How Do the Laws of Supply & Demand Affect the Labor Market?
The laws of supply and demand are in play in any market, wherever people are buying and selling goods and services. The labor market is no different. While we talk about the labor market as if were one monolithic market, within the overall labor force of 155 million, there are many subsections, each subject to the laws of supply and demand.
The supply of labor is determined by population, immigration and labor force participation -- how many adults are working or actively seeking employment. The supply of labor can be influenced by additional workers entering the labor force, which tends to depress wage rates. Workers leaving the labor force, either because they are retiring or becoming discouraged about finding a job, tend to support wage rates. The higher the wage rate, the more people want to work, but the supply side is just half the market.
The demand for labor derives from the demand for the goods and services that labor produces. A strong demand for products creates a demand for the labor to produce them. When the wage rate is high, employers limit the number of employees they hire. Workers who improve their skills can improve the demand for their services, since they are more productive to their employers.
Every time the Congress votes to increase the minimum wage, a debate erupts about its effect on unemployment. If workers are employed at the prevailing minimum wage, then a government-mandated higher minimum will increase unemployment. More workers will look for work seeking the higher wage; at the same time, employers will lay off workers because they cannot -- or will not -- pay them more than the free market dictates.
Unions typically negotiate to raise their pay scale or to limit the size of their membership. A craft union composed of members in a particular trade can restrict the supply of labor by requiring that employers hire only union workers. With a limited supply of workers, the result is higher wages. An inclusive union organizes all available workers and then engages in collective bargaining for higher wages. Higher wages reduce the demand for workers being hired.
The effect of inexpensive labor from abroad has depressed U.S. wages even as jobs have been lost. The Third World has a virtually unlimited supply of labor, which is becoming more skilled with the passage of time. American labor must gain new skills to remain competitive in a global market.
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