Question

In: Economics

21. Why do some jobs pay higher wages than others? Explain using the supply & demand...

21. Why do some jobs pay higher wages than others? Explain using the supply & demand shifters in the market for labor.

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Expert Solution

Labor demand

Labor demand curve depicts the value of marginal product of labor.

In equilibrium, w=VMPL

w=p*MPL

Hence labor demand can change in two ways : either the price of the commodity changes or marginal product of labor changes.

When Price of the commodity being produced increases, the firm would want to sell more products, hence more amount of labor is demanded to increase the production. This causes labor demand to shift to right thereby increasing wage rate.

When technology available changes, it increases the efficiency of the workers. It means workers can produce more, MPL increases. This causes labor demand to shift to the right and increases the wage rate.

Both the cases are depicted in figure 1. When labor demand curve shifts to the right from D1 to D2, the wage rate increases from w1 to w2.

figure 1


Labor supply

It is based on the fact that people face a trade off between labor and leisure and shows how labor supply changes as the wages change.

Few factors that can shift the labor supply are changes in tastes, availability of alternative opportunities and population growth.

Suppose there is a fall in population (due to emigration), this causes labor supply to shift leftwards.  This will increase the wage rate.

When there is availability of alternative opportunities, for example there is high labor demand in automobile sector, people would move out of agriculture. This would lead to a decrease in labor supply and shift the labor supply curve to the left , increasing the wage rate.

Both of these cases are depicted in figure 2.

When labor supply curve shifts to the right from S1 to S2, the wage rate increases from w1 to w2.

figure 2


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