Author: Lori Alden
A labor supply curve
shows the number of workers who are willing and able to work in an
occupation at different wages.
You can easily demonstrate that the labor supply
curve has a positive slope by deriving one with your students.
Just pick an occupation—say, phone solicitor—and ask
your students to raise their hands if they’d be willing to enter
it after they graduate for $10,000 a year.
Plot the quantity of labor supplied at those earnings as a
point on a graph. Continue
raising the earnings in $10,000 increments—and plotting
points—until almost everyone in the class has been enticed to
enter the occupation. Draw
a curve through the points to show the labor supply curve.
A labor demand curve
shows the number of workers firms are willing and able to hire at
different wages. As
a rule, a firm will hire a worker only if the additional revenue
it gets from doing so covers the additional cost.
It simply doesn’t make sense to hire someone for $10 an
hour if that person can only bring in an extra $5 an hour.
The additional revenue a worker brings to a firm, in turn,
depends on both the additional output he or she contributes to the
firm and the price of that output.
If a worker on a fishing boat, for example, contributes
five additional pounds of fish per hour to a firm’s output and
the price per pound is $1, then the value of that worker’s
contribution to the firm—called the marginal revenue
product—is $5 per hour.
Labor demand curves
slope downward because of the law of diminishing returns.
As a firm hires more and more workers, each
additional worker contributes less and less additional
output—and revenue—to the firm.
changes either the amount of output workers can produce or the
price of that output will shift the labor demand curve.
Fishers, for example, would be more productive if they were
provided with better training, more equipment, or improved
technology, so all of these things would tend to increase the
demand for them. So
would a new diet craze that calls for people to eat more fish,
since that would tend to increase the price of fish.
We must put the supply and demand curves together to
explain why workers in different occupations earn different
amounts. Figure 1, for
example, shows supply and demand diagrams for registered nurses
and hotel clerks. In
2000, the median annual earnings of registered nurses were
$44,840, while those for hotel clerks were only $16,380.
One reason that nurses earn more than hotel clerks is that
they tend to be better educated and therefore more productive.
This makes the demand for nurses relatively high.
The supply of nurses, on the other hand, is relatively
low—not many people are willing and able to go through the
difficult and lengthy training it takes to enter nursing.
education and training explain many of the differences in earnings
we see between occupations.
In 2000, the median earnings of males in the age group
25-34 who graduated from college were 60 percent higher than those
who had only completed high school or a GED, while those of
females were 95 percent higher. These
earnings differences help explain why so many people choose to get
more training and education after high school—more education is
often well rewarded with higher pay.
There are, of
course, other things besides education that explain wage
example, it normally takes only a high school diploma to become a
fitness trainer or a hazardous materials removal worker.
But as Figure 2 shows, the median hourly earnings of
hazardous materials removal workers were $13.71 in 2000, while the
earnings of fitness trainers were $10.96.
This raises a question:
Why don’t fitness trainers quit their jobs to become
hazardous materials removal workers?
If they did, then
the supply of fitness trainers would decrease and the supply of
hazardous materials removal workers would increase, as shown in
Figure 3. If earnings
were the only thing that mattered, then we’d expect this process
to continue until workers in both occupations earned roughly the
same. But it isn’t
happening—people apparently enjoy being fitness trainers more
than they do hazardous materials removal workers, even with lower
High wages can persist in any occupation as long as
potential workers can’t or won’t enter it to drive down the
wage. Many of us would
love to become professional athletes, entertainers, or
supermodels, but lack the necessary talents or attributes to do
so. This keeps the
earnings of the people in these occupations high. People are also
reluctant to enter occupations that are risky, like logging, or
unpleasant, like port-a-potty cleaning. Discrimination
can also prevent people from entering certain occupations.
Luck can also play a
role in determining wages, though your students may exaggerate its
importance. Ask them
to provide examples of people who they think are receiving high
earnings because of luck. After
discussing these examples, your students may discover that luck
has less to do with success than they initially thought.
At the high school level, it’s best to explain growth in
any labor market by discussing how future events might affect the
demand for workers in that market.
For example, as the average age of Americans increases,
people will likely demand more nursing services and so the demand
for nurses will tend to rise.
The demand for hotel clerks also is predicted to rise over
the next several years. This
is because incomes are expected to rise, and people tend to travel
more as their incomes rise.
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