Microeconomic Analysis to the Demand for Labor

It is hard to describe and fully understand economics without looking at the labor market. The job market is the supply and demand for labor, where employees are suppliers, and employers demand. This a major component of any economy, and it is linked to the main markets of capital, goods, and services. It is crucial to economic development because one of the main parameters for determining economic growth is a low unemployment rate. When there is positive economic growth, many people have jobs, and the consumption rate goes higher. Consequently, markets grow faster and generate more revenues because the demand for their goods and services is high. The more they produce, the more job opportunities they create. And when there is negative growth in the economy, companies reduce production; they lay off workers and shut down some operations. Sometimes it leads to a total failure of some markets. In this case, the rate of unemployment spikes as consumption declines. There is no need for firms to keep many employees as they produce less.

This is the normal behavior of any economy. At one time, it surges and grows into a bubble, letting people enjoy the benefits of a strong economy before falling into a recession. A good example here is the events before and after the 2007/2008 Great Recession. Before the markets failed, there was a great economic bubble caused by a rise in housing costs. This looked like a great opportunity for firms to invest, who started giving out loans without even considering the capabilities borrowers. They used most of their properties are collateral. And the prices dropped abruptly. Borrowers were unable to pay back their loans. It became hard for lenders to sell the used properties as collateral, and even if they did, it was not enough to cover the money they had given out. Many went into states of bankruptcy as the financial market faced the biggest blow.

It was the labor market the suffered the most. Many lost their jobs and were forced to adjust their lives to the new reality. The rate of unemployment spiked, leading the general economy into more stress. Note that when people are working, the government spends less and earns more. They will pay taxes, which is put in development programs like infrastructure and similar projects. The labor market grows, increasing household consumption, which is another parameter for mearing economic growth.

On a macroeconomic scale, the demand and supply for goods and services are influenced by the dynamics in the domestic and international markets, as well as other factors like immigration, age, and education levels. The relevant parameters used in this case include unemployment, productivity, participation rates, total income, and gross domestic product. Coming down to the microeconomic level, individual firms make direct interaction with employees. They can hire them, fire them, increase and decrease their wages and hours as per concerned policies. There is a major relationship between supply and demand, which affects hours employees work and how they are compensated in terms of wages, salary, and benefits. It is hard to understand the concept of labor without understanding markets. These are simply companies in a particular economic ecosystem that produces similar products. For instance, the financial markets comprise of banks, insurance companies, and microfinance institutions, among many others. These markets are important economic growth because they show a sense of direction. There is not proper economic growth, or even analysis without looking at how markets are down.

Understanding Labor Demand

We can summarize the labor market as a factor market, meaning it offers a means by which employers find needs for labor, and millions of people provide their labor services by working in different industries. Labor demand is when firms require people to work in their production lines. It is very common when there is positive economic growth. Here, demand is high, and firms have to increase their production to meet these demands. Those who cannot do this face a lot of competition and may be left behind in terms of market capitalization. It is all about making decisions when there is an opportunity.

Many factors affect how many people business is willing to hire, with wage rate and salary as the most basic once. There is an inverse relationship between demand for labor and the wage rate that a business needs to pay as they hire more people to their production line. Hiring new workers is not a simple decision that a company will wake up and take. They have to consider all the right factors that encourage proper economic growth. 

The most important consideration is the activities happening in the general market. When things are going well, and there is an increase in demand, the firm will choose to invest in more workers.

Another factor that influences the demand for labor is the level of education. It is assumed that those who have gone through a higher learning system are more easily hired than those without such skills. Even so, in terms of earning, there are mixed reactions, since research has shown that there is a large number of college dropouts who have hired a degree holder. One NBC's television show called "The Apprentice: Street Smarts vs. Book Smarts presented a contest between contestants who had not college degrees, yet they were earning more than three times their opponents with a college degree. The two sides got involved in a heated argument against each until the final episode where a Tana, a 37-year-old 'street smart' (top-sales woman for Mary Kay), went up against Kendra, a 26-year-old 'book smart), a real estate agent. At the Donald Trump shouted to the college graduate Kendra that she was hired. These series come with an array of contestants who demonstrated that not every college graduate earns more than every high school graduate. However, on average, this always the case.

Many experts have attempted to measure the payoff from college by comparing how far the wages of college-trained workers are above those with less education. This has been the trend across the world, where payoff from college in the USA, for instance, has grown significantly over the past two decades. In the late 70s, the male college graduates aged between 25 and 35 were earning 28% more than their high school counterparts in the same age bracket. This gap had widened even further by 2006, where youthful male graduates from college were earning 76% more than those with high school diplomas. It was the same case with young female college graduates who were earning 54% more than those with high-school grades only in 1979, increasing to 86% in 2006.

These figures indicate that there is a drastic widening of the difference between workers with different education levels, which explains how demand and supply work in the labor market. You will always notice and an increase in the demand for college graduates compared to high-school graduates. By studying these shifts, we aim to discover why there are shifts, what determines the demand for labor, and how the demand and supply changes affect wages and employment. As stated above, there is a significant relationship between how household consumption and market growth.

The Labor Equilibrium

There are generally two types of markets in any economy, the perfect competition market, and the imperfectly competitive market. As the name suggests, perfect competition is where everything operates smoothly at the same level. There is perfect information, and no once firm is bigger than others. Everyone is a price taker since consumers know the prices and what they should expect from their products.

But this kind of market exists only in theory. It is a measure used in determining what a market should be like, and what influences real growth. This is why you will find the most markets run under imperfect competition. Only a few firms have the right information, which they are not willing to share because they need to use it to their advantage.

In any market, labor generates considerably more revenue than all other production factors together. For instance, in the United States, it is shown that labor accounts from about 73% of the general income since 1959. The rest comes from owners of capital and natural resources.

In other data, there were about 34 000 registered nurses working in Minneapolis – St. Paul-Bloomington, Minnesota-Wisconsin metropolitan area in 2013 as recorded by BLS. This figure is a combination of different employees, including hospitals, doctors' offices, health clinics, and nursing homes. On a plot, the demand and supply for labor determine equilibrium in the labor market, where the quantity supplied and the quantity of nursed demanded is involved. When there is a high demand for nurses, wages increase, because then, more employees are demanding for more there services. They will, therefore, post-high wages to attract qualified professionals. In this case, they were earning $75,000, and the quantity supplied increases to 38,000. At equilibrium, where the quantity supplied is 34,000, they earned $70,000. However, the number of nurses demanded a higher pay decline to 33,000. At the above-equilibrium salary, there would be an excess supply of nurses. If it went below equilibrium, at a salary of $60,000, the quantity supplied drops to 37 000, whereas demand increases to 40 000 nurses. We expect excess demand or a surplus to existing at below-equilibrium.

In short, when there is an increase in the salary of the nurses, the quantity supplied will soar. It attracts more nurses to apply for jobs here. Which means, more nurses will move from other cities to Minneapolis-St. Paul-Bloomington to find better-paying jobs. More people will also be willing to train as nurses as those who are trained venture more into full-time working as nurses. There will be a surge in the number of people looking to work as nurses in this region.

When equilibrium hits, the quantity supplied will be equal to the quantity demanded. This means any employer willing to hire a nurse at this equilibrium wage will easily find one, and ever nurse who accepts this wage gets a job. The salaries discussed above are derived from the 'average' nurse wage. But in real markets, there are mini-markets, like varying degrees of experience and credentials that further determine the wages. Many markets are like this, where thein contain closely related products, but differ in quantity. For example, like gasoline, you will find regular, premium, and super-premium, which vary in quality and price. The same applies to the labor market, where many applicants apply for the same job by being hired and paid according to their expertise levels.

Shifts in Labor Demand

The ceteris paribus assumption is used in determining the demand curve for labor, which shows the number of labor employees wish to hire. When there is a change in the wage or salary rate, there will be a change in the quantity of labor demanded. For instance, an increase in wages forces employees to hire less to maximize profits, which leads to a decrease in the quantity of labor demanded. And if the wages decrease, employees are more likely to hire more, increasing quantity on labor demand – a downward movement along the demand curve.

The main reasons provoke shifts in the demand curve. One of the main factors is labor demand based on the demand for products. If there is a demand for more computers, for instance, a large number of computer engineers will be hired. This is called the demand for output, where an increase in demand for goods produced increases both output price and profit.

Another factor is education and training, where a well-trained and educated workforce leads to an increase in the demand for that labor from employees. Increased productivity leads to increased demand. Technology changes may also cause a shift in labor demands where machines are used as substitutes for human workers. Also, an increase in certain technology can increase labor demand – acts as a complement to labor. Other factors include the number of companies, government regulation, price, and availability of other inputs.

In the labor market, households are on the market's supply side, while companies provide the demand. Labor demand is influenced by a number of factors, mainly the economic conditions within which the markets operate. All of these factors contribute to economic growth.

Author: James Hamilton