labor market - The labor market Now that we've taken a look...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
The labor market Now that we've taken a look at how the demand for labor is affected by the nominal wage and product price, we need to think about the supply of labor , and then let the two meet. Economists usually think that labor is bought and sold like any commodity. So theoretically, a worker can offer to work any number of hours per period, and may change that offer as she pleases. Likewise, firms can offer to employ a person any number of hours per period that it chooses. At times though we may think about workers and jobs. As you all know, a job is more or less a commitment to work a specified number of hours per period, etc. The assumption that is almost always made regarding labor supply is this: the quantity of labor supplied is positively related to the real wage. That is, when the real wage goes up, more people want to work and/or workers want to work more hours; when it goes down, fewer people want to work and/or workers want to work fewer hours. Great. But what exactly is the real wage? Well, it's defined as follows: The real wage is the goods and services that can be purchased with the nominal wage. Let's think about that statement for a second. You work an hour say and receive $15. That means the nominal wage is $15. But what can you buy with that $15? What you can buy is the real wage. Recall our thought experiment in class (working for me to have an account at that fabulous department store I own). That experiment demonstrated that the typical worker is not worried about the number of dollars he gets for working so many hours. Instead he worries about what that money will buy. When he is able to buy more goods and services by working an hour, he has a bigger incentive to work. And what do people do when they have more of an incentive to do something? Answer: They do it more! All right. So what determines the real wage? Obviously two things. One, the nominal wage, the number of $s you get by working an hour. Two, the prices of goods and services. Think about it. If prices are constant and the nominal wage goes up, you're able to buy more goods and services with your wage, the money you get when you work an hour = the real wage goes up. On the other hand, if the nominal wage is constant and prices go up, the money you get from working an hour buys fewer goods and services = the real wage goes down. To summarize:
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 6

labor market - The labor market Now that we've taken a look...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online