Labor and Factor Market
Table of Contents
This section covers the following topics:
- The labor supply curve
- The labor demand curve
- Price ceilings and floors in the labor market
- Labor unions
- Monopsonists and bilateral monopolies
Section Summary
The labor supply curve is upward sloping, as people are more willing to work for higher wages. However, as a person’s income increases, two competing forces come into play. The substitution effect pushes people to work more, as the cost of leisure is effectively higher, while the income effect pushes people to work less so that they can enjoy their income. The elasticity of labor supply depends on the nature of the labor market as well as the individual situations of the workers.
The labor demand curve is downward sloping, as firms will hire fewer employees if they have to pay higher wages. The labor demand curve is a derive demand curve, as it is based on the ultimate demand for the firm’s products in the marketplace. The elasticity of labor demand depends on a few different factors.
Price ceilings and price floors on wage levels create shortages and surpluses, respectively. Minimum wage laws, for example, benefit people who have a job but prevent others from finding a job at all.
Labor unions are groups of workers that collectively negotiate contracts and may stop working all at the same time (go on strike) for leverage. Labor unions will generally attempt to lower the number of workers hired and raise the average wage.
Sometimes there is only one buyer of labor (a monopsonist). A monopsonist will hire fewer workers than a perfectly competitive firm would. A bilateral monopoly has one buyer of labor and one seller (one labor union).
Introduction
Labor is one of the many inputs that are required to supply a good or service. The market for labor is an example of a factor market, but is special because political and social forces are very influential.
