Just as in any other market, in the labor market the relationship between the quantity of labor demanded by firms and the supply of workers able to fill that demand establish an equilibrium.
Every worker decides individually whether to do a given job for a given price. The lowest wage at which a given worker will accept a given job is called the worker’s reservation wage. Below that wage, the worker will choose not to work. At any greater wage, the worker will take the job.
The labor market is not always perfectly competitive, and it is different for all occupations and regions. For some jobs, labor is available everywhere, whereas for others, especially highly skilled jobs, employers must look nation- or even worldwide to find candidates.
Did You Get It?
The supply and demand curves for every occupation
the same.
Labor Market
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As stated before, the labor market is subject to the laws of supply and demand. In a perfectly competitive market, the labor market will have an equilibrium point where the quantity of labor demanded by firms is equal to the quantity of labor workers are willing and able to supply, and that will determine the price for labor.
Did You Get It?
Use the graph to show the effect on the local supply and demand for experienced machinists in a town where many machinists are nearing retirement but a new machine parts factory has opened.
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A minimum wage is a price floor on the cost of labor that is imposed by a government. A price floor distorts a perfectly competitive market equilibrium. If workers must be paid higher wages than equilibrium determines, the quantity of labor supply will increase and become greater than the quantity of labor demanded, because the wages will be higher than workers’ reservation wage.
At the same time, firms will find that some jobs do not have a marginal utility equal to the higher cost, and the quantity of labor demanded will decrease. Since the quantity supplied is greater than the quantity demanded, there is a surplus of labor. When more workers want jobs than there are jobs available, unemployment increases.
In practice, a small increase in minimum wage does not increase unemployment. This is because most workers earn more than minimum wage, and because demand for minimum wage labor is fairly inelastic.
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For each scenario, use the sliders to show how the quantity supplied and the quantity demanded change. Check your answer after setting the sliders.
The government eases visa restrictions for foreign nationals who are computer programmers.
Nursing colleges graduate 10% fewer registered nurses for several consecutive years.
Assembly line workers go on strike,
and the company tries to hire replacement workers.
More government workers than expected choose an early retirement option intended to reduce the government workforce.
A factory invests in new automatic
equipment to replace workers on all of its assembly lines.
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Wrap Up
The supply of labor by workers and the demand for labor by firms establish wages and employment levels in labor markets just as supply and demand determine prices and quantities in markets for goods.
For more information on labor supply and equilibrium, read Chapter 11, Module 32 of Explorations in Economics and study the Module 32 Review and Assessment. You can also test yourself with the Module 32 online quiz here on the BCS.