Workers, Wages and the Labour Market: Question 2

Worked solution

Part (a): Factors that increase demand for labour

The demand for labour is a derived demand, firms only want installers because customers want solar panels installed. Besides the wage rate itself, the market demand for solar panel installers could increase because of:

• A rise in demand for solar panel installations, if more households want panels fitted, installation firms need more installers to meet this demand.
• An increase in installer productivity. If installers can fit more panels per hour (e.g. with better tools), each installer becomes more valuable to a firm, raising demand for their labour.

(Other acceptable answers include a rise in the price of capital equipment that could substitute for installer labour, or an increase in the number of firms in the industry.)

Part (b): Describing the wage determination diagram

On a diagram with wage rate on the vertical axis and quantity of labour on the horizontal axis:

• The demand curve for labour slopes downward from left to right. As the wage rate rises, installers become more expensive to employ, so firms are willing and able to employ fewer of them at higher wages.
• The supply curve for labour slopes upward from left to right. As the wage rate rises, working as an installer becomes more attractive relative to other jobs, so more people are willing to train for and take up this occupation.

The equilibrium wage rate is the wage at which the quantity of labour that firms want to employ exactly equals the quantity of labour that workers are willing to supply. That is, the point where the demand curve and the supply curve cross ($Q_D = Q_S$). At the original wage of $28.00 per hour, this equilibrium quantity is 4000 installers.

Part (c): Effect of the training scheme

The training scheme changes the supply side of the market, not the demand side:

• More people are now qualified to become installers at every wage rate, so the entire supply curve for solar panel installers shifts to the right.
• The demand curve for installer labour is unaffected, since nothing about the demand for solar panel installations or installer productivity has changed.

At the original wage of $28.00 per hour, there are now more qualified installers willing to work than firms wish to employ, an excess supply of labour. This pushes the wage rate down. The market moves to a new equilibrium with a lower equilibrium wage rate and a higher quantity of labour employed, since firms are willing to hire more installers now that labour is relatively cheaper.

Final answers

• (a) Any two of: a rise in demand for solar panel installations; an increase in installer productivity; a rise in the price of substitute capital equipment; an increase in the number of installation firms.
• (b) Demand for labour slopes down, supply of labour slopes up; equilibrium wage occurs where $Q_D = Q_S$.
• (c) The supply curve shifts right; the equilibrium wage rate falls below $28.00 per hour and the quantity of labour employed rises above 4000 installers.