13.3.3 The determination of wages in a particular occupation
According to neo-classical economic theory, the wage rate will be determined by the interaction of demand and supply (see Figure 13.5). The equilibrium wage rate is £OW; any changes in demand or supply will lead to a change in the equilibrium wage rate. If the demand for labour increases to D1,at the old wage rate there will be a shortage of labour. The equilibrium wage rate will rise to £OW1 to clear the market. As the wage rate for this occupation is now higher than previously, in the longer term more labour will be attracted into this industry, the supply of labour will rise (S1) and the wage rate will fall. Thus the equilibrium wage rate changes in response to changes in demand and supply factors.