Author:  Lori Alden

A labor supply curve shows the number of workers who are willing and able to work in an occupation at different wages.   You can easily demonstrate that the labor supply curve has a positive slope by deriving one with your students.  Just pick an occupation—say, phone solicitor—and ask your students to raise their hands if they’d be willing to enter it after they graduate for $10,000 a year.  Plot the quantity of labor supplied at those earnings as a point on a graph.  Continue raising the earnings in $10,000 increments—and plotting points—until almost everyone in the class has been enticed to enter the occupation.  Draw a curve through the points to show the labor supply curve.

A labor demand curve shows the number of workers firms are willing and able to hire at different wages.   As a rule, a firm will hire a worker only if the additional revenue it gets from doing so covers the additional cost.  It simply doesn’t make sense to hire someone for $10 an hour if that person can only bring in an extra $5 an hour.  The additional revenue a worker brings to a firm, in turn, depends on both the additional output he or she contributes to the firm and the price of that output.  If a worker on a fishing boat, for example, contributes five additional pounds of fish per hour to a firm’s output and the price per pound is $1, then the value of that worker’s contribution to the firm—called the marginal revenue product—is $5 per hour.   

Labor demand curves slope downward because of the law of diminishing returns.   As a firm hires more and more workers, each additional worker contributes less and less additional output—and revenue—to the firm.  

Anything that changes either the amount of output workers can produce or the price of that output will shift the labor demand curve.  Fishers, for example, would be more productive if they were provided with better training, more equipment, or improved technology, so all of these things would tend to increase the demand for them.  So would a new diet craze that calls for people to eat more fish, since that would tend to increase the price of fish. 

            We must put the supply and demand curves together to explain why workers in different occupations earn different amounts.  Figure 1, for example, shows supply and demand diagrams for registered nurses and hotel clerks.  In 2000, the median annual earnings of registered nurses were $44,840, while those for hotel clerks were only $16,380. 

            One reason that nurses earn more than hotel clerks is that they tend to be better educated and therefore more productive.  This makes the demand for nurses relatively high.  The supply of nurses, on the other hand, is relatively low—not many people are willing and able to go through the difficult and lengthy training it takes to enter nursing.  

             Differences in education and training explain many of the differences in earnings we see between occupations.   In 2000, the median earnings of males in the age group 25-34 who graduated from college were 60 percent higher than those who had only completed high school or a GED, while those of females were 95 percent higher.  These earnings differences help explain why so many people choose to get more training and education after high school—more education is often well rewarded with higher pay. 

There are, of course, other things besides education that explain wage differences.   For example, it normally takes only a high school diploma to become a fitness trainer or a hazardous materials removal worker.  But as Figure 2 shows, the median hourly earnings of hazardous materials removal workers were $13.71 in 2000, while the earnings of fitness trainers were $10.96.  This raises a question:  Why don’t fitness trainers quit their jobs to become hazardous materials removal workers?

 

If they did, then the supply of fitness trainers would decrease and the supply of hazardous materials removal workers would increase, as shown in Figure 3.  If earnings were the only thing that mattered, then we’d expect this process to continue until workers in both occupations earned roughly the same.  But it isn’t happening—people apparently enjoy being fitness trainers more than they do hazardous materials removal workers, even with lower pay.

   High wages can persist in any occupation as long as potential workers can’t or won’t enter it to drive down the wage.  Many of us would love to become professional athletes, entertainers, or supermodels, but lack the necessary talents or attributes to do so.  This keeps the earnings of the people in these occupations high. People are also reluctant to enter occupations that are risky, like logging, or unpleasant, like port-a-potty cleaning.  Discrimination can also prevent people from entering certain occupations. 

Luck can also play a role in determining wages, though your students may exaggerate its importance.  Ask them to provide examples of people who they think are receiving high earnings because of luck.  After discussing these examples, your students may discover that luck has less to do with success than they initially thought.

            At the high school level, it’s best to explain growth in any labor market by discussing how future events might affect the demand for workers in that market.  For example, as the average age of Americans increases, people will likely demand more nursing services and so the demand for nurses will tend to rise.   The demand for hotel clerks also is predicted to rise over the next several years.  This is because incomes are expected to rise, and people tend to travel more as their incomes rise.   

 

 

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