Because there are many different jobs and many different kinds of workers, there is no single labor market and no single wage. Instead, you can think of there being many different labor markets just as there are many different credit markets. Like different credit markets, different labor markets are linked: households may participate in more than one labor market, and most firms purchase many different kinds of labor. As with the credit market, we sometimes look at the market for a particular kind of labor and the economy as a whole. Most of the time in macroeconomics, it is sufficient to think about an aggregate labor market, as shown in ***Figure 4.12 "Equilibrium in the Labor Market". [***In Chapter 8 "Jobs in the Macroeconomy", we pay more attention to the fact that workers and jobs are not all identical.***] As the real wage increases, households supply more hours, and more households participate in the labor market. For both of these reasons, as the real wage increases, the quantity of labor supplied also increases. Labor demand comes from firms. As the real wage increases, the cost of hiring extra labor increases, and firms demand fewer labor hours. That is, the firm’s labor demand curve is downward sloping.
Toolkit: Section 16.1 "The Labor Market"
The labor market is the market in which labor services are traded. The supply of labor comes from households. At the equilibrium real wage, the number of hours supplied and the number of hours demanded are equal.
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