Question

Answer the following questions related to the labor market. Explain in words below to the best of your ability and place any graphical analysis on your scratch paper. In class, we analyzed various trends in the U.S. labor market and specifically noted that since 1970 there has been a slowed rate of increase in the real wage and we have seen an increase in the quantity of workers (i.e. an increase in N). Using the standard labor market supply and demand framework, can you explain this behavior?

Answer 1

The labour market includes the demand and supply of labour. The demand and supply of labour determine the equilibrium wage rate. The demand for labour means that the workers hired for the existing market wage rate and supply of labour mean that the labours available for the job in the market. Generally, the demand curve for labour is the downward sloping curve shows that there is an inverse relationship between wage rate and the demand for labour. The supply curve for the labour market shows that there is a positive relationship between the wage rate and the supply of labour. The point where both the demand and supply curve intersect is determined the equilibrium wage rate.

The demand and supply for the labour market are given the above graph. The x-axis is represented the number of workers, and the Y-axis represents the wage rate. The equilibrium wage rate is W, and equilibrium number of workers is in N. if the wage rate is increased to W to W1 then the equilibrium quantity of workers increased from N to N1, and if the wage rate is decreased from W to W2, then the quantity of workers decreased N to N2.

In the US since the 1970s shows the tendency of a decrease in the real wage rate and increase the quantity of employment. It is because of the shape of the production function. Because of the law of diminishing returns firms will hire more labour with law wage rate.