Just as there is a market for goods and services the same happens for labour. And there is also a market price for labour which is the equilibrium wage rate. The equilibrium wage rate is determined by seeing at which wage rate the demand for labour meets the supply. This can be represented graphically. By looking at this wage we can see how much labour will actually be employed.
Why firms may change their demand for labour
- Changes in consumer demand for goods and services, if consumer demand raises the firm tends to raise their output by producing more so more labour is needed.
- Changes in the productivity of labour, labour becomes more productive and therefore the output gets more valuable, then firms may demand more labour. Productivity can be improved by new technologies or working methods and training programmes
- Changes in the price and productivity of capital, machinery and equipment might become cheaper or more productive due to new technology then I firm may replace workers with more capital.
- Changes in non-wage employment costs, employment laws and taxes may change due to decisions from the government.
Why labour supply may change
- Changes in the net advantages of an occupation, people are attracted by the advantages and disadvantages of a job so if they change it will, therefore, cause a change in supply
- Changes in the provision and quality of education and training, changes in the level of education can increase the supply of workers with different skills. For example, the increase of programming courses has increased the number of people doing this kind of jobs.
- Demographic changes, changes in the size and age distribution in an economy will cause changes in the supply of labour of different occupations.
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