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Economic Theory

Figure 4.1 – Labor Market Equilibrium

Labor demand comes from firms. As the real wage increases, the
marginal cost of hiring more labor increases, so each firm demands fewer
hours of labor input – that is, a firm’s labor demand curve is downward

sloping. The labor demand curve of a firm is shifted by changes in
productivity. If labor becomes more productive, then the labor demand
curve of a firm shifts rightward: the quantity of labor demanded is higher
at a given real wage.

Labor market equilibrium: the real wage and the equilibrium quantity
of labor traded are determined by the intersection of labor supply and labor
demand. At the equilibrium real wage, the number of hours supplied and

the number of hours demanded are equal.
Shifts in labor demand. The demand curve for labor shows the
quantity of labor employers wish to hire at any given salary or wage rate,
under the ceteris paribus assumption. A change in the wage or salary will

result in a change in the quantity demanded of labor. If the wage rate
increases, employers will want to hire fewer employees. The quantity of
labor demanded will decrease, and there will be a movement upward along

the demand curve. If the wages and salaries decrease, employers are more
likely to hire a greater number of workers. The quantity of labor demanded
will increase, resulting in a downward movement along the demand curve.

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