Economics the Labor Market Determines the Price Essay

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Economics

The labor market determines the price of labor (wages) at an equilibrium level. The number of workers in the market will be determined in part by the opportunity cost of not working. Thus, lower wages will mean that more workers will be voluntarily unemployed. As the supply of workers falls, it becomes lower than demand. Thus, firms will increase the wages in order to bring more workers back into the workforce. The point of natural unemployment, where no workers are voluntarily unemployed, is the long-run equilibrium point.

Prices are related to the equilibrium point because the cost of workers will be factored into the price of goods. In addition, the price of goods will impact the opportunity cost of being unemployed. Short-run equilibrium is achieved at any point where the price of goods is sufficiently high as to lower the opportunity cost of being unemployed that, in combination with higher wages, will leave no worker voluntarily unemployed.

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At such a point, however, wages are likely to increase as the result of inflationary pressures. Workers will demand to be paid more in order to cover the higher cost of purchasing goods.

To achieve long-run equilibrium, wages and prices must be adjusted to a point where there is a sufficient enough gap created between the working wage relative to the price of goods and the payment one receives while not working (the opportunity cost of not working). This adjustment should be upward, primarily because there is a wage floor in the form of minimum wage. Lowered wages and prices will diminish the opportunity cost of not working, so in order to achieve long-run equilibrium, a movement to increase wages will occur, and this in turn will increase prices. If wages and prices are too high, the economy may operate at….....

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