Wages and Employment Dynamics in a Single Labour Market

Priyal Shah – 219658150

ECON 3906A

Mir Ahasan Kabir

21 July 2024
Understanding the Labour Market:

The labour market is a place where employers and employees can interact. Employers aim to hire

workers to produce goods or services, while employees provide labour in exchange for pay. The

supply and demand concepts apply: the supply of labour is the number of persons willing to

work at certain wage levels, and the demand for labour is the number of workers that enterprises

are prepared to hire at those rates. Equilibrium is reached when the quantity of labour supplied

equals the quantity requested, which determines the wage rate. Factors impacting this include

skill levels, economic situations, and government policies. (KENTON, n.d.)

Determinants of Wages:

Determinants of wages in a labour market include:

Education and Skills: Higher education and specialized skills usually result in higher salaries

due to improved productivity and demand for skilled workers.

Experience: More experienced workers frequently get higher wages because they bring better

skill and efficiency.

Occupational Demand: Jobs in high-demand industries typically pay higher compensation to

attract qualified candidates.

Bargaining Power: Greater bargaining power, frequently achieved through unions or individual

negotiations, can result in greater salaries.

Changes in these characteristics have an impact on wages because they modify the supply and

demand for different forms of labour, influencing wage levels and distribution among workers.

(Smith, n.d.)
Labour Supply and Demand:

Labour supply refers to the total number of hours that works are willing and able to work at

certain wage rates, whereas labour demand refers to the number of hours that businesses are

willing to recruit at those salaries. The interaction of supply and demand produces the

equilibrium pay and employment levels. If demand remains constant, an increase in labour

supply, such as that caused by population expansion or immigration, can drop wages. In contrast,

an increase in labour demand caused by economic growth or technical breakthroughs has the

potential to raise wages. Changes in these variables modify the supply and demand curves,

influencing equilibrium wages and employment outcomes in the labour market. (Smith, n.d.)

Equilibrium Wage Determination:

The equilibrium wage is the wage rate at which the quantity supplied equals the amount

demanded. It is defined by the intersection of the labour supply and demand curves. The

equilibrium points mark the intersection of the supply (upward sloping) and demand (downward

sloping) curves. For example: if 100 workers are willing to work at $20 per hour and 100

enterprises are willing to recruit them, then $20 is the equilibrium wage. At this stage, there is no

labour surplus or shortage, ensuring market stability in terms of employment and wage rates.

(Gasset, n.d.)

Labour Market Dynamics:

The employment market is dynamic, with supply and demand curves changing over time.

Economic situations, such as recessions or booms, have an impact on demand. Recessions reduce

demand lowering wages and employment, whereas booms boost demand, raising both.
Government policies that affect supply and demand include minimum wage laws and

immigration controls. Technological developments can raise demand for skilled workers, hence

raising salaries, while potentially decreasing demand for less-skilled labour, lowering wages.

These factors generate variations in supply and demand curves, which affect equilibrium wages

and employment levels, reflecting the labour market’s ever-changing nature. (Daly, n.d.)

Unemployment and Underemployment:

Unemployment happens when people who are capable and wanting to work are unable to obtain

employment. Underemployment occurs when workers are employed in jobs that do not fully

utilize their skills or provide insufficient hours. There are various types of Unemployment that

includes:

1. Frictional: Temporary, resulting from work changes.

2. Structural: Long-term, caused by skill mismatches with employment requirements.

3. Cyclical: Linked to economic downturns, which reduce total labour demand.

Technological advances, economic downturns, and variations in consumer demand are all factors

that contribute to unemployment. Income loss, lower consumer spending, and increased

government spending on social services are some of the consequences. High unemployment

exerts downward pressure on wages, whereas low unemployment might cause salaries to rise due

to increasing competition for workers. Both unemployment and underemployment indicate

labour market inefficiencies. (Chen, n.d.)

Minimum Wage Laws:

of ensuring a livable income. Supporters say that these laws alleviate poverty, raise labour

morale, and stimulate consumer spending, which benefits the economy. Critics argue that they

can lead to higher unemployment because firms may recruit fewer workers or cut hours to

counter rising labour expenses. Furthermore, minimum wages may disproportionately damage

small enterprises, limiting job options for low-skilled individuals. The impact on wage levels and

employment varies by area and industry, making the minimum wage a controversial policy tool

with both good and negative labour market consequences. (KENTON, n.d.)

Case Studies:

Case 1: The Impact of Technology on Manufacturing Jobs in Detroit:

Automation and modern industrial technologies have had a tremendous impact on Detroit’s job

market. As manufacturers implemented robotics and AI, the demand for low-skilled labour

dropped resulting in job losses and wage reductions in traditional industrial roles. In contrast,

there was a greater demand for highly skilled people to operate and maintain new technologies,

which raised wages for these occupations. This transition led to more polarized wage

distribution, with an obvious distinction between low and high-skills workers. The changes

underline the importance of retraining programs for displaced workers to assist them transition

into new, higher-paying jobs. (Freeman, n.d.)

Case 2: Immigration and Agricultural Wages in California:

An inflow of immigrant labourers ready to accept lower salaries increased labour supply,

resulting in wage reductions for farm workers. However, strict immigration controls and
deportations resulted in labour shortages, pushing wages higher as farmers fought for fewer

available workers. This dynamic highlight the sensitivity of wage outcomes to changes in labour

supply, as well as the role of immigration in filling vital but low-paying positions. It also

underlines the need for balanced immigration policy to maintain employment and income levels

in important sectors. (Warren, n.d.)

Policy Implications:

Various policies implemented by the government can impact wage and employment dynamics in

the labour market. Education and training programs improve workers skills, increasing

employability and potentially enhancing wages. Labour market restrictions, such as minimum

wage laws and worker rights, seek to promote equitable treatment but may have an impact on

employment rates. Economic redistribution measures, such as tax credits and social welfare

programs, help to alleviate poverty and rescue economic inequality. These interventions can help

alleviate market failures, benefit disadvantaged groups, and promote economic stability but they

must be carefully designed to strike a balance between encouraging job creations, assuring fair

salaries, and avoiding unanticipated negative employment consequences. (Daly, n.d.)

Conclusion:

While analyzing wages and employment dynamics in a labour market, we discovered major

drivers such as education, skills, experience, occupational demand, and bargaining strength. The

balance between labour supply and demand produces equilibrium wages, which are impacted by

economic conditions, technological improvements, and government regulations. Unemployment

and underemployment pose issues for wage levels and labour market efficiency. Minimum wage
regulations remain a split policy instrument with a variety of consequences. Moreover, the long-

term implications of technological progress and globalization on labour markets, as well as the

effectiveness of targeted government interventions.

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