The Labor Market

Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License.

The story about the housing market in the United Kingdom at the beginning of this chapter contained some dire predictions about employment:

The lack of spending in these areas will hit employment, with some analysts forecasting that the construction sector alone could see a loss of up to 350,000 jobs within the next five years.

To understand this prediction, we need to look at another market—the labor market.

In the markets for goods and services, the supply side usually comes from firms, and the demand side comes from households. In the labor market, by contrast, firms and households switch roles: firms demand labor, and households supply labor. Supply and demand curves for construction workers are shown in ***Figure 4.10 "Equilibrium in the Market for Construction Workers". Here the price of labor is the hourly real wage that is paid to workers in this industry.

Toolkit: Section 16.1 "The Labor Market"

The real wage is the wage corrected for inflation. To obtain the real wage, simply divide the wage in dollars—the nominal wage—by the price level:

The individual demand for labor by firms comes from the fact that workers’ time is an input into the production process. This demand curve obeys the law of demand: as the real wage increases, the quantity of labor demanded decreases. At a higher real wage, a firm will demand less labor services (by hiring fewer workers and/or reducing the hours of workers) and will respond to the higher labor cost by reducing production.

Workers care about the real wage because it tells them how much they can obtain in terms of goods and services if they give up some of their time. The supply of labor comes from households who allocate their time between work and leisure activities. In ***Figure 4.10 "Equilibrium in the Market for Construction Workers", the supply of labor is upward sloping. As the real wage increases, households supply more labor because (1) higher wages induce people to work longer hours, and (2) higher wages induce more people to enter the labor force and look for a job.

　

Figure 4.10 Figure 4.10 Equilibrium in the Market for Construction Workers 

This picture shows the supply of and demand for hours of work in the construction industry. 

　

Figure 4.11 Figure 4.11 A Decrease in Demand for Construction Workers 

Because builders are building fewer houses, they hire fewer construction workers, causing the labor demand curve to shift leftward.