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Labor and Labor Markets, Labor Supply and Demand

computer programmers, product markets, blacksmiths, labor markets, geographic regions

The wages and salaries that U.S. workers earn vary from occupation to occupation, across geographic regions, and according to workers’ levels of education, training, experience, and skill. As with goods and services purchased by consumers, labor is traded in markets that reflect both supply and demand. In general, higher wages and salaries are paid in occupations where labor is more scarce—that is, in jobs where the demand for workers is relatively high and the supply of workers with the qualifications and ability to do that work is relatively low. The demand for workers in particular occupations depends largely on how much the work they do adds to a firm’s revenues. In other words, workers who create more products or higher-priced products will be worth more to employers than workers who make fewer or less valuable products. The supply of workers in any occupation is affected by the amount of time and effort required to enter that occupation compared to other things workers might do.

Workers seeking higher wages often learn skills that will increase the likelihood of finding a higher-paying job. The knowledge, skills, and experience a worker has acquired are the worker’s human capital. Education and training can clearly increase workers’ human capital and productivity, which makes them more valuable to employers. In general, more educated individuals make more money at their jobs. However, a greater level of education does not always guarantee higher wages. Certain professions that demand a high level of education, such as teaching elementary and secondary school, are not high-paying. Such situations arise when the number of people with the training to do that job is relatively large compared with the number of people that employers want to hire. Of course this situation can change over time if, for example, fewer young people choose to train for the profession.

Supply and demand factors change in labor markets, just as they do in markets for goods and services. As a result, occupations that paid high wages and salaries in the past sometimes become outdated, while entirely new occupations are created as a result of technological change or changes in the goods and services consumers demand. For example, blacksmiths were once among the most skilled workers in the United States; today, computer programmers and software developers are in great demand.

The process of creative destruction carries over from product markets to labor markets because the demand for particular goods and services creates a demand for the labor to produce them. Conversely, when the demand for particular goods or services decreases, the demand for labor to produce them will also fall. Similarly, when new technologies create new products or new ways of producing existing products, some workers will have new job opportunities, but other workers might have to retrain, relocate, or take new jobs.

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