Question

Question 3:

What are the determinants of demand for labor and supply of labor? How the equilibrium wage rate is determined in labor market? Why a janitor gets lower wage than a heart surgeon? Explain

Answer 1

Below are the determinants of labor demand:

- Demand for Product

- Productivity

- Price of other resources

- Number of firms in the market

Below are the determinants of labor supply:

- General Population

- Non-wage income

- Preferences for work vs leisure

Equilibrium wage rate is determined at a point where the Marginal Revenue Product of Labor becomes equal to that particular wage rate.

Marginal Product Product of Labor = Marginal Product of Labor * Output price. It represents the additional revenue that a firm gets when it employs additional unit of labor in the production. It is also known as Marginal Benefits.

Wage rate is the marginal cost of using an additional unit of labor.

If MRPL > Wage, then firm will hire more labor

If MRPL < Wage, then firm will lay-off the workers.

So, Equilibrium is determined by the condition when MRPL = wage

The difference between a Janitor wage and a surgeon wage is called the wage differential. Such differentials arises because of the amount of training and education one has to acquire in order to get the job. A heart surgeon must have undergone heavy training and posses valuable skills to the society. Surgeons have much to offer to society than to janitor and that is why differences in the skills leads to such wage differentials.