The Labor Market – Economic Lowdown, Ep. 4


Hi, I’m Scott Wolla. Have you looked for a job recently? If so, you’ve been an active participant in
the labor market. The labor market works much like other markets. There are buyers and sellers and they interact
to determine a price. In this case, the ”good’ being bought and
sold is labor and the ‘price’ for that good is a wage. In many of the markets we encounter, individuals
such as you and I demand goods and services, and firms supply those goods and services. Although the labor market works in a similar
way, the roles reverse. In the labor market, firms demand labor, and individuals such as
you and I supply that labor. Employers demand labor because workers are
an important part of the production process. Workers use tools and equipment to turn inputs
into output. Without workers, employers couldn’t produce
goods and services and earn profits. When graphed, the demand for labor looks much like
the demand for other goods and services – it has a downward slope. This indicates that a greater quantity of
labor is demanded at lower prices than at higher prices. That is, in the labor market,
employers are willing to buy more hours of labor at lower wages than at a higher wages. Although the employers who demand labor prefer
lower wages, the workers who supply that labor prefer higher wages. Workers are willing to supply labor because
the wages they earn enable them to buy the goods and services they want. When graphed, the supply of labor looks much
like the supply of other goods and services – it has an upward slope. This indicates that workers are willing to
supply a greater quantity of labor hours – that is, they are willing to work more – at higher
wages than at lower wages. Here’s an example: Acme Company is hiring
a new employee to help with the production of widgets. I’m interviewing these potential
employees to find out what motivates them. How many hours would you be willing to work
for $2 an hour? Probably not many. When you think of other ways you could spend
your time, a $2 wage probably isn’t enough to lure you away from the other alternatives,
such as an afternoon at the beach. Or, put differently, the opportunity cost is too high. But, what if you were offered $10 an hour? Now, you’d probably be willing to give up
other opportunities and work a few, or more than a few, hours. But what if you were offered $50 an hour?
Now, you’d probably be willing to forgo other alternatives and work as many hours as you
could. Like most people, you are far more likely
to work more hours at a higher wage than at the lower wage. This is called the substitution effect and
explains why the labor supply curve is upward sloping: workers are willing to work a greater
quantity of hours at higher wages than at lower wages. Again, like other markets, the demand for
labor and the supply of labor interact and result in an equilibrium price. In this case,
the price is called a wage. And, like other markets, the demand for labor
and the supply of labor shift, which can cause wages to increase and decrease. What causes the demand for labor to shift?
The demand for labor is derived from or determine by the demand for goods and services produced.
For example, the demand for nurses is determined by the demand for health-care services. If the demand for health-care services increased
dramatically, the demand for nurses to provide those services would also increase. In such
a case, the demand curve would shift to the right and wages for nurses would increase. On the other hand, if the demand for health-care
services were to decrease, the demand for nurses would decrease as well. The demand
curve would shift to the left, and wages for nurses would stagnate – or even decline – over
time. The supply of labor in the labor market is
determined by the number of workers who are willing to provide that labor. One factor that affects the number of workers
in given professions is the comparative attractiveness of jobs. For example, if higher wages or better working
conditions make nursing more attractive than other jobs, more people may be willing to
work in nursing, which would shift the supply curve for nursing to the right. This rightward shift would decrease wages
for nurses. Likewise, if nursing were to become a less attractive occupation, some nurses
would leave for other professions. This decrease in supply would result in higher wages for
the nurses who remain. So, do you want to earn higher wages? If so,
find a profession with high demand but a relatively small supply of qualified providers. Obtain the appropriate education and training
for that profession. Then, continue your education and training
so that you increase your productivity and, as a result, also increase the demand
for your services.

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