The Interaction of Markets

Demand for Labour

The demand for labour is derived from the demand for goods and services a firm produces. If the demand for those products increases, the demand for labour will rise too.
Wage rates are a key factor affecting demand for labour. As wages increase, it becomes more expensive for firms to hire workers, thus reducing the demand for labour.
Productivity also influences the demand for labour. Higher output per worker can increase the demand for labour.

The supply of labour increases when more people are willing and able to work. This may be influenced by factors such as wage rates, the level of education, and government policies.
Wage rates are a significant factor affecting supply of labour. Higher wages tend to increase the supply of labour as more people are incentivised to work.
The working conditions affect labour supply too. Safe and comfortable workplaces tend to increase the supply of labour.

The intersection of the labour supply and demand curves determines the equilibrium wage rate and the level of employment.
When wages are above the equilibrium level, it creates a surplus of labour, also known as unemployment.
When wages are below the equilibrium level, there is an excess demand for labour, leading to a shortage of workers.

Market imperfections can prevent markets from efficiently allocating labour. These can include rigidities in wage adjustment, discrimination, and asymmetrical information.
Union activities may lead to wages being set above the market-clearing level causing unemployment.
Discrimination, both racial and gender-based, can lead to inefficiencies in the labour market as it restricts the available supply of labour.
Asymmetric information in the labour market can lead to adverse selection and moral hazard, these are situations where one party has vastly greater information than the other party leading to inefficient outcomes.

Governments can play a role in addressing market imperfections through regulations, taxes, subsidies, and policy initiatives.
Minimum wage laws help to ensure a fair wage for workers, but could possibly lead to unemployment if set too high.
Governments may provide education and training to improve the quality of labour and increase productivity.
Policies that discourage discrimination and promote equal opportunities can also enhance efficiency in the labour market.