The Price of the Labor Market - Essay Example

Workers want to work at the highest wage rates while firms want to hire at lowest wage rates. This keeps on pulling the demand and supply curves up and down and hence the equilibrium keeps shifting from one point to another. Hence, these supply and demand patterns in the labor market largely affect the market equilibrium. Suppose there is an equilibrium position in the labor market. Then, many new graduates enter the market and the supply of labor increases. When there is excess supply in the market, the employers have a free hand at the wage-rate and they can hire workers at lower wage rate and the equilibrium shifts inwards.

However, if the workers are being paid less than other related industries, or cannot find a job altogether, they might start switching to the industries that pay higher or might start their own business. They may also resort to starting their own business and become self-employed or might stop looking for a job and start relying on other sources of income dropping out of the labor force altogether, or they may become unemployed. This reduces the supply of labor. At this point in time, the supply of labor decreases than the demand and the employers are forced to increase the wage rates in order to attract the workers needed.

This shifts the equilibrium back outwards. This increase and decrease and supply and demand keep on taking place as the employers continuously tend to minimize wage rates and workers keep on demanding higher wages affecting the supply of labor accordingly. This, in turn, keeps on moving the equilibrium inward and outward as the demand and supply continue attempting to reach equilibrium.