Labor Demand

Introduction to Labor Markets

We have already studied how the market functions when buyers and sellers are dealing with goods and services: firms supply goods and services in response to the equilibrium price, and households buy these goods and services in response to the equilibrium price. The combined effects of their decisions and behavior determine whether the market equilibrium stays steady, or if it shifts with changes in the supply and demand curves.

Similarly, there is a market for labor: individuals decide how willing they are to supply labor (hours of work), and firms decide how willing they are to buy labor. (Note that in labor markets supply and demand are the reverse of that for goods and services markets: in labor markets, firms make up labor demand, and individuals make up labor supply). The combination of supply and demand curves for labor determines how much labor is purchased, and at what price. (Labor price is usually called a wage, the amount of money paid for a unit of work). Firms decide how much labor they want based on the wage and the amount of work they need to get done. Individuals decide how much labor they want to supply based on the wage and the trade-off between consumption and leisure, as seen in the Labor Supply unit.

In this unit, we will study Labor Demand: examining the behavior of firms in the labor market, learning how labor demand curves are determined, and observing market equilibrium.