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

market is in equilibrium, the demand for labor equals the supply of labor. No worker
who wishes to get a job (for which he is qualified) at the going market wage will
fail to get one. No firm that wants to hire a worker at the going wage will fail to find
a qualified employee.
If demand and supply are not equal at the going market wage, the wage will
adjust. If, at the going wage, the number of hours of labor that households wish to
supply is greater than the number of hours of labor that firms wish to employ, those
in the labor force without jobs will offer to work for less than the going wage. The
process of competition will lead to lower wages, until eventually demand again equals
supply. Likewise, if firms in the economy demand more labor at the going wage than
is supplied, competition by firms to hire scarce labor services will bid the wage up
until demand and supply are equal.
This basic model of the labor market makes clear predictions for the consequences
of shifts in the demand and supply of labor. Consider first shifts in the
supply curve of labor. Such shifts can occur because the total labor force grows,
as the number of young people reaching working age exceeds the numbers of workers
retiring, because of new immigrants, or because of social changes such as the
entry of more women into the labor force. The U.S. labor force expanded rapidly in
the 1970s, for example, as the baby boomers entered the labor force and more and
more women worked outside the home. An increase in the labor force shifts the
supply curve of labor to the right; at each real wage, the total number of labor hours
that individuals wish to supply is greater. The equilibrium real wage falls. This fall
in the price of labor indicates to firms that labor is less scarce than it was before,
and firms should therefore economize less in the use of labor. Firms respond to the
lower real wage by creating more jobs. Employment rises to absorb the increase in
labor supply.
Consider now the effects of a shift in the demand curve for labor. Suppose
technological progress makes workers more productive, raising the marginal
product of labor. At each wage, firms now wish to hire more labor, and the labor
demand curve shifts to the right. Real wages rise to restore equilibrium in the
labor market.
Over the past quarter century, increases in the American labor force have
shifted the labor supply curve to the right. At the same time, increases in worker
productivity have shifted the labor demand curve to the right as well. The basic
model predicts that the total quantity of labor employed will rise, but real wages may
either fall (if supply shifts more than demand) or rise (if demand shifts more than
supply). Average real wages in the United States in fact have fallen slightly over
this period.
LABOR SUPPLY, DEMAND, AND THE EQUILIBRIUM WAGE ∂ 185