Equilibrium (Labor) in a Perfectly Competitive Market

While each labor market is different, the equilibrium market wage rate and the equilibrium number of workers employed in every perfectly competitive labor market is determined in the same manner: by equating the market demand for labor with the market supply of labor. The determination of equilibrium market wage and employment is illustrated in Figure . 

 

The equilibrium market wage is W, and the equilibrium number of workers employed is Q. At wage rates greater than W, the demand for labor would be less than the supply of labor, implying that there would be a labor surplus. At wage rates belowW, the demand for labor would be greater than the supply of labor, implying that there would be a labor shortage. A labor surplus is eliminated when some workers agree to sell their labor for lower wages, thereby driving down the market wage rate to W. A labor shortage is eliminated when some firms agree to employ workers at higher wages, thereby driving the market wage rate up to W. At the equilibrium wage rate, there is no surplus or shortage of labor.

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