Labor supply and labor demand are two key concepts in macroeconomics that explain how the labor market works and affects the overall economy. In this article, you will learn what are the main determinants of labor supply and labor demand, and how they interact to determine the equilibrium wage and employment level.
Labor supply is the amount of labor that workers are willing and able to offer at different wage rates. It depends on various factors, such as the preferences, skills, and opportunities of workers, as well as the taxes, benefits, and regulations that affect their incentives and constraints. Generally, labor supply is positively related to the wage rate, meaning that workers tend to offer more labor when the wage is higher, and vice versa. However, this relationship may not be linear or constant, as workers may also consider the trade-off between leisure and income, the income and substitution effects, and the non-monetary aspects of work.
One relationship between wages and labour to consider is the efficiency wage theory which posits that employers must pay their workers high enough wages so that workers are incentivized to work productively and highly productive workers do not quit.
Aunque, en líneas generales, se acepta la relación directa entre el salario que recibe un trabajador o trabajadora y el número de horas que está dispuesto a trabajar, se podría dar el caso de que, traspasado un cierto umbral de salario, el trabajador prefiera disminuir el número de horas disponibles para el trabajo para disfrutar, en consecuencia de horas de ocio. Este hecho se reflejaría en la gráfica salario- horas disponibles para el trabajo con un tramo hacia atrás.
Labor demand is the amount of labor that firms are willing and able to hire at different wage rates. It depends on various factors, such as the productivity, profitability, and expectations of firms, as well as the demand for their products and services, and the technology and capital they use. Generally, labor demand is negatively related to the wage rate, meaning that firms tend to hire less labor when the wage is higher, and vice versa. This is because labor is a cost for firms, and they seek to minimize their costs and maximize their profits.
Nowadays technology plays a major role in determining labor demand with the increasing adoption of automation in various industries.
Labor market equilibrium is the point where labor supply and labor demand are equal, meaning that there is no excess supply or excess demand of labor. At this point, the wage rate is called the equilibrium wage, and the employment level is called the equilibrium employment. The labor market equilibrium reflects the optimal allocation of labor resources in the economy, as workers are paid according to their marginal productivity, and firms hire labor according to their marginal revenue product.
To understand how the labor market works and how the figure of the equilibrium salary subsequently appears in said marketz A labor market is one in which people offer their work capacity to companies in exchange for a salary, and also one in which a person or organization can look for employees to do a job. In this theory, it is understood that work is like any other resource and it is the market that determines the allocation of work and its costs, that is, it is the market that determines that people work in a certain place for a specific salary. . The general economic law of supply and demand also helps to understand how the labor market works. For example, if the price of labor falls, employers will be willing to hire more workers.
Labour market equilibrium is seldom achieved in real life as wages are sticky downwards i.e. the amount of labor supply might increase but proportionately the wage rate rarely decreases.
The labor market equilibrium can change over time due to shifts in labor supply and/or labor demand. A shift in labor supply means that workers change their willingness or ability to offer labor at different wage rates, holding everything else constant. A shift in labor demand means that firms change their willingness or ability to hire labor at different wage rates, holding everything else constant. A shift in either curve can affect the equilibrium wage and employment level, as well as create a temporary surplus or shortage of labor.
Changes in population size, age structure, migration, education, or health can influence the number and quality of potential workers in an economy. Similarly, shifts in preferences, attitudes, or social norms can affect the work-leisure trade-off, the labor force participation rate, or the hours worked by workers. In addition, taxes, benefits, or regulations can alter the net income or opportunity cost of working, or the eligibility or constraints of workers – all of which can cause a shift in labor supply.
I would add how technology shifts the labor supply by increasing worker productivity. Going from the typewriter to the computer shifts the labor supply curve because the computer makes the work easier and more efficient. Furthermore, technology reduces toil or manual work through automation. Innovations such as canned email responses and Q + A chatbots remove the rudimentary tasks allowing employees to focus on more important work.
Another thing to consider are the labor or trade unions who collectively bargain the wages of labor. Minimum wages are not always market determined. They are rather fixed by either collective bargaining by labor unions or by government regulation. As such they can cause shifts in the labor supply. If minimum wages are high enough firms might consider hiring less labor or try to use labor saving technology in their production process.
The demand for labor can be affected by various factors, such as changes in consumer preferences, income, or expectations, which can influence the demand for products and services. Technological advances, innovation, or competition may also impact the productivity, profitability, or market share of firms. Additionally, capital, energy, or other inputs can affect the complementarity or substitutability of labor with other factors of production.
Skills are nowadays very important to consider when talking about labour demand. In today's age of technology there is always demand for technically skilled personnel. There is often a demand supply mismatch when it comes to skilled labor. So people should try to skill themselves with the in demand skill to be employed at better wages.
The assumption on which the labor market model is based has been rejected long ago i.e perfect information but yet it appears in text books. While the dynamic monopsony model of the labor market which captures the behavior of labor market participants more accurately is not even discussed. Hence, there is bias in the text book approach as it over-emphasize the neoclassical theories irrespective of the fact these models have less to do with reality. Furthermore, the possibility of mutliple equibira that may exist in the labor market due to information asymmetry are also ignored in most of the microeconomics and macroeconomics textbooks. Moreover, such alternative perspectives of the labor market must be added in textbooks.
Here are some additional Determinants of Labor Supply: geographic mobility, health and well-being, work-life balance policies, childcare availability and costs. Some additional Determinants of Labor Demand are: economic conditions, industry growth, regulatory environment, business cycles, employer expectations. Textbook determinants of Labor Supply, are: wage rates, working conditions, education and training, demographic changes, cultural and social factors, non-labor income, government policies, and technological changes. As for textbook determinants of labor demand are some of the same as above plus productivity of labor, demand for goods and services, substitute and complementary inputs, cost of capital, market structure and competition.
Do we have the same "labour market" for stall vendors and astronauts? It is useful to read further on topics regarding "fallacy of composition", "deep markets", measurement scales, and scale-free measurement.
the main determinants of labor supply are wage rates, non-monetary benefits, population and demographics, education and training, cultural and social factors, and government policies.The primary determinants of labor demand are wage rates, productivity and technology, demand for goods and services, business cycle, government regulations, and globalization.
According to the World Economic Forum, technological advances will allow the creation of 97 million new jobs worldwide in just 2 years. These positions will require skills and knowledge such as Artificial Intelligence, Business Intelligence, Data Analytics, Cloud, Mobility, Digital Twins, Machine Learning, among others. According to the information provided by Statista, it can be stated that the artificial intelligence market is experiencing explosive and constant growth, proof of this is that it is expected that this year it will close at US$ 165 billion, by 2024 it is projected the figure of US$227 billion, in 2025 at US$314 billion and by 2030 the figures are even more encouraging, a value greater than US$1,591 billion is expected.