So we’ve got our downward sloping demand curve…equal to MRP, marginal revenue product:
Next we need our supply curve – which will be upward sloping like always.
And that’s because when wages go up, people realise they can make more money…so more people will be willing to work more and the quantity supplied of labour will increase!
But if wages go down, people can’t make as much money working…so fewer people will be willing to work and the quantity supplied of labour will decrease!
So our labour market diagram looks like:
Our labour market diagram looks like just a regular supply and demand diagram and that’s because as wages increase:
As wages increase, hiring workers becomes more expensive, so firms demand fewer workers.
But, equally, as wages increase, workers are more willing to work because they can make more money…so they’ll supply more labour!
As wages decrease, hiring workers becomes cheaper, so firms demand more labour.
But, as wages decrease, workers are less willing to work because they can’t make as much money…so they’ll supply less labour!
And so we end up with a very familiar looking supply and demand diagram: but this time we have wages on the vertical axis, and we’re representing the supply and demand of labour. So firms do the demanding, and workers do the supplying!
