[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

CHAPTER 8
LABOR MARKETS
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The previous three chapters examined demand and supply in the markets
for goods and services. Choosing what goods to purchase and how much of
them are among the most basic decisions of households. The amount of
money available to spend depends on two other basic decisions: how much to work
(and earn) and how much to save (or spend from savings). The decisions that people
make about work determine the economy’s supply of labor. Their decisions about
saving determine the economy’s supply of funds in the capital market. Understanding
the factors that influence these decisions will give us insight into the supply side of
the economy’s labor and capital markets.
In this chapter, we focus on the labor market and the decisions that determine
both the demand for labor and the supply of labor. We will find that the approach
developed in Chapter 5 to understand how households decide about consuming can
also offer insights into how they decide how much to work. We will also look into
the factors that determine the firm’s demand for labor. By bringing together the
demand and supply sides of the labor market, we will see how wages are determined
in a competitive market economy. Chapter 9 will then examine saving decisions and
the capital market.
The Labor Supply Decision
At one time, going to college was a full-time job. Students were supported by their
families or by scholarships and loans, with few students holding down jobs. Today,
most college students work to help pay their tuition and living expenses. In addition
to deciding which classes to take, students have to decide whether to work; and
if they decide to work, they need to decide how many hours to work each week.
Working more helps pay the bills, but it also takes time away from studies, perhaps
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