Economics the Labor Market Determines the Price

Economics

The labor market determines the price of labor (wages) at an equilibrium level. The number of workers in the market will be determined in part by the opportunity cost of not working. Thus, lower wages will mean that more workers will be voluntarily unemployed. As the supply of workers falls, it becomes lower than demand. Thus, firms will increase the wages in order to bring more workers back into the workforce. The point of natural unemployment, where no workers are voluntarily unemployed, is the long-run equilibrium point.

Prices are related to the equilibrium point because the cost of workers will be factored into the price of goods. In addition, the price of goods will impact the opportunity cost of being unemployed. Short-run equilibrium is achieved at any point where the price of goods is sufficiently high as to lower the opportunity cost of being unemployed that, in combination with higher wages, will leave no worker voluntarily unemployed. At such a point, however, wages are likely to increase as the result of inflationary pressures. Workers will demand to be paid more in order to cover the higher cost of purchasing goods.

To achieve long-run equilibrium, wages and prices must be adjusted to a point where there is a sufficient enough gap created between the working wage relative to the price of goods and the payment one receives while not working (the opportunity cost of not working). This adjustment should be upward, primarily because there is a wage floor in the form of minimum wage. Lowered wages and prices will diminish the opportunity cost of not working, so in order to achieve long-run equilibrium, a movement to increase wages will occur, and this in turn will increase prices. If wages and prices are too high, the economy may operate at full employment, but may not be in equilibrium if the prices and wages are too high -- demand for workers may outstrip supply at this point, creating severe inflationary pressures.

At present, high unemployment means that there is a lack of demand for labor. Under this scenario, wages and prices should fall in order to ensure that all workers who want to work can -- lower wages will spur demand for workers from industry. This should increase the jobs available. There is currently an excess of labor supply. The implications of this are twofold. Wages will need to come down in order to make hiring these workers affordable for companies. However, the lower wages will reduce the opportunity cost of not working, so some workers will simply choose to be unemployed -- lower wages are not an enticement to enter the labor force. Thus, the supply of workers willing to work will decrease as wages fall. This will bring the economy back to equilibrium. The number of those voluntarily unemployed will increase. Combined with the workers who have been brought back into the workforce with newly-created low wage jobs, the unemployment rate will move back towards a new equilibrium point where all those who want work have it.