Labor and Financial Markets

This is Unit Three of Principles of Microeconomics: the demand-and-supply model taken into the market for labor and the market for funds. Carry one idea. The model from unit two describes any market, and the only things that change are the names: the price becomes a wage or an interest rate, and households move from the buying side to the selling side. Every result carries over, including what a control does. By the end you will be able to relabel the diagram for labor and for funds. To name what shifts labor demand and labor supply and predict the wage from a shift. To find the equilibrium wage from a schedule and say when a minimum wage binds. To report the minimum-wage evidence as the dispute it is, and trace technology to the wage gap. And to work a credit market through a shift and a usury cap.

Two entries on the transfer: the same two curves, relabeled for labor and for funds.

The same model, three times.

MIC 0201 One Model, Three Markets

Demand and supply describe any market. In a goods market the price is a price; in the labor market it is a wage; in the market for financial capital it is an interest rate. The same two curves, relabeled, do all three jobs, and only the names change: shifters, equilibrium, surplus and shortage work identically in each.

The labor market's price.

MIC 0202 The Wage Is the Price of Labor

In a labor market households supply and employers demand. A higher wage lowers the quantity of labor employers want and raises the quantity workers offer, so the curves slope as usual. Above the equilibrium wage, applicants outnumber openings; below it, employers cannot fill posts. Quantity is hours or workers, and the price is total compensation, benefits included, not the hourly figure alone.

Five entries on the two sides of the labor market: where demand comes from, what shifts each side, and why supply can bend back.

Where labor demand comes from.

MIC 0203 Labor Demand Is Derived Demand

A firm wants workers only for what they produce, so the demand for labor is derived from the demand for the product; more restaurant meals mean more demand for cooks. Nobody hires a pharmacist without customers who want prescriptions filled. Derived demand is the exam's term, and unit thirteen gives it a number: what one more worker adds to revenue.

What moves the labor demand curve.

MIC 0204 What Shifts Labor Demand

Labor demand shifts with the demand for the product, the workforce's education and training, technology, the number of firms, government rules, and the price of other inputs. A rule requiring a nurse for a procedure shifts nurse demand right. A change in the wage itself moves along the curve; only these other events shift it.

Technology's two directions.

MIC 0205 Technology: Substitute or Complement

A new technology can substitute for a kind of labor, shifting its demand left, or complement it, shifting demand right, and the same invention often does both to different workers. Word processing replaced typists and raised demand for the people who maintain networks. Ask which tasks the machine does: routine tasks are substituted, and tasks that use the machine are complemented.

The other side of the market.

MIC 0206 What Shifts Labor Supply

Labor supply shifts with the number of workers, the education a job requires, and government policy: licensing lowers supply, training subsidies raise it, and benefits change the appeal of work. Fewer people can supply cardiology than primary care, so its supply curve sits further left. Wages in related occupations shift supply too: a pay cut for surgeons sends doctors into family practice.

Why a supply curve can bend back.

MIC 0207 Work, Leisure and the Backward Bend

The wage is the price of leisure. A higher wage makes leisure dearer, so workers substitute toward work; it also raises income, and richer workers buy more leisure. Past some wage the second effect wins and the individual's supply curve bends back. Market supply still slopes up, since a higher wage pulls workers from other occupations; unit five names the two effects.

Six entries on the wage and the floor under it: a schedule, a shift, the minimum wage, whether it binds, the evidence, and the wage gap.

Reading a labor schedule.

MIC 0208 Finding the Equilibrium Wage from a Schedule

A labor schedule lists wages with the number of workers firms want and the number who offer to work at each. Read down for the wage where the two match; that is the equilibrium wage and employment. At any other wage the gap is a surplus of labor above equilibrium and a shortage below. For warehouse workers, at eighteen dollars firms want two thousand four hundred and one thousand six hundred offer; at twenty, two thousand and two thousand; at twenty-two, one thousand six hundred and two thousand four hundred. The numbers match at twenty dollars with two thousand employed; eighteen leaves a shortage of eight hundred, twenty-two a surplus of eight hundred. A surplus of labor is unemployment among people who want work at that wage, and a shortage does not mean nobody is hired.

Events that move the wage.

MIC 0209 Which Labor Curve Shifts, and Which Way

Given an event in a labor market, decide which side it changes and which way, then read wage and employment off the shift. Product demand, training, technology, the number of firms, regulation and other input prices shift labor demand; population, required education, licensing, benefits and wages elsewhere shift labor supply. Demand right raises wage and employment; demand left lowers both; supply right lowers the wage and raises employment; supply left does the reverse. For construction workers: new families wanting houses, demand right, both rise; prefabricated framing, a substitute technology, demand left, both fall; a training program, demand right, both rise; a rival trade raising its pay, supply left, wage up and employment down. A minimum wage is not a shifter but a floor, and more workers is supply, not demand.

The floor governments set here.

MIC 0210 Minimum Wage and Living Wage

A minimum wage is a legal floor under the hourly wage, and a living wage is a higher local floor, usually applied to a city's own employees and contractors. A floor above equilibrium draws more job-seekers while employers hire fewer. Workers who keep their jobs gain; workers who lose them do not, and both groups are in the same diagram.

Whether the floor bites.

MIC 0211 Is the Minimum Wage Binding?

A minimum wage matters only where it sits above the equilibrium wage for the workers it covers. Below the equilibrium the floor is not binding and employment stays where it was; many jobs already pay more. Above it, the quantity firms demand at the floor is employment, the quantity offered is larger, and the gap is the surplus, which grows the higher the floor sits. Low-skill labor in a city clears at eleven dollars with twelve thousand jobs. A floor of ten changes nothing. A floor of twelve binds: firms want eleven thousand two hundred and thirteen thousand offer, a surplus of one thousand eight hundred and a job loss of eight hundred. A floor of fifteen binds harder: eight thousand five hundred wanted, fifteen thousand five hundred offered, a surplus of seven thousand. The surplus is not the job loss, because the higher wage also drew in new job-seekers.

What the evidence says about the size.

MIC 0212 The Employment Effect: What the Evidence Says

The model predicts that a binding minimum wage lowers employment. Studies disagree on how much: some find a ten percent rise cuts low-skill hiring by one to two percent, and some find none. The dispute is about size, and it is a positive question. Whether lost jobs are worth higher pay for those who keep theirs is normative, and the course reports both positions and takes neither.

Technology and the wage gap.

MIC 0213 Technology and the Wage Gap

Run the four steps twice. Information technology substitutes for routine low-skill work, shifting that demand left, so wage and employment fall. It complements high-skill work, shifting that demand right, so both rise. The gap between the two wages widens from both ends. The model gives the direction; how much of the measured gap it explains is an attributed estimate, not voiced here.

Five entries on the third market: savers and borrowers, the interest rate as a price, what shifts each side, and a credit market worked.

The third market.

MIC 0214 Savers and Borrowers

In the market for financial capital, savers supply funds and borrowers demand them, and any household, firm or government can be on either side. A family saving for retirement supplies; a firm building a plant demands. Lending your savings is supplying capital, not demanding it; the side is set by which way the money moves now.

The price in this market.

MIC 0215 The Interest Rate Is the Price of Capital

The interest rate is the price of borrowed funds. A higher rate lowers the quantity borrowers want and raises the quantity savers offer, so the curves cross at an equilibrium rate. Above that rate funds go unlent; below it, borrowers are turned away. The rate is the return to waiting, and unit fifteen shows that it also discounts every future payment.

What moves the two curves.

MIC 0216 What Shifts Saving and Borrowing

The supply of funds shifts with income, plans for the future, and the risk and return of alternatives. The demand for funds shifts with borrowers' confidence about repaying and about their projects' returns. New technology shifts business borrowing right; a downturn shifts it left. A change in the interest rate moves along both curves; only these other events shift them.

Why saving's response is uncertain.

MIC 0217 Saving and the Interest Rate: Two Effects

A higher rate makes consuming now dearer, so people substitute toward saving. It also lets a saver reach a target with less saving, so income pulls the other way. The supply of funds slopes up because the first effect usually wins. The pair is the same one that bends the labor supply curve, and unit five names them the income and substitution effects.

A credit market worked through.

MIC 0218 A Credit Market: Shift and Usury Cap

Analyze a credit market with the four steps and the binding test. Draw the market with the interest rate on the vertical axis, decide whether the event changes savers or borrowers and which way, and read the new rate and quantity. For a usury law, a legal ceiling on the rate, compare the ceiling with the equilibrium: above it, no effect; below it, a credit shortage of willing borrowers refused at the legal rate. Small-business loans clear at eight percent with four hundred million lent. Software that judges applications more cheaply shifts the supply of funds right: the rate falls to seven percent and lending rises to four hundred sixty million. A cap at nine percent sits above seven and does nothing. A cap at five binds: borrowers want six hundred million, lenders offer three hundred million, a credit shortage of three hundred million. The refused borrowers are invisible in the loan statistics, because no loan was made.

Two entries to close: what a price does in all three markets, and the whole unit in one chain.

What a price does in all three markets.

MIC 0219 Prices Carry Information in Three Markets

A price, a wage and an interest rate all transmit what is known about scarcity. A rising wage tells students to train; a rising rate tells firms to postpone weak projects; a grower plants more oats without knowing why the oat price rose. A control kills the messenger: the forces beneath the price remain, and only the signal is gone.

The whole unit in one chain.

MIC 0220 One Model, Three Markets, Worked

One method covers every market in this course, and running it three times shows the differences are names, not logic. Draw the market before the event, with the market's price on the vertical axis: a dollar price, a wage, or an interest rate. Decide which side the event touches, remembering who is on each: households buy goods and sell labor and funds, while firms sell goods and buy labor and funds. Decide the direction, draw the shift, and read the new equilibrium against the old. Too much at the going price is a surplus of a good, unemployment in the labor market, and idle funds in the credit market; a legal price is a ceiling, a minimum wage or a usury cap, and it matters only when it forbids the equilibrium. A city's population jumps as a new plant opens. In the apartment market, more buyers shift demand right: rent rises and more units are let. In the labor market for shop workers, more residents shift supply right: the wage falls and employment rises, unless the plant's own hiring shifts demand right too, in which case employment rises for certain and the wage could go either way. In the mortgage market, more households wanting homes shift the demand for funds right: the rate rises and more is lent. Households are on different sides in different markets, so one event is a demand shift in one market and a supply shift in another, and the answer came from asking which side the newcomers stand on.

Look at what you can now do. You can relabel the diagram: the price becomes a wage or an interest rate, and households move to the selling side. You can name what shifts labor demand, from product demand to technology, and what shifts labor supply, from population to licensing, and read the wage and employment off a shift. You can find the equilibrium wage where a schedule's columns match, and say that a minimum wage binds only above it, with a surplus larger than the job loss. You can report the employment effect as a dispute about size, and trace technology to a wage gap that widens from both ends. And you can work a credit market through a shift and a usury cap, and run the four steps in any market by asking what is traded and what its price is called. Unit four asks how much quantity responds when a price moves.