What makes the demand for and supply of labour elastic, and why software engineers earn more than care workers: two labour markets on one diagram.
In April 2025 the median full-time care worker in the UK earned £13.55 an hour, against £19.74 for all full-time employees. Many care workers are paid close to the National Living Wage. Yet when people are asked which jobs matter most, care work comes near the top.
If pay is not set by how important a job is, what does set it?
Source: ONS, Annual Survey of Hours and Earnings, April 2025 (Tables 1 and 26).
Each occupation has its own labour market. Firms demand labour; workers supply it. The wage rate goes up the side and the quantity of labour along the bottom.
The model assumes each market is competitive: no single employer or union sets the wage. It also assumes workers cannot move freely between the two jobs (occupational immobility): a care worker cannot become a software engineer next week, so the two markets clear at different wages.
Importance is not price. Water is essential and cheap; diamonds are not and are dear. Whether a job should pay more is a normative question.
A full-time care worker earns a median £13.55 an hour. The median full-time employee earns £19.74.
Most people would say care work matters a great deal.
What best explains why it is paid less than the average job?
Pay is set by demand and supply in each labour market: how much revenue a worker brings a firm and how many people can and will do the job. How important a job is does not set its price, just as water is essential but cheap.
Care workers first. Supply SC is large and fairly flat: many people can do the job after short training, so a small rise in pay brings in many more applicants. Demand DC sits low: care home fees are limited, many by council budgets, so the revenue each worker brings in is limited. The market clears at WC.
Check: Why is the supply of care workers fairly elastic?
With few barriers to entry, a small rise in pay brings in many more applicants.
How far does employment fall when pay rises? **Wage elasticity of demand for labour** = % change in quantity of labour demanded ÷ % change in the wage rate. It is PED with workers in place of goods. Use the starting values for each percentage.
Teacher tip: Elastic or inelastic refers to the size of the number, ignoring the minus sign: bigger than 1 is elastic.
Check: A 10% pay rise cuts the care hours demanded by 5%. What is the wage elasticity of demand for labour?
−5% ÷ 10% = −0.5. Below 1 in size, so demand for labour is inelastic.
Four things make demand for labour more elastic: more time to adjust, machines or other workers that can substitute, price elastic demand for the product (demand for labour is derived, so the product’s elasticity passes through) and labour being a large share of costs. Wages are about 60% of a care home’s costs but a small share of an oil refinery’s.
Check: Which change makes a firm’s demand for labour more elastic?
Easy substitution means a pay rise leads firms to swap workers for machines, so the quantity of labour demanded falls a lot.
Now software engineers, on the same axes. Demand DE is high: software can be sold to millions of users, so each engineer can bring a firm a great deal of revenue, and few other workers can do the job. Draw demand first, as for any market.
Check: Why is the demand for software engineers high?
Demand for labour is derived from the revenue the work produces.
Supply SE is to the left and steep. It takes years of study and practice to code at a professional level, so even a large pay rise brings in few new engineers in the short run. Supply is inelastic. The market clears at WE, well above WC. Supply of labour is more elastic when there are unemployed workers with the right skills and over a longer time period, as more people train.
Teacher tip: Name the barrier. “There are few engineers” describes where the curve sits; “training takes years” explains why it is steep.
Check: The supply of software engineers is inelastic mainly because:
Inelastic supply is about how hard it is to raise the number of workers. Years of training stop numbers rising quickly.
The gap WE − WC is the **wage differential**. Two forces push the engineers’ wage up: higher demand, and lower, inelastic supply. A strong answer gives one reason from each side and links each to the wage.
Check: On this diagram, the wage differential between engineers and care workers is:
The differential is the gap between the two equilibrium wages.
Other reasons, and the side each works through. Experience and ability: demand, as the worker earns the firm more. Dangerous or unsociable jobs: supply, as fewer are willing (compensating differentials). Geographical immobility: supply cannot move to where pay is high. Discrimination: demand, as some employers value some groups less. International competition: demand. Union bargaining power can hold pay above equilibrium.
Check: Oil rig workers are paid more than onshore workers with similar skills. Through which side does this work?
Danger and weeks away from home cut the supply of willing workers, so pay must be higher to attract them: a compensating differential.
Regions. In April 2024 median full-time pay was £853 a week in London, against £684 in Wales, £671 in Northern Ireland and £661 in the North East (ONS). Demand: London has more high-revenue firms, such as finance and head offices. Supply: high housing costs limit how many workers can afford to live there, while higher unemployment in lower-pay regions means more people chasing each job.
Check: High housing costs in London tend to:
Fewer workers can afford to live there at a given wage, so supply shifts left and wages are pushed up.
Their supply curve is far to the right and flat, as if anyone could start coding tomorrow. Years of training make the supply of engineers small and inelastic: to the left and steep. Drawn their way, engineers would earn about the same as care workers.
Using a labour market diagram, explain two reasons why software engineers are usually paid more than care workers.
Software engineers and care workers work in separate labour markets, because workers cannot easily move from one occupation to the other.
[Diagram: wage rate against quantity of labour. DE and SE for engineers cross at WE. DC and SC for care workers cross at WC, below WE. SE is to the left of SC and steeper.]
Supply: it takes years of study and practice to code at a professional level, so few people can offer this labour at any wage and supply is inelastic, drawn to the left and steep. Care work needs much shorter training, so many people can do it and supply is larger and more elastic. The smaller supply of engineers raises their equilibrium wage.
Demand: the demand for labour is derived from the revenue it helps produce. Software can be sold to millions of users, so each engineer can bring a firm a great deal of revenue and demand, DE, is high. Care homes’ fees are limited, many by council budgets, so demand for care workers at higher wages is lower. Higher demand also pushes WE above WC.
**Evaluation:** pay reflects demand and supply, not how much society values a job, so whether care workers should earn more is a normative judgement. Many care workers are paid at or near the National Living Wage, so a legal floor, not the market alone, sets their pay.
Care worker and employee pay: ONS, Annual Survey of Hours and Earnings, April 2025. Diagrams drawn with Rough.js and perfect-freehand, both MIT licensed. Your answers are saved only on this device.