The Market for Work
The labor market is a market like any other, with households supplying labor and firms demanding it at a price called the wage.
Labor demand slopes downward because firms hire up to the point where a worker's contribution matches their pay. It is a derived demand: firms want workers only because customers want products.
Labor supply slopes upward: higher wages draw more people into work and more hours from them.
Where the curves cross, the equilibrium wage clears the market. When forecasting employment in a sector, look first at the demand for its products, not the workers.
| Curve | Source | Slope | Meaning |
|---|---|---|---|
| Demand | Firms | Downward | Derived from product demand |
| Supply | Households | Higher wages | Draws more workers and hours |
Wages and Unemployment
Wages differ systematically due to scarce skills (surgeons), compensating differentials (extra pay for dangerous night shifts), and human capital from years of training.
A minimum wage set above equilibrium raises pay for some but can price the least experienced out of work. Supply rises, demand falls, and the gap is measured unemployment.
| Unemployment | Cause | Nature |
|---|---|---|
| Frictional | Search time between jobs | Normal and healthy |
| Structural | Skill or location mismatch | Painful and persistent |
| Cyclical | Recession, demand collapses | Returns with recovery |