The labour market diagram: why the demand for labour is derived and slopes down, what shifts demand and supply, the backward-bending supply curve and how the wage is set. Through Royal Mail’s Christmas hiring.
Every autumn, Royal Mail takes on temporary staff for the Christmas peak. For 2025 it planned to recruit about 20,000, mostly to sort the extra online shopping parcels, with contracts running from late October to early January.
Nobody at Royal Mail wants a sorter for the sake of it. It wants the parcels sorted, because customers are paying for them to arrive.
Where does a firm’s demand for workers come from?
Source: Royal Mail, 30 September 2025.
The labour market is a factor market. The roles swap round compared with a goods market: firms demand labour and workers supply it. The price is the wage rate; the quantity is the number of workers or hours.
The demand for labour is the demand for workers from firms. It is not workers’ demand for jobs.
We assume a competitive labour market: many firms and many workers, none of whom can set the wage on their own, so the wage is set by demand and supply.
The demand for labour shifts right if:
The supply of labour to an industry shifts right if:
A change in the wage itself is never a shift. It is a movement along the curve.
Online shopping doubles in the weeks before Christmas.
Parcel firms have far more orders to deliver.
What happens in the market for delivery drivers?
Firms do not want drivers for their own sake. They want them to deliver the parcels customers are paying for. More parcels means more drivers wanted at every wage: the demand for labour is a derived demand, and it shifts right.
Wage rate up the side, quantity of labour along the bottom. The demand for labour slopes down for two reasons. In the short run capital is fixed, so each extra worker adds less output (diminishing returns), and a firm only takes on more if the wage falls. In the long run a higher wage makes firms swap workers for machines.
Check: Sixth formers looking for Saturday jobs are:
Workers sell their time to firms, so they are on the supply side. Firms are the buyers: they demand labour.
The supply of labour to an industry slopes up. A higher wage draws in workers from other industries and people who were not working at all. It starts above zero: the wage has to be high enough to make it worth anyone starting.
The market clears at W1 = £14 an hour, with 12 thousand drivers. Below W1, firms want more workers than are available, so there are vacancies and firms bid the wage up. Above W1, more people want work than firms will employ: involuntary unemployment, which pushes the wage down.
Check: The wage is set above the equilibrium. What results?
At a higher wage more people want to work but firms want fewer workers, so some people who want a job at that wage cannot find one.
Back to Christmas. More online orders means parcel firms want more drivers at every wage. Demand for labour shifts right, from D1 to D2. This is derived demand: firms want workers for the revenue their work brings in.
Check: Online orders rise. Which curve shifts, and which way?
More parcels means firms want more drivers at every wage. The demand for labour is derived from the demand for the product.
At W1 there is now a shortage of drivers: 6 thousand. Firms compete for the scarce workers by offering more pay.
Check: At the old wage of £14, firms now want 18 thousand drivers but 12 thousand are willing to work. What is the shortage?
18 thousand demanded minus 12 thousand supplied: a shortage of 6 thousand drivers.
The wage is bid up to W2 = £16 and more people are willing to drive, so quantity supplied extends along S to Q2 = 16 thousand. Wage and employment both rise.
If the wage rises to £18 with nothing else changing, firms move up D1 and want only 8 thousand drivers: a contraction in the quantity of labour demanded, not a shift.
Check: The wage rate for delivery drivers rises. In the market for drivers, this causes:
The wage is on the axis, so a change in it moves along the curve. Firms want fewer drivers: a contraction in the quantity of labour demanded.
The opposite case: the government funds more HGV training places. More people qualify to drive at every wage, so supply shifts right, to S2. With demand unchanged, the wage falls and employment rises.
Check: Warehouses nearby raise their pay. What happens to the supply of delivery drivers?
Some drivers move to the better-paid warehouse jobs, so fewer offer to drive at every wage.
One worker’s supply of labour can bend backwards. Up to W1 the substitution effect is stronger: a higher wage makes each hour of leisure cost more, so the worker works more hours.
Check: A student on £10 an hour takes extra shifts when pay rises to £12. Which effect is stronger?
Each hour of leisure now costs £12 of pay instead of £10, so the student swaps leisure for work.
Above W1 the income effect is stronger: the worker already earns enough to buy more leisure, so they work fewer hours. Over the last century UK real wages rose a lot, yet average hours fell.
Check: A barrister already on a very high hourly rate gets a further pay rise. On the backward-bending curve, she is most likely to:
Above W1 the income effect is stronger: she can afford more leisure, so she buys it with fewer hours.
A rise in the wage does not shift the demand for labour. The wage is on the axis, so firms move along D1 and want fewer drivers: a contraction. Only a non-wage change, such as more orders, shifts demand.
Using a labour market diagram, explain the likely effect of a rise in online shopping on the wage rate and employment of delivery drivers.
The demand for labour is a derived demand: parcel firms do not want drivers for their own sake but to deliver the orders customers pay for. A rise in online shopping increases the demand for deliveries, so firms want more drivers at every wage and the demand for drivers shifts right from D1 to D2.
[Diagram: wage rate on the vertical axis, quantity of labour on the horizontal axis. D1 and S crossing at W1 and Q1. D2 to the right of D1, crossing S at a higher W2 and Q2.]
At the old wage W1 firms now want more drivers than are willing to work, so there is a shortage. Firms compete for the scarce drivers by offering higher pay, and the wage rises to W2. As the wage rises, more people are willing to drive, so quantity supplied extends along S and employment rises from Q1 to Q2.
However, the size of the wage rise depends on the elasticity of supply of drivers. Van drivers need little training, so supply is fairly elastic and most of the change is in employment. HGV drivers need a licence that takes months to get, so their supply is inelastic and their wage rises more.
Royal Mail seasonal recruitment: Royal Mail (30 September 2025). Diagrams drawn with Rough.js and perfect-freehand, both MIT licensed. Your answers are saved only on this device.