Price, Supply, and Demand in the Labor Market
How to Supply, Demand, and Price interact in the Labor Market?
Written by Jason Gordon
Updated at March 17th, 2023
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How do Price, Supply, and Demand in the Labor Market?
Markets for labor have demand and supply curves, just like markets for goods. The law of demand applies in labor markets this way: A higher salary or wage—that is, a higher price in the labor market—leads to a decrease in the quantity of labor demanded by employers, while a lower salary or wage leads to an increase in the quantity of labor demanded.
The law of supply functions in labor markets, too: A higher price for labor leads to a higher quantity of labor supplied; a lower price leads to a lower quantity supplied.
In the real world, this “price” would be total labor compensation: salary plus benefits. It is not obvious, but benefits are a significant part (as high as 30 percent) of labor compensation.
As the salary rises, the quantity demanded will fall. As the salary for nurses rises, the quantity supplied will rise.