Workers supply labour; employers demand it.
In a labour market, the price is the wage and the quantity is labour employed per period. Define the occupation, location and labour unit: worker-hours and numbers of workers are not interchangeable. Employers demand labour because it helps produce goods or services that customers want; this is derived demand. Workers supply labour. Apply the usual demand-supply reasoning while stating the assumptions of an upward-sloping market labour supply curve, downward-sloping labour demand curve and flexible wages. Qualifications, location and time to train matter when judging which workers can enter this market.
- Who supplies and demands?
- Workers supply labour; employers demand it. Labour demand is derived demand: firms hire workers because their work helps produce the goods or services customers want.
- The wage and labour quantity
- The wage is the price paid for labour. Put hourly wages vertically and worker-hours per week horizontally. More hours employed do not necessarily mean the same increase in the number of workers.
- The model's prediction
- With downward-sloping labour demand, upward-sloping market labour supply and flexible wages, demand shifting right raises wage and employment. Supply shifting right lowers wage and raises employment.
Keep the labour-market explanation precise
Demand shifts
Higher demand for a firm's output can increase demand for the labour needed to produce it. A change in technology may replace some tasks or create demand for other skills; the effect needs context, not a blanket claim that technology always cuts employment.
Supply shifts
Training, migration of suitably qualified workers, participation decisions and changes in working conditions can affect hours offered at each wage. Population growth alone does not guarantee more suitably qualified labour in this occupation.
Wage changes
A change in this occupation's wage causes movements along its unchanged labour demand and supply curves. A wage rise alone does not show which curve originally shifted.
Limits of the model
Contracts, wage-setting institutions and difficulties matching skills to vacancies can slow or alter adjustment. State the flexible-wage assumption when drawing the simple equilibrium conclusion; marginal revenue productivity theory is not required here.
Worked example: Demand for bicycle mechanics
Consider qualified bicycle mechanics in one town, measured in mechanic-hours per week. More cycling increases demand for repair services. Repair firms want to hire more mechanics at each hourly wage. Initially, the supply of qualified mechanic-hours is unchanged.
- Identify the market: the vertical axis is hourly wage and the horizontal axis is mechanic-hours employed per week. Households supply these hours; repair firms demand them.
- Higher demand for the repair service increases firms' derived demand for mechanics. Labour demand shifts right. Do not put the consumer price of repairs on the labour-market vertical axis.
- At the old wage, firms want more mechanic-hours than workers offer. With flexible wages, the wage rises; quantity of labour supplied extends and quantity demanded contracts along the new labour demand curve until a new equilibrium is reached.
- The equilibrium wage and employment in hours both rise, holding labour supply constant. The number of people employed need not rise by the same proportion because existing workers might work more hours.
- Later, more people qualify as mechanics. That can shift labour supply right. Relative to the position after demand rose, this pushes the wage down and hours employed up. Its effect on the wage compared with the original position depends on the relative demand and supply changes.
Watch out for this
Workers demand jobs, so they form the labour demand curve.
In this model, workers offer labour services and firms buy them. Workers therefore supply labour; employers demand it. Everyday language about wanting a job reverses the economic roles.
Check your understanding
More trained dental assistants become available in a town. Employers' demand for dental-assistant hours is unchanged. Under ordinary slopes and flexible wages, what happens?
- Labour demand shifts right; wage and employment rise.
- Labour supply shifts right; wage falls and employment in hours rises.
- Labour supply shifts right; wage and employment both fall.