EQUILIBRIUM IN THE LABOUR MARKET

Objectives:

Equilibrium in the labour market is where supply equals demand. The wage at this point is the market wage or the market clearing wage.
No worker who wants a job at this wage rate or a lower one is without a job. They are employed.
No firm who wishes to hire people at this wage rate (or higher) has vacancies. The market at this point has cleared.
Any worker who is not prepared to work for this wage rate is without a job and is voluntarily unemployed and is without work. (The area to the right of equilibrium).

In the long term quantity supplied of labour will change in a response to real wages.

Real Wages are the purchasing power of a persons wage. It takes into account inflation. This can be compared with a persons nominal wage which is the wage rate a person receives in their hand - the dollar amount of their wage.

If the real wage rate rises above the equilibrium wage rate then more workers will be supplied than is demanded by the market – a surplus of workers. This will create a involuntary unemployment because these workers want a job but are unable to find one.
Anything above this point is voluntary unemployment � even at this higher wage rate they don�t want a job.

 

 

 

 

 

Increasing Wages.
Consider the fact that we look at real wages. If prices in an economy are increasing (inflation) then workers will want a wage increase to compensate themselves for the increase in the cost of living (a decrease in their real wage).
With inflation the real wage rate decreases and so there is disequilibrium in the labour market.

This will create a shortage of workers and so the real wage rate will increase removing he shortage, with the labour market going back to the equilibrium.

DISEQUILIBRIUM IN THE LABOUR MARKET

Wages in an economy tend to be ‘sticky� This means that wages will rise much more easily than they will fall. Labour markets are very rigid when it comes to falling wage levels.
Some of the main reasons are

  • Strong trade unions – they are able to keep wages above the equilibrium as they can operate as a monopoly supplier of labour.
  • Firms tend not to hire cheap labour as this could backfire with lower skilled workers and lower levels of productivity.
  • Firms tend to want to hold onto existing skilled / experienced workers as re-training new workers can be costly.
  • The idea that a job may have an intrinsic value or worth, regardless of demand and supply.
  • The influence of humanising values can be strong.

    • Impact Of A Minimum Wage

    A minimum wage means that the wage rate is set above the equilibrium wage rate by law.
    This means that wages are not allowed to fall to the equilibrium wage level. And so the quantity of labour demanded by firms will fall, but the quantity of labour supplied will increase.
    This will mean there is a surplus of workers in the market. People who want to work at the minimum wage rate but are unable to find a job and so are involuntary unemployed.
    Employment will decrease as the quantity of labour demand falls.
    At the higher wage rate voluntary unemployment will decrease as more people are willing to work.

    FLEXIBILITY IN THE LABOUR MARKET
    Flexibility is the willingness and ability to adapt to changing conditions. The adaptation might mean

  • accepting a lower wage rate,
  • moving to another area where there are work opportunities,
  • or retraining in a different type of occupation.

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