Labor Market

Wage determination in a competitive labor market, productivity, participation, and equilibrium employment.

Equilibrium: L* = 53.8, w* = 47.3

Current equations

Ld: w = 85 − 0.7·LLs: w = 15 + 0.6·L

A market like any other, except the 'good' is hours of work and the 'price' is the wage. Firms demand labor (more when workers are productive or business is booming); people supply it (more when wages are higher). The intersection sets employment and the going wage.

Source: Borjas, Labor Economics, ch. 2-4

Shift the curves

Labor demand (productivity, output demand)0

Firms hire when workers produce value: higher productivity or product demand shifts Ld right.

Labor supply (participation, immigration)0

More people willing to work at each wage shifts Ls right (slider right = more workers).

The Labor Market model, in writing

Definition

Supply and demand applied to work: firms demand labour (downward sloping, from diminishing marginal product) and workers supply it, setting the real wage and employment.

Labour demand: w = MPL ; equilibrium where labour supply meets labour demand

The intuition

Firms hire until the last worker adds just enough output to cover their wage, so anything that raises productivity (technology, capital, education) raises labour demand and wages. A binding minimum wage above equilibrium creates a gap between how many people want jobs and how many jobs firms offer.

Exam tip

Always draw the wage floor ABOVE the equilibrium wage; a minimum wage below equilibrium changes nothing. Unemployment on the diagram is the horizontal gap between supply and demand at the floor.

Related models in Labor Economics

Labor-Leisure Tradeoff →Human Capital & the Mincer Equation →Search & Matching (DMP) →Bathtub Model of Unemployment →