3.1.5.4 The role and operation of the labour market
The labour market: demand for and supply of labour
Labour market: where employers (who demand labour) and workers (who supply labour) meet. The ‘price’ of labour is the wage.
It is a factor market: labour is a factor of production.
Demand for labour: the number of workers firms want to employ at each wage. At a lower wage, firms want to hire more, so the demand curve slopes down.
Derived demand: firms only want workers because people want what they make. If demand for the product rises, demand for the workers who make it rises too.
Supply of labour: the number of people willing and able to do a job at each wage. A higher wage attracts more people, so the supply curve slopes up.
Exam tipIn the labour market, firms demand and workers supply. It is the other way round from a product market, so students often swap them.
Labour market
The market in which workers supply their labour and employers demand it; the price is the wage.
Derived demand
Demand for a factor of production, such as labour, that comes from demand for the product it makes.
Wage
The payment for labour.
3.1.5.4 Determination of wages through supply and demand
How demand and supply set the wage
The equilibrium wage (W) is where the demand for labour equals the supply of labour. Q is the number of workers employed.
Axes: wage (W) on the vertical axis; quantity of labour (Q) on the horizontal axis.
If the wage is above equilibrium, more people want the job than firms want to hire: excess supply of labour. Wages tend to be pushed down.
If the wage is below equilibrium, firms can’t fill their vacancies: excess demand for labour. Firms raise wages to attract staff.
High wages are likely where demand is high and supply is low (few people have the skills). Low wages are likely where supply is high and demand is low (many people can do the job).
The equilibrium wage W and quantity of labour Q
Above the equilibrium wage there is excess supply of labour; below it there is excess demand
Exam tipAQA accepts ‘Wage’, ‘W’, ‘Price’ or ‘P’ on the vertical axis of a labour market diagram. Label the horizontal axis ‘Quantity of labour’, and label both curves.
Equilibrium wage
The wage at which the demand for labour equals the supply of labour.
Excess supply of labour
More people want to work in a job than firms want to employ at that wage.
Excess demand for labour
Firms want more workers than are willing to work at that wage: unfilled vacancies.
3.1.5.4 Wage determination using simple demand and supply analysis
Shifts in demand and supply of labour
Demand right: the wage rises (W to W1) and more workers are employed (Q to Q1).
Supply right: the wage falls (W to W1) and more workers are employed (Q to Q1).
A shift left does the opposite. For example, automation can shift the demand for checkout staff to the left, lowering wages and employment in that job.
Demand for labour shifts right (increases) if…
Supply of labour shifts right (increases) if…
Demand for the product rises (derived demand)
More people gain the skills or qualifications
Workers become more productive
Training becomes shorter or cheaper
The job can’t easily be done by machines
The job becomes more attractive (safer, better conditions)
Firms expand or new firms open
The population or migration grows
Demand for labour increases (D to D1): wage and employment rise
Supply of labour increases (S to S1): wage falls, employment rises
Exam tipAQA marks a labour-market drawing like this: 1 mark for the original D and S with W and Q marked; 1 for the correct curve shifted the correct way and labelled; 1 for the new W1 and Q1. Shifting supply when demand should move scores no marks for the shift.
Increase in demand for labour
A shift of the demand for labour curve to the right: firms want more workers at every wage.
Increase in supply of labour
A shift of the supply of labour curve to the right: more people are willing and able to work at every wage.
3.1.5.4 Wage differentials between occupations
Why pay differs between occupations
Wage differentials: differences in pay between different jobs, or between people doing the same job.
Skills and qualifications: few people have rare skills, so supply is low and pay is high.
Length of training: long, costly training (doctors, pilots) puts people off, so supply is low.
Demand for the product: if what workers make is in high demand, firms value them more (derived demand).
Danger or unpleasant conditions: higher pay is needed to attract people to risky or anti-social jobs.
Ease of replacement: jobs that almost anyone could do have a large supply of workers, so pay is lower.
Responsibility: managers, and jobs where mistakes are costly, tend to be better paid.
Trade unions and the minimum wage can also affect pay in some jobs.
Exam tipTop answers turn a reason into a demand and supply chain: ‘training takes seven years, so few people qualify, so the supply of labour is low compared with demand, so the wage is high’. Only about a third of students reached the top level on AQA’s 6-mark pay question.
Wage differentials
Differences in wages between different occupations, or between workers in the same occupation.
Occupation
A type of job, such as nurse, electrician or teacher.
3.1.5.4 Wage differentials within occupations
Why pay differs within an occupation
Experience and length of service: experienced workers are more productive, and many pay scales rise each year.
Region: pay is often higher in London and the South East, where living costs are higher and demand for workers is strong (some employers add a ‘London weighting’).
Sector: the same job may pay differently in a private firm, a charity or the public sector.
Size and profitability of the employer: large, profitable firms may pay more.
Performance: bonuses or commission reward higher output.
Discrimination: paying people less because of their sex, ethnicity or age is illegal, but it can still contribute to pay gaps.
Full-time v part-time: part-time jobs often pay less per hour.
Exam tipRead whether the question asks between occupations (e.g. a vet and a cleaner) or within one (e.g. two electricians). The reasons are different.
London weighting
Extra pay given to some workers in London to reflect higher living costs.
Pay gap
The difference in average pay between two groups, such as men and women.
3.1.5.4 Gross and net pay
Gross pay, deductions and net pay
Gross pay: total pay before anything is taken off.
Deductions: amounts taken from gross pay before it is paid: income tax, National Insurance contributions (NI), pension contributions and, for some, student loan repayments.
Net pay (take-home pay) = gross pay − all deductions.
Income tax and NI are paid to the government. Pension contributions are saved for the worker’s retirement.
Ways of being paid: an hourly wage (pay = rate × hours) or a salary (a set amount a year, paid monthly).
From gross pay to net pay on an invented monthly pay slip
Exam tipVAT is not a deduction from pay: it is a tax on spending. AQA’s examiners saw students give indirect taxes as deductions and score nothing.
Gross pay
Pay before any deductions are taken off.
Net pay
Pay after all deductions (income tax, National Insurance, pension, student loan) have been taken off.
Deductions
Amounts taken from gross pay, such as income tax and National Insurance.
Salary
A fixed yearly amount of pay, usually paid monthly.
3.1.5.4 How to calculate income including gross and net pay
Calculating gross pay, income tax and net pay
Rates for the 2026–27 tax year (6 April 2026 to 5 April 2027) in England, Wales and Northern Ireland. Scotland’s income tax bands are different.
Income tax: take off the tax-free Personal Allowance first, then apply each rate to the part of income in its band. (The allowance is reduced for incomes over £100,000.)
Employee National Insurance (2026–27): 0% on the first £242 a week, 8% on earnings from £242 to £967 a week, and 2% above that.
NI can also be worked out on yearly figures: 8% of earnings between £12,570 and £50,270 a year, and 2% above that. The pay slip in Gross pay, deductions and net pay uses this method: (£30,000 − £12,570) × 8% ÷ 12 = £116.20 a month. The weekly and yearly methods give almost the same answer.
Exam questions usually give you the rates. Learn the method: rates change at Budgets.
Last checked: November 2026.
Taxable income a year
Income tax rate (2026–27)
Up to £12,570 (the Personal Allowance)
0%
£12,571 to £50,270
20% (basic rate)
£50,271 to £125,140
40% (higher rate)
Over £125,140
45% (additional rate)
Worked exampleIn April 2026 a worker aged 25 earns the National Living Wage of £12.71 an hour and works 37.5 hours a week. What is their gross weekly pay?
Worked exampleHow much income tax does someone pay on a salary of £30,000 in 2026–27 (England, Wales and Northern Ireland)?
Taxable income = £30,000 − £12,570 = £17,430Take off the Personal Allowance first.
£17,430 × 20% = £3,486All of it is in the basic-rate band.
£3,486 a year
Worked exampleHow much income tax does someone pay on £60,000 in 2026–27 (England, Wales and Northern Ireland)?
Basic-rate band: £50,270 − £12,570 = £37,700 × 20% = £7,540Tax each band separately.
Higher-rate band: £60,000 − £50,270 = £9,730 × 40% = £3,892Only the income above £50,270 is taxed at 40%.
£7,540 + £3,892 = £11,432Add the bands.
£11,432 a year
Worked exampleHow much employee National Insurance is paid on weekly earnings of £600 in 2026–27?
(£600 − £242) × 8% = £358 × 0.08 = £28.64NI is 8% only on the earnings above £242 a week. Employers work NI out for each pay period (here a week), using that period’s threshold.
£28.64 a week
Worked exampleA worker’s monthly gross pay is £2,500. Deductions are income tax £290.50, NI £116.20 and pension £125. What is their annual net pay?
£2,500 − £290.50 − £116.20 − £125 = £1,968.30 a monthNet pay = gross pay − all deductions.
£1,968.30 × 12 = £23,619.60Multiply a monthly figure by 12 for a year.
£23,619.60 a year
Exam tipTwo classic slips: taxing the whole income without taking off the Personal Allowance (AQA gives 1 mark of 3 for that), and forgetting to multiply a monthly figure by 12. Never add deductions to gross pay.
Personal Allowance
The amount of income a person can earn in a year before paying income tax: £12,570 in 2026–27.
Income tax
A tax on income, deducted from pay.
National Insurance contributions
A deduction from pay above a threshold, which helps pay for the state pension and some benefits.
3.1.5.4 Gross pay and the labour market
The National Minimum Wage and National Living Wage
The National Minimum Wage is the lowest hourly pay employers may legally pay, by age. The rate for workers aged 21 and over is called the National Living Wage (NLW).
The government sets the rates each year. The April 2027 rates were announced at Budget 2026 (October 2026): the NLW rise is about 3.9%.
For comparison, in June to August 2026, average regular pay was growing by 3.7% a year (ONS).
Arguments for a higher minimum wage, as supporters put it: higher pay for the lowest paid; a stronger reason to work; less in-work poverty; motivated staff who stay longer; more spending in local businesses.
Arguments against, as critics put it: higher costs for labour-intensive firms such as care homes, shops and restaurants; higher prices; fewer jobs or hours, especially for young and less-skilled workers; more use of machines; smaller pay gaps for more skilled staff.
On a labour market diagram, a minimum wage set above the equilibrium wage can create excess supply of labour: more people want jobs than firms want to fill.
Last checked: November 2026. Rates change every April.
Age group
Hourly rate from 1 April 2026
Announced for April 2027
21 and over (National Living Wage)
£12.71
£13.21
18 to 20
£10.85
£11.27
Under 18
£8.00
£8.31
Apprentice
£8.00
£8.31
Exam tipOld papers quote old rates (AQA’s specimen used £7.20). Use the figures in the question; if you add your own, give the date.
National Minimum Wage
The lowest hourly pay employers may legally pay, which depends on age.
National Living Wage
The minimum hourly rate for workers aged 21 and over: £12.71 from April 2026.
3.1.5.4 Wage differentials (related vocabulary)
Trade unions and immobility of labour
Trade union: an organised group of workers formed to protect and improve their pay, conditions and rights.
Collective bargaining: the union negotiates for all its members at once, which gives workers more bargaining power than one person alone. Strong unions can raise wages in some jobs.
Geographical immobility: workers can’t easily move to where the jobs are, for example because of high housing costs or family ties.
Occupational immobility: workers can’t easily switch to a different type of job because they lack the skills or qualifications.
Immobility can keep wage differentials wide: if workers can’t move to where pay is higher, the gap doesn’t close.
Exam tipThese terms are in AQA’s vocabulary list, so you can use them, but they are not named in the specification. Use them to support a wage differentials answer.
Trade union
An organised association of workers formed to protect and further their rights and welfare.
Geographical immobility
When workers are unable to move to new locations for work.
Occupational immobility
When workers are unable or unwilling to gain the skills to move to a different type of job.
Genious