Understanding the Labor Market: Demand, Supply, and Wage Dynamics

Labour Market

What is it?

• Labor, like any other good or service, has a market; this market is the labor market and is determined by the demand and supply forces of labor.
• Labor can be manual or mental:
• A manager is still a laborer but merely uses his brain more than his hands.
• In an economy there can be several labor markets and they can be regional, national or international.
• There is a labor market for every occupation in an economy.
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• Labor markets are different for young and old workers with different levels of experience, or for temporary, part-time or full-time employees.

The Demand for Labor:

• Labor is demanded not for itself but for the goods and services that the said labor can provide:
• Thus the demand for labor is also what is known as derived demand.
• The more a good or service is demanded the higher the revenue one can generate from providing that good or service, therefore the higher the demand for laborers to provide that good or service will be.

• Employers will only employ new workers if those new workers have the potential to generate more revenue than it takes to pay for the employment of said workers.
• Similarly, if an employer begins losing profits he or she will attempt to decrease the number of employees on their payroll; this is done in the attempt to protect the employer’s profits.
• Thus, workers who are less productive are often sacked when the companies’ profits are threatened.
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• The demand for workers is therefore intimately related with their wage rate, along with the other costs of employment, and with their productivity.
• The higher the wage rage for a unit of labor in a market, the greater the cost needed to employ that unit of labor:
• This will cause the quantity demanded for labor in that particular market to decrease.
• The demand curve for labor is always downward sloping when plotted with the Wage Rate on the y-axis and the Units of Labor employed per period on the x-axis.
• When the wage rate is changed it will cause a corresponding contraction (wage rate is increased) or extension (wage rate is decreased) along the demand curve.
• Wage rate can be calculated for a certain period of time (per month, per year or per hour) and can also be calculated directly from a worker’s productivity by paying the said worker a certain amount for each unit of output the worker produces.
• The earnings of the worker – the money the worker receives at the end of the day – may be more than his or her base salary as it may include bonuses received for working overtime, etc.

The Supply of Labor:

• The total supply of labor in an economy is its labor force and is determined by the number of people who are both willing and able to work.