more than a machinist?
At $12, each occupation now has a shortage of labour of 12,000, so in each the wage rises as employers compete for workers. For machinists, each $2 rise in the wage brings 8,000 more people into the job, and the quantity demanded falls by 4,000. Together that closes the shortage of 12,000 by the time the wage reaches $14, with 44,000 employed.
Radiographers take years to train, so in the years after the rise each $2 brings only 2,000 more. The quantity demanded still falls by 4,000, so the shortage shrinks by only 6,000. At $14 there is still a shortage of 6,000 radiographers (44,000 demanded against 38,000 supplied), and the wage keeps rising until $16, where both quantities are 40,000.
The supply of radiographers is less elastic: their quantity supplied responds less to a higher wage. So the same rise in demand raises their wage by $4, from $12 to $16, but the machinists' wage by only $2. Their employment rises by only 4,000, against 8,000 for machinists.
After the rise, radiographers earn $16 an hour and machinists $14, a gap of $2. A gap between the pay of two groups of workers is called a wage differential. It arises because each occupation has its own demand and supply curves:
A union that agrees a wage above the equilibrium raises pay, but unless the demand for labour also rises, firms employ fewer workers.
Lorun's garment machinists have a trade union. Each year it meets the workshops to agree pay for all its members. This is called collective bargaining.
Collective bargaining: negotiation between a trade union and an employer, or a group of employers, over the pay and working conditions of the workers the union represents.
Put simply, the union speaks for all its members at once, so no machinist has to agree pay alone. In a competitive labour market no single worker can set the wage. A union can, because it acts for all its members together. The deal sets one wage, and no member works for less. The agreed wage is a wage floor: a wage below which no member may be paid. Workshops may pay more than it, but not less.
Suppose the union wins $16 an hour, above the equilibrium of $12, where 36,000 machinists were employed. At $16, fewer machinists add output worth at least the wage. So workshops move up along their demand curve and employ fewer. The quantity of labour demanded contracts to 28,000, which is 8,000 fewer than before. At the same time, the higher wage draws more people in, and the quantity supplied extends to 52,000.
This is a surplus of labour of 24,000. These machinists are willing to work at $16, but cannot find a post in this occupation. In a competitive market, these workers would offer to work for less, and the wage would fall. Here no member may work for less than $16, so the surplus stays.
How many jobs are lost depends on the elasticity of demand for labour. Suppose machines cannot easily replace machinists. Then the demand for labour is inelastic, and employment falls only a little. If machines can easily replace them, demand is elastic, and many more jobs go. Jobs may not fall at all if the deal also raises productivity, for example by adding training that lets each worker produce more. If each machinist sews more shirts an hour, each is worth more to the workshops, so the demand for labour shifts right. A rising demand for shirts has the same effect.
When the government is the employer, pay is set by a decision, and it can stay below the equilibrium wage.
Who pays Lorun's nurses, teachers and police? The government does. They work in the public sector (the part of the economy owned and run by the government). So do the staff of Lorun's national railway and its power company, which are state-owned enterprises (business organisations in the public sector that sell a good or service).
Most pay in the public sector is not set by a market. It is a decision, made in three ways:
A state-owned enterprise often uses the same pay scale. But unlike a ministry, it sells its service, and its revenue (the money it receives from sales) pays part of its wages. So its pay also depends on how much it sells. When Lorun's railway sells fewer tickets, the government may have to cover more of its costs, and a pay rise is harder to agree.
Three things shape pay in the public sector that a market would not. The government budget (its plan for spending and taxes) limits the total, because money spent on pay cannot be spent on medicines or roads. Fairness pushes for one national scale, because nurses of the same grade and years of service are expected to receive the same pay wherever they work. And the government is the main employer of nurses, so it can keep pay low without losing all of them, because most nurses have no other employer.
A wage set above the equilibrium leaves a surplus of labour; a wage set below it does the reverse. In Lorun's market for nurses the equilibrium wage is $24 an hour, with 26,000 nurses employed, but the pay commission sets $21. At $21, the quantity of labour demanded is 29,000 nurses and the quantity supplied is only 20,000: a shortage of labour of 9,000. The fixed wage cannot rise to remove the shortage, so 9,000 posts stay empty, and only 20,000 nurses are employed, 6,000 fewer than at the equilibrium wage.
How large the shortage is depends on three things. The further below the equilibrium the pay is set, the larger it is. It is larger when supply is more elastic, because more nurses leave or do not apply for each $1 of lower pay; if supply is inelastic, because nursing takes years of training, the quantity supplied falls only a little in the short run. And it is larger when private hospitals, or employers abroad, pay more for the same skills, because nurses then have somewhere else to go. Pay is not all that staff weigh, though: job security may keep some in their posts.
One national scale can also leave a shortage in one region and a surplus in another at the same time. In Ostel, Lorun's capital, rents are high, so $21 buys less and fewer nurses are willing to work there. In Galdo, a region where rents are low, the same $21 buys more, so more nurses may apply than there are posts, if $21 is above Galdo's own equilibrium wage.
Real Example: Kenya's Salaries and Remuneration Commission, set up under its 2010 constitution, sets the pay of the country's state officers (the holders of its top public offices). It also advises the national and county (local) governments on the pay of other government staff. It must keep the total cost of government pay affordable, and also let public services attract and keep the skills they need. This shows the two pulls on pay set by the government: the budget, and the need to fill posts.
When workers find it hard to move to where new jobs are, some places have unemployed workers while others have jobs nobody fills.
Lorun has two regions (large areas of one country): Galdo, an older textile (cloth-making) region in the north, and Ostel, the capital, where newer workshops are growing. Each employs 18,000 machinists (workers who sew clothes on machines) at $12 an hour.
Then orders move to Ostel's workshops. The demand for machinists falls by 6,000 at every wage in Galdo, where workshops close, and rises by 6,000 at every wage in Ostel. Can Galdo's machinists follow the jobs?
Geographical immobility of labour: when workers find it difficult to move from one area to another to take up a job.
Put simply, the worker has the skills and the job exists, but the place is hard for her to reach. Three things make the move hard:
Now suppose wages can change over time. In each region, every $1 fall in the wage cuts the quantity of labour supplied by 2,000 and raises the quantity demanded by 1,000, and a $1 rise does the opposite. In Galdo, the surplus pushes the wage down. At $10, the quantity supplied is 18,000 − 4,000 = 14,000 and the quantity demanded is 12,000 + 2,000 = 14,000, so the surplus is gone. In Ostel, the shortage pushes the wage up. At $14, the quantity supplied is 18,000 + 4,000 = 22,000 and the quantity demanded is 24,000 − 2,000 = 22,000, so the shortage is gone. Ostel now pays $4 an hour more than Galdo for the same work. Each machinist who moved from Galdo to Ostel would narrow this gap, by taking one worker from Galdo's quantity supplied and adding one to Ostel's, but the barriers above stop many of them.
So when pay stays the same, geographical immobility leaves unemployment where demand fell and vacancies where it rose. When pay does change, it leaves a lasting wage gap between the regions instead.
Real Example: In Lagos, Nigeria, about 80% of residents rent their home, and one housing report found that tenants (people who rent their home) spend more than half their income on rent. A worker from a rural area (the countryside) who takes a job there may keep less than half her pay after rent. This is how housing costs can keep workers away from a city's jobs.
Some workers find it difficult to move into a different kind of job, even when that job is in the same place.
Now some shirt orders leave Lorun for another country for good, so its workshops need fewer machinists. Meanwhile Lorun's hospitals are short of nurses. Could a machinist who loses her job become a nurse?
Occupational immobility of labour: when workers find it difficult to move from one type of job to another.
Put simply, the new job may be next door, but the worker cannot yet do it. Three causes stand in her way:
The result is also unemployment beside vacancies, but between kinds of job, not places. Some machinists stay unemployed: this is structural unemployment (unemployment caused by a lasting fall in demand for a particular skill or industry). Others take lower-paid work that uses little of their skill, so they produce less than they could. With hospital posts empty too, output (the goods and services produced) is lost: people who could work are unemployed or under-used, and the work in the empty hospital posts is not done.
One worker can face both kinds at once: a Galdo machinist may lack a nurse's qualification and also be unable to pay the rent in Ostel.
When workers find it hard to move to where they are needed, labour is not put where it is worth most.
In Lorun, machinists are paid $12 an hour in both regions. At that pay, Galdo has a surplus of 6,000 machinists, who are unemployed, and Ostel has a shortage of 6,000, so 6,000 posts are unfilled. Is this bad luck, or is the market failing?
Resources are what is used to produce goods and services, such as workers and machines. A market failure is when a market allocates (shares out) resources inefficiently: it does not put them where they are worth most.
In a working labour market, pay would respond in each region. Ostel's shortage would raise pay there to $14, and Galdo's surplus would lower pay there to $10. The higher pay in Ostel is a signal that machinists are needed there. Galdo's machinists would answer it by moving to Ostel, where they can earn more for the same work. Each machinist who moved would add to the quantity of labour supplied in Ostel and take away from it in Galdo, until pay was the same in both regions and the $4 gap was gone.
Immobility breaks the link between the signal and the move. If pay stays at $12, the signal is never sent, and Galdo's unemployed machinists stay beside Ostel's unfilled posts. If Ostel's pay does rise to $14, the signal is sent, but the machinists who would answer it find it too difficult to move, so the $4 gap lasts. Either way, labour is not allocated to where it is worth most. At the adjusted wages, an Ostel workshop pays $14 an hour for its last machinist and a Galdo workshop only $10, so the same machinist's work is worth more in Ostel. That is a market failure, and its costs fall on three groups:
Not every pay gap is a failure. Lorun's radiographers (hospital staff who take X-rays) earn more than its machinists because their training takes years. That gap reflects demand and supply. Over the years the higher pay draws more trainees in, so the shortage of radiographers shrinks: this is the market working. Extra pay for dangerous work is the market working too, because the extra pay is what draws people into that work. A gap is a failure when it lasts because workers find it too hard to move to close it.
Real Example: At the end of 2025, 42.5% of the labour force (the people working or looking for work) in South Africa's Eastern Cape was unemployed, against 18.1% in the Western Cape. Over the past ten years, the Eastern Cape's rate has stayed above the country's average and the Western Cape's below it. The figures do not say why, but a gap between regions that lasts this long is the pattern that geographical immobility can cause.
Firms want workers for the goods they make, so the number of workers they want follows the demand for those goods.
A firm hires one more worker only while what she adds to its output sells for at least her wage.