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.
Labour Supply
The labour supply curve shows the quantity of labour that workers are willing and able to offer at different wage rates. Generally, the labour supply curve is upward sloping, reflecting the fact that higher wages incentivize more people to enter the workforce and work more hours.
Key determinants of labour supply include:
Wage rate: Higher wages generally increase labour supply.
Population size: A larger population typically leads to a larger labour supply.
Social preferences: Factors like the desire for leisure and work-life balance can influence labour supply.
Other economic opportunities: The availability of other income sources (e.g., unemployment benefits) can affect labour supply.
Labour Demand
The labour demand curve shows the quantity of labour that firms are willing and able to hire at different wage rates. Generally, the labour demand curve is downward sloping, reflecting the fact that as wages rise, firms will demand less labour.
Key determinants of labour demand include:
Product price: Higher product prices increase the demand for labour to produce more goods or services.
Technology: Technological advancements can increase or decrease the demand for labour, depending on whether they substitute for or complement labour.
Productivity of labour: Higher productivity of labour allows firms to demand more labour at the same wage rate.
Cost of other inputs: The prices of other inputs (e.g., capital, raw materials) can influence the demand for labour.
Equilibrium Wage Rate and Employment
The equilibrium wage rate is the wage at which the quantity of labour supplied equals the quantity of labour demanded. This point is where the supply and demand curves intersect.
At the equilibrium wage rate, the quantity of labour employed is determined by the intersection of the supply and demand curves. This represents the optimal level of employment in the market.
Suggested diagram: Supply and demand curves for labour intersecting at the equilibrium wage rate and quantity of labour.
Wage Rate
Quantity of Labour Supplied
Quantity of Labour Demanded
$W_1$
$S_1$
$D_1$
$W_2$
$S_2$
$D_2$
Impact of Government Intervention
Governments often intervene in labour markets to address perceived market failures, such as wage inequality or unemployment. These interventions can have a significant impact on the equilibrium wage rate and employment level.
Minimum Wage: A minimum wage is a legal minimum price that employers must pay their workers. If the minimum wage is set above the equilibrium wage, it will lead to a surplus of labour and unemployment.
Unemployment Benefits: Unemployment benefits provide a safety net for workers who have lost their jobs. These benefits can increase labour supply by reducing the disincentive to search for work.
Job Training Programs: Government-funded job training programs can improve the skills of the workforce and increase labour demand.
Trade Unions: Trade unions represent the interests of workers and can negotiate for higher wages and better working conditions. This can shift the labour supply curve to the right, leading to a higher equilibrium wage rate and employment level.
Conclusion
The equilibrium wage rate and employment level in a perfectly competitive labour market are determined by the forces of supply and demand. Government interventions can influence this equilibrium, but they can also have unintended consequences. Understanding these forces is crucial for analyzing labour market issues and evaluating the effectiveness of government policies.