A wage is the price paid for labour. Like any price, it is shaped by demand (how much employers want workers) and supply (how many workers are willing and able to do the job).
The demand for labour
Employers demand labour to produce goods and services. Demand for a worker is higher when:
- the worker is very productive, adding a lot of value;
- demand for the product the worker makes is high;
- the worker's skills are hard to replace with machines.
The supply of labour
Supply is the number of workers willing and able to do a job. Supply is lower when:
- the job needs long training or rare qualifications;
- the work is dangerous, unpleasant or unpopular;
- few people have the required talent.
How wages are determined
Where demand meets supply sets the wage. When a job has high demand but low supply, such as a specialist doctor, the wage is high. When many people can do a job that few employers need, such as unskilled seasonal picking, the wage is low. A national minimum wage can also set a legal floor below which pay may not fall.
Why wages differ between jobs
Several reasons explain pay gaps:
- Skills and qualifications: jobs needing years of training pay more.
- Danger and conditions: risky or unpleasant work may pay a premium.
- Responsibility: managing people or money raises pay.
- Bargaining power: workers in strong unions or short supply can negotiate more.
Put these steps in order to show how a shortage of qualified workers pushes up wages:
- Few workers have the required skill (low supply)
- Employers still want many of these workers (demand stays high)
- Employers compete for the scarce workers by offering higher pay
- The market wage rises