The Concept of Supply and Demand in the Labor Market - Essay Example

The article summarizes the current situation of the economy of the United States and comments on the different policies and initiatives taken by the government. The writer, with the help of this article, wants to explain the changing attitude of the consumers in the market of the United States. The ongoing decreases in the income level have resulted in the generation of feelings against the government of the United States. There has been around a 9.8 percent decline in the national income, for the period starting from the recession till June 2011, which is the highest in previous decades (Pear).

Although there has been a slight improvement in the unemployment rate, the overall wage rate has been stagnant or decreasing. Different factors have been identified for this by the writer like an increasing number of people looking for jobs, people are ready to work at low wages, and the wage rate per hour is not able to cover the increase in the overall cost because of inflation (Pear). Along with this, the writer has presented the ideas of different economists and analysts, who are of the view that the recession has not yet ended for the economy of the United States of America. People are facing serious issues because of the lack of jobs and reduced wage rates. As a result, overall spending has also decreased.
EVALUATION AND EXPLANATION OF THE ARTICLE:

In the article, Pear has provided different statistics to prove the decline in the overall household income and take-home wages. The article presents different reasons behind the decline of these wage rates and national income. One main reason is the growing unemployment rate, there are an increasing number of people who are looking for jobs out there. Owing to the increase in the unemployment rate, people working in different organizations cannot demand salary increases. Unemployed people are ready to work at low wage rates, which further put downward pressure on the average wage rates in the United States.

This change can be explained with the help of the concept of supply and demand in the labor market. It has been known through the concept of Marginal Productivity, that there is an inverse relationship between the wage rate and the demand for labor. On the other hand, the supply of labor is directly related to the wage rate. If the supply of labor is more than the demand for labor, a situation that results in unemployment, the overall wage rates in the economy decrease considerably (Mankiw, 376-388).

The decreased wage rate and increasing unemployment level have a direct impact on the consumption and spending of the consumers which in turn influence the total GDP and output of any economy. The total output or GDP consists of different components namely: private consumption, government spending, investments, and net exports i.e. exports minus imports (Leamer, 44-45).
GDP = C + I + X – M
Private consumption is related to the level of earnings of the people. The disposal income is the income earned by people after paying taxes (Arnold, 209). The consumption is equal to disposal income plus savings.
C = Yd + S
The consumption function describes the direct relationship between private consumption and disposal income. The slope of the consumption function is known as the marginal propensity to consume, which explains the change in consumption because of the change in disposal income (Wessels, 139-141).
C = a + bYd
Where: a = consumption level at no income, b = marginal propensity to consume, and Yd = disposal income.

With the decrease in wages, the disposable income of the people decreases, in turn, the overall private consumption is decreased, and as a result the economy experience downturn or recession. It is a complete cycle and should be kept in mind while formulating different strategies and methods for improving the overall condition of the economy.
The U.S. economy has been experiencing the combined effects of different economic factors after one of the worse recessions, which is making it difficult for the government and other associated officials to improve the condition of the economy. Read More