Demand and Supply Factors in Labor Market

History of the Topic

Supply and demand of labor has been an issue for quite some time. In the early 1800s, economists tried to understand the shifts in the demand and supply of labor with the view of bringing long term stability and solutions in the event of a crisis in this field (Coeurdacier, Kollmann & Martin, 2007). In their study, they discovered that the shifts to the left or to the right usually noticed in the labor demand and supply curves were necessitated by several factors. Among these factors were: changes in salaries and wages, wealth, technological changes, growth or decrease in population and increase or decrease in the prices of related goods and services (Phillips & Gully, 2015). This paper discusses the factors that bring about negative and positive shifts in the labor demand and supply curve and appropriately relates them to the corresponding shifts.

The supply and demand of labor relate differently in different countries depending on the nature of the factors that prompt changes in both demand and supply (Prasch, 2008). Discussing this relationship is very important to human resource as it helps firms know which measures to adapt in order to maintain high profits at affordable efficient amounts of labor (Coeurdacier et al, 2007).

Factors that Affect Supply and Demand for Labor

Rise of Salaries and Wages

An increase in salaries motivates more workers qualified for certain jobs on the market to look for them (Coeurdacier et al, 2007). In such a situation, the market experiences more labor that it requires. Consequently, many firms end up employing more people and spending more on wages than they would. The goods produced are, therefore, produced at higher costs. This situation means that the firms will make less profit compared to when they produce the goods at lower costs (Phillips & Gully, 2015). The most sober action for firms to take in order to overcome this crisis is reducing the number of employees (Drinkwater, 2013). The ultimate result of such a decision is a higher supply of labor and less demand for the same.

Wealth Effects

It is normal that whenever employees’ income increases, they tend to prefer working for fewer hours than when they do not have as much wealth. Many of such employees like spending most of their time on leisure activities than at work. The labor demand and supply curve for this state is one that curves upwards. Therefore, there will be more demand for labor than there is on the market (Coeurdacier et al, 2007). For instance, an individual who has made savings totaling to $ 500, 000 will not be as willing to work as somebody else whose bank only has $10, 000.

Technological Change

The 21st century has been a century of technology. There is a machine and a computer for almost every field of production. Many of the jobs that were previously done by human beings are currently being done by machines. The best example is the taking over of machines in tea harvesting. There were major demonstrations and lamentations about loss of jobs due to this takeover in tea producing countries but all these complaints fell on deaf ears. About 500,000 million jobs were lost in the early 90s and about four times of this number have been lost today (Coeurdacier et al, 2007). As a consequence, the supply of laborers increased but the demand for it drastically reduced.

Change in Population

According to Carneiro et al (2006), an increase in population is, in normal circumstances, followed by an equal increase in the supply of labor for each level of wage. When this happens, many people will be willing to work despite the eventual downward movement of wage levels. Firms will reduce the amounts they spend on salaries and wages but, still, there will be more labor than the market can support (Carneiro et al, 2006). Therefore, many people will be unemployed despite having the necessary qualifications and skills. On the contrary, when a country experiences low birth rates or comes up with harsh immigration laws, the supply of labor will drastically go down (Prasch, 2008). Many firms will want to have more employees but the market will have none to offer (Phillips & Gully, 2015). Many efforts to move the supply of labor to the right will be futile. Such initiatives may include increasing salaries and wages to stimulate interest in their jobs (Kollman, 2006). Some firms may even offer their employees privileges to work for fewer hours at the same pay.

Changes in Prices of Related Goods

The demand and supply of labor can also be affected by shifts in the prices of related goods. An increase or decrease in prices of related goods will either stimulate or discourage people from working (Phillips & Gully, 2015). For example, an increase in the salary of employers will motivate them to look for house helps. Conversely, a decrease in salaries will discourage bosses from looking for house helps.

Detailed Current Practices

Modern labor markets are characterized by high levels of specialization (Prasch, 2008). Many employees specialize in certain fields by going through specialized college education. Therefore, one’s probability of getting a job is limited to his or her field of specialization. The labor market is also characterized by the invasion of technology and mechanization (Prasch, 2008). The supply of labor is, most of the times, higher than the demand since technology and machines have replaced human labor.


Carneiro, F., Gill, I., & Barros, R. (2006). The third dimension of labor markets. New York: Nova Science.

Coeurdacier, N., Kollmann, R., & Martin, P. (2007). International portfolios with supply, demand and redistributive shocks. Cambridge, Mass.: National Bureau of Economic Research.

Drinkwater, M. (2013). The impact of wages on the supply of labor. Upper Saddle River, NJ: Pearson/Prentice Hall.

Kollman, D. (2006). Price wars. New York: Oxford University Press.

Phillips, J., & Gully, S. (2015). Strategic staffing. Upper Saddle River, NJ: Pearson/Prentice Hall.

Prasch, R. (2008). How markets work. Cheltenham, UK: Edward Elgar.

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