In a perfectly competitive labour market, the equilibrium wage rate and employment level are determined by the forces of supply and demand. This section will explore these forces and illustrate the resulting equilibrium.
Supply of Labour
The supply of labour represents the number of workers willing and able to work at different wage rates. Generally, the supply curve is upward sloping, indicating that as the wage rate increases, more people are willing to enter the labour market.
Factors influencing the supply of labour include:
Population size
Participation rate (proportion of the population in the workforce)
Demographic changes (age structure of the population)
Preferences for leisure vs. work
Immigration and emigration
Demand for Labour
The demand for labour represents the quantity of workers that firms are willing and able to hire at different wage rates. Generally, the demand curve is downward sloping, indicating that as the wage rate increases, firms will demand fewer workers.
Factors influencing the demand for labour include:
Demand for the goods or services produced by the labour (influenced by consumer preferences and income)
Productivity of labour (higher productivity increases demand)
The cost of other inputs (e.g., capital, raw materials)
Technology (technological advancements can impact demand)
Equilibrium Wage Rate and Employment
The equilibrium in the labour market occurs where the supply and demand curves intersect. At this point, the quantity of labour supplied equals the quantity of labour demanded.
The equilibrium wage rate is the wage at which the quantity of labour supplied equals the quantity of labour demanded. The corresponding quantity of labour is the equilibrium level of employment.
Suggested diagram: A standard supply and demand diagram with labour on the vertical axis and wage on the horizontal axis. The intersection point represents the equilibrium wage and employment level.
Shifts in Supply and Demand
Changes in factors influencing the supply or demand for labour will cause the respective curves to shift, leading to a new equilibrium wage rate and employment level.
Increase in Supply: A shift to the right of the supply curve will lead to a higher equilibrium wage rate and a higher equilibrium level of employment.
Decrease in Supply: A shift to the left of the supply curve will lead to a lower equilibrium wage rate and a lower equilibrium level of employment.
Increase in Demand: A shift to the right of the demand curve will lead to a higher equilibrium wage rate and a higher equilibrium level of employment.
Decrease in Demand: A shift to the left of the demand curve will lead to a lower equilibrium wage rate and a lower equilibrium level of employment.
Impact of Government Intervention
Governments may intervene in the labour market through various policies, which can affect the equilibrium wage rate and employment level.
Examples of government intervention include:
Minimum Wage Laws: A minimum wage is a legal minimum price that employers must pay for labour. If the minimum wage is set above the equilibrium wage, it will lead to a surplus of labour (unemployment).
Wage Controls: Wage controls are legal limits on the amount that employers can pay their workers. If set below the equilibrium wage, they can lead to a shortage of labour.
Unemployment Benefits: Unemployment benefits provide income support to unemployed individuals. This can potentially affect the incentive to search for work and the duration of unemployment.
Job Training Programs: These programs aim to improve the skills and productivity of the workforce, potentially shifting the supply curve to the right and increasing employment.