Economics
Equilibrium in Labour Market
Equilibrium in the labor market refers to the point where the supply of labor matches the demand for labor, resulting in a balance between the number of workers seeking employment and the number of job opportunities available. At this equilibrium, the wage rate is stable, and there is no excess supply or demand for labor. Any changes in supply or demand can disrupt this equilibrium.
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11 Key excerpts on "Equilibrium in Labour Market"
eBook - PDF- S.G. Hall, S.G.B. Henry(Authors)
- 2014(Publication Date)
- North Holland(Publisher)
Chapter 3 1. Introduction This chapter considers material which is rather different from that in the other chapters and will explore the estimation and application of disequilibrium modelling techniques. The example of the labour market used in Section 4, however, will extend material used in Chapter 1 to the disequilibrium case. The concept of equilibrium is obviously an important one in economics but it is not entirely unambiguous. Equilibrium is sometimes taken to mean that demand is equal to supply (in all markets if more than one market is being considered); an alternative definition is that the economic system is f at rest 1 and so there are no forces tending to bring about change. These two definitions are not identical, we can for example consider the equilibrium position for a monopolist who fixes a market price subject to a known demand curve. The system has no tendency to move and is in equilibrium in the second sense but clearly demand does not equal supply and the first definition of equilibrium is inappropriate. This concept of an equilibrium which is defined by an absence of change is fundamental to much of the theoretical literature on disequilibrium or temporary equilibrium which has grown out of the work of Clower (1965) and Leijonhufvud (1968). In its most fundamental form we can model a market with the DISEQUILIBRIUM MODELS Ö 9 90 S.G. Hall and S.G.B Henry following two equations 1t (1) 2t (2) Equation (1) is a demand curve, which relates demand for any good to its real price (P ), a set of other factors Ζ , which may be a vector, and t u U* lt a stochastic error term. Equation (2) similarly relates supply to the price of the good, a set of other factors and an error term u* 2t . The coefficient vectors B 1 and are such that the model is identified. These two equations are common to all forms of market analyses, the various approaches differing in their assumptions about what is observed and how the real price is determined.
eBook - PDF- Martha L. Olney(Author)
- 2015(Publication Date)
- Wiley(Publisher)
Why does the labor demand curve slope down? LABOR MARKET EQUILIBRIUM Bringing together labor supply and labor demand determines the wage. Figure 9.3 illustrates. Labor supply increases as wages increase over most of the range of wages. Labor demand decreases as wages increase. The intersection of labor supply and labor demand determines the equilibrium or market wage, w*, and the equilibrium quantity of labor, q*. If the wage is above the market wage, the quantity of labor supplied exceeds the quantity of labor demanded. If the wage is too high, more workers will want jobs than businesses are willing to hire. Some workers will be unemployed. The wage will be bid down until it reaches the equilibrium wage, w*. If the wage is below the market wage, the quantity of labor supplied will be less than the quantity of labor demanded. If the wage is too low, businesses will want to hire more workers than are available. There will be lots of “Help Wanted” signs and job listings. The wage will be bid up until it reaches the equilibrium wage, w*. Wage w* q* D L S L Quantity of labor Figure 9.3 Labor market equilibrium. The labor market is in equilibrium when the quantity of labor demanded equals the quan- tity of labor supplied. Here, the equilibrium wage is w* and the equilibrium quantity of labor is q*. Labor Market Equilibrium 125 Changes of Labor Market Equilibrium It is important to know the difference between movements along and shifts of the supply and demand curves. Any time the wage changes, there is a movement along a curve. If anything else that affects labor supply or labor demand changes, the entire curve shifts. Shifts of Labor Supply The labor supply curve captures the labor–leisure tradeoff of workers. A change in tastes or in institutions that alters our desire to work can shift the labor supply curve. More white married women entered the U.S. labor force in the 1970s. Political movements, legal changes, and other causes lay behind the increase.
eBook - ePubLabour
A Heterodox Approach
- Jean Vercherand(Author)
- 2014(Publication Date)
- Palgrave Macmillan(Publisher)
Figure 2.1 at the beginning of this chapter). Under these conditions, there should be no involuntary unemployment.Thus a contraction of global demand in consumer goods will impact labour demand, and a new balance will be found with a lower wage rate, which again equalises the quantities of labour supplied and demanded. The reverse occurs in the case of an extension of labour demand. For this, the labour market must remain perfectly competitive: there must be no barrier to prevent the adjustment between the quantities of labour supplied and demanded made possible by flexible wage rates. Figure 2.7 , which can be found in most manuals on microeconomics and the economics of labour, illustrates this rebalancing mechanism on the labour market (with labour demand diminishing from D to D’).In this representation of how the labour market works, involuntary unemployment can only stem from exogenous influences that disturb and prevent wage rate flexibility and the equalisation of the quantities of labour supplied and demanded. In particular, two types of disturbance can be underlined:
eBook - PDFDevelopment Economics
Theory, Empirical Research, and Policy Analysis
- Julie Schaffner(Author)
- 2013(Publication Date)
- Wiley(Publisher)
The upward-sloping labor supply schedule S in Figure 9.2c indicates the total quantities of labor supplied by all low-skill workers in the economy at each wage. Because workers are perfectly mobile, it makes sense only to describe their total supply and not their supplies to Producer 1 and Producer 2 separately. The labor market achieves equilibrium when no producer would prefer to hire or fire workers, every worker is content to remain in his current job, and every potential worker who is not working is content to remain out of the labor force. We ignore the possibility of international migration, so that we can focus more clearly on the developmental roles of domestic labor markets. With employers perfectly competitive and workers perfectly mobile, the two employers must pay the same wage in labor market equilibrium. If Producer 1 paid a higher wage than Producer 2, Producer 1 would have an incentive to steal Producer 2’s workers by offering them wages just above Producer 2’s low wage. To avoid being replaced by such outsiders, Producer 1’s workers would have to accept wage cuts. To avoid losing all his workers, Producer 2 would have to raise his wage. This process would continue until the two producers offered the same wage. Labor market equilibrium also requires that the total quantity of labor demanded by both employers at the equilibrium wage equal the total quantity of labor supplied at that wage. Thus, the equilibrium wage w* and equilibrium total employment (L 1 * + L 2 *) are found at the inter- section of the total supply and demand schedules in Figure 9.2c. We find the equilibrium quantities of labor employed by individual producers by drawing a horizontal line at the height of the equilibrium wage and observing where it intersects the VMPL schedules in the first two panels. In the equilibrium depicted in Figure 9.2, Producer 1 employs L 1 * units of labor and Producer 2 employs L 2 *.
eBook - PDFThe Economics of Imperfect Labor Markets
Second Edition
- Tito Boeri, Jan Ours(Authors)
- 2013(Publication Date)
- Princeton University Press(Publisher)
1.2.3 A Perfect Labor Market Equilibrium Figure 1.5 depicts a downward-sloping labor demand together with an upward-sloping aggregate labor supply. In a perfect labor market the equilibrium wage level w ∗ will lie at the intersection of the two curves. It is important to notice that there is only one wage level being determined at the equilibrium in this context. Thus, workers with a reservation wage strictly lower than w ∗ will realize a positive surplus from participating in the labor market. The sum of all these individual surpluses is given by the shaded area ( W s ) below the equilibrium and above the labor supply curve. Firms will also realize some surplus or profits. This is depicted as the shaded area ( F s ) above the equilibrium wage and below the labor demand schedule. Workers with a reservation wage larger than w ∗ will instead decide not to work. In other words, L ∗ = G(w ∗ ) will be the employment rate (the fraction of the working-age population holding a job), while 1 − G(w ∗ ) will be the equilibrium nonemployment rate. Notice that the equilibrium wage level may well be in a flat segment of the labor supply curve. In this case there will be individuals with w r = w ∗ who are not working, even if they are willing to work at the equilibrium wage. These individuals are, strictly speaking, unemployed , as denoted by the segment U in the right-hand panel of figure 1.5, although they do not suffer any welfare loss from not working ( w r = w ∗ means that they are just indifferent between working and not working). All other nonemployed individuals are inactive, according to the internationally accepted definitions of labor market status reviewed in section 1.1. w w L s ( w ) F s W s L d ( w ) L L B C A U w w L s ( w ) L d ( w ) L L A (a) Firms’ and workers’ surplus (b) A flat segment of labor supply FIGURE 1.5 Equilibrium in a competitive labor market 14 1. Overview
eBook - PDF- Frank Burchill(Author)
- 2017(Publication Date)
- Red Globe Press(Publisher)
If the demand for products grows, other things being equal, employers will demand more of the factors of production. To the extent that capital cannot be substituted or is relatively more expensive, employers will want more labour and THE MARKET FOR LABOUR 15 will offer to pay more for it. Thus, more labour will make itself available and more labour will be employed. If the demand for a particular product grows – for example, computer games – there will be an increase in the demand for those who are capable of programming such games, the pay offered to them will rise and such people will be attracted both from preferring leisure at lower wages and from other occupations. As such when people leave other occupations the pay in those occupations they have left will also rise. As pay levels between occupa-tions are equalised, mobility ceases, having ensured a shift of labour towards the production of computer games. Wages are thus determined by the demand for, and supply of, labour. In this model anyone who wishes to work can approach an employer who uses the type of labour the person can supply and secure work at the current rate or at a rate slightly lower. If the employer has all the workers required at the current rate then an offer to work at a slightly lower rate enables the employer to reduce pay for everybody to that rate and use the savings to employ additional labour. (This result is achieved by the process of offering dismissal to the nearest employee, pointing out that the new one is prepared to work at a lower rate. This employee will probably accept the slight reduction rather than volunteer to leave. If all employees behave in the same way, savings can be made, and labour will become cheaper relative to capital.) It follows that the lower the rate labour is willing to accept, the greater the quantity of labour employed. There will be a rate which would result in everybody being in work.
- Roy Rotheim(Author)
- 2013(Publication Date)
- Taylor & Francis(Publisher)
Figure 7.8 ).Figure 7.8This result deserves a brief comment. The maximum level of labour demand is the amount of labour force that firms want to hire when—being the observed level of employment zero—the ratio between the work effort and the wage rate is at its maximum. In other words, it is the level of labour demand expressed by firms when workers do not shirk at all and the wage rate is fully downward flexible. The analysis carried out here has therefore shown that if an ‘efficiency wage unemployment equilibrium’ exists, it will be stable only if firms would not hire the existing amount of labour force even when workers did not exhibit any propensity to shirk and the wage rate were perfectly flexible. The interesting result is that a hypothetical ‘efficiency wage unemployment equilibrium’ is stable only if unemployment is to be explained by referring to causes different from those highlighted by the efficiency wage theory. The Appendix (see A.4) shows that such a result, here obtained by assuming thatΣis a linear function of LaL i
- Tito Boeri, Jan van Ours(Authors)
- 2021(Publication Date)
- Princeton University Press(Publisher)
fraction of the working-age population holding a job), while 1 − G ( w ∗ ) will be the equilibrium nonemployment rate (defined in section 1.5). Notice that the equilibrium wage level may well be in a flat segment of the labor supply curve. In this case there will be individuals with w r = w ∗ who are not working, even if they are willing to work at the equilibrium wage. These individuals are, strictly speaking, unemployed , as denoted by the segment U in the right-hand panel of figure 1.11, although they do not suffer any welfare loss from not working ( w r = w ∗ as they are just indifferent between working and not working). All other nonemployed individuals are inactive, according to the internationally accepted definitions of labor market status reviewed in section 1.5. In a perfect labor market there is no total surplus associated with the marginal job. Neither the worker nor the employer enjoys any rent with respect to their outside options. In other words, it is a market where y = w and w = w r , so that also y = w r ; that is, wages are ultimately immaterial at the equilibrium: They simply align the value of the job to the employer to the reservation wage of the worker. Put another way, employers and workers are indifferent between continuing or terminating any job rela-tionship. Losing a worker for an employer or losing a job for an employee is not a big deal. Another worker or job can be found instantaneously without suffering any loss in profits or reduction in well-being. The mar-ket is transparent, workers and firms are perfectly informed about wages and labor services offered by other workers-firms, and there are no fric-tions or costs (e.g., no time related to job search and no transportation costs when going to job interviews) involved in the matching of workers and vacancies—that is, of labor supply and demand.
- G.C. Harcourt(Author)
- 2019(Publication Date)
- Routledge(Publisher)
The lower is x, the tighter is the labour market and the lower is the productivity of the conditional firms. The derivative of output with respect to x is Q'(x)=~ (v+x:)N/2 . v =(1-x)-N 2x (6) Output increases with x over the whole range of x, so the optimum occurs at x = 1, where all firms hire conditionally. It is inefficient to hold any labour in reserve within any firm; even though the method of placing workers in jobs is severely limited, it is less costly than placing workers in firms with only a 50 per cent probability of being productive. 1 This vacancy rate is the number of firms idled by lack oflabour. It should be distinguished from the vacancy rate for jobs as collected by the government. Firms with vacant jobs may still operate at capacity if the firms are looking for workers in antici-pation of future needs. 358 Microeconomic Foundations of Macroeconomics Next I will investigate market equilibrium in this model. I define equi-librium as the absence of opportunity for any individual economic agent to improve his situation. (Supply and demand for labour need not be equal in the model, so the usual definition of competitive equilibrium does not apply.) Two conditions are required for equilibrium defined in this way. First, if both employment strategies co-exist in the market, they must be equally profitable -were one strategy more profitable than another, the second would not be used. Second, employment must be equally attractive in the two kinds of firms. I will assume the absence of risk aversion among workers and employers. The only unattractive feature of the open labour to workers is the reduction in expected income associated with unemployment, not the uncertainty it causes. Then if the wage for stable employment among unconditional firms is w, the suitably higher wage in the open labour market with unemployment rate u is -1 w .
eBook - PDF- Steven Landsburg(Author)
- 2013(Publication Date)
- Cengage Learning EMEA(Publisher)
At any given wage, we read each individual ’ s quantity supplied from his own supply curve; then we add these quantities to get the quantity of labor supplied to the market. There is also a market demand for labor, which we know from Chapter 15 coin-cides with the MRP L curve. Putting the supply and demand curves together, we can find the point of labor market equilibrium. Now we can use the machinery of supply and demand to analyze the effects of some simple changes. To carry out the exercises of this section, we assume that the labor supply curve is upward sloping. Changes in Nonlabor Income Part A of Exhibit 16.8 illustrates what happens when a single worker experiences an increase in nonlabor income, such as an unexpected inheritance. The labor market (depicted in the left-hand panel) is in equilibrium at the wage W . The individual worker, who is a competitive supplier in the labor market, then faces a flat demand curve for his services at that wage. His initial supply curve is s in the right-hand panel, and he supplies L units of labor. 1 E. Prescott, “ Why Do Americans Work So Much More Than Europeans?, ” Federal Reserve Bank of Minneapolis Quarterly Review 28, July 2004. 2 A. Alesina, E. Glaeser, and B. Sacerdote, “ Work and Leisure in the U.S. and Europe: Why So Different?, ” Harvard Institute of Economic Research Discussion Papers 2068, April 2005. THE MARKET FOR LABOR 507 Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
eBook - PDF- Sherwin Rosen(Author)
- 2007(Publication Date)
- University of Chicago Press(Publisher)
Assuming that firms do not realize that wage rates affect the behavior of labor supply strikes me as unrealistic. If firms realize that the supply of labor depends on wages they offer, then the problem of characterizing equilibrium reduces to the problem of choosing wages w1 and w2 so as to maximize expected utility subject to the budget constraint 4 w 1 -Xl) + a 2 R(WZ)(WZ - XZ) = 0 where ai = probability of state i, wi = wage paid in state i, Xi = amount produced in state i, and R(wZ) = probability that a worker quits in un- favorable state given a wage w2. In this formulation, firms recognize that the quit rate R will change as wage w2 changes. The budget constraint guarantees zero expected profits for firms. The equilibrium (wl, w2) will be a tangency-in (wl, w2) space-between the indifference curves and the budget constraint. It is a simple exercise to show under the assump- tions of the model that along an indifferencesurface d2wzldwl2> 0, while along the budget constraint d2w2/dw12 C 0. This means that there can be at most one tangency between the indifference curves and the budget constraint-hence we obtain a unique equilibrium. The possibility of explaining black-white earning differentials as arising from multiple equilibria vanishes. I find it disturbing that relaxing what appears to be an overly restrictive assumption fundamentally changes one of the model’s results. I therefore doubt that much of the black-white earnings inequality can be attributed to the multiple equilibria story. Nevertheless the model is a rich one with many empirical applications. For example, the model makes predictions about the relation of wage rates and reliability, and about quit rates in booms. I would encourage the authors to analyze these issues with their insightful model. References Azariadis, C. “Implicit Contracts and Underemployment Equilibria.” Journal of Political Economy 83 (December 1975): 1183-1202.
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