Section 2 Labor and Wages
Objectives
After studying this section you will be able to:
- Analyze the relationship between supply and demand in the labor market.
- Understand the connection between wages and skill levels.
- Explain how laws against wage discrimination affect wage levels.
- Describe other factors affecting wages, such as minimum wage and workplace safety laws.
Section Focus
In a competitive labor market, laws of supply and demand are the main factors responsible for determining wages. Wages are also affected by skill levels and legislation prohibiting wage discrimination. Other factors, such as minimum wage laws, workplace safety laws, and labor unions also affect wages.
- derived demand
- productivity
- equilibrium wage
- unskilled labor
- semi-skilled labor
- skilled labor
- professional labor
- glass ceiling
- labor union
- featherbedding
If you are considering what career to pursue, you've probably thought about how much money you can earn in various professions. Most surgeons, for example, earn a lot of money. Social workers generally do not. Why? What determines the size of our paychecks?
It's a matter of supply and demand. Like eggs or airplanes or pet iguanas, labor is a commodity that is bought and sold. Wages are high in professions where supply is low and demand is high. Doctors, for example, are in relatively short supply but in high demand. Relatively large numbers of people become social workers compared to the number of social work jobs available. Hardly anyone needs a widget maker, so widget makers earn very little if anything at all. Thus workers' earnings—the price of labor—depend on conditions in the labor market.
Supply and Demand for Labor
Employment or unemployment in a labor market depends on how closely the demand for workers—the number of available jobs—meets the supply of workers seeking jobs. Let's examine how supply and demand operate in labor markets.
Labor Demand
The demand for labor comes from private firms and government agencies that hire workers to produce goods and services. In most labor markets dozens, or sometimes hundreds, of firms compete with one another to hire workers.
Demand for labor is a derived demand because it is derived, or set, by the demand for what a worker produces. For example, the demand for cooks in a market depends on the demand for restaurant meals.
In a competitive labor market, workers are usually paid according to the value of what they produce. For example, competition among restaurants results in a wage for cooks that reflects the cook's productivity. Productivity is the value of output, which in this example is the cost of a meal. Suppose that most of the restaurants in your city pay $12 an hour for cooks who generate $20 an hour in revenue for the restaurants. The possibility of profit will attract other restaurant entrepreneurs. Competition will push up the wage for cooks to nearly $20. As a result, cooks will be paid close to the value of their productivity. The flowchart in Figure 9.6 shows the ripple effect that occurs when the new restaurant hires cooks at a higher wage.
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