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There is a whole section of economic theory concerned with labour - people working for bosses in return for payment. We refer to such people as employees, and the bosses who employ them as employers. The theory of of labour does not concern itself with those who are self-employed (i.e. work for themselves).

Supply and Demand of Labour

The theory of supply and demand, as discussed in another section, apply to the workforce as well as to products. Essentially, the service being sold is the work done by the workforce, and the customers are the employers who are prepared to pay for the work.

I do not intend to go into the concept of supply and demand in great detail here. We can produce a graph showing the relationship between the quantity of labour demanded or supplied, and the wage rate paid to the workers (equivalent to the price in supply and demand).

The line marked Supply in the diagram represents the number of potential workers available in this particular market at any given wage rate. In general, the greater the wage rate offered, the more people will put themselves forward to do the work (i.e. the supply increases) - this is why the Supply line slopes up to the right.

Of course, wage rate is not the only factor governing the supply of labour. Many jobs (such as nursing or teaching) require specialised training, or it may be necessary for a potential employee to obtain some licence to work (such as a gun licence to work as a game-keeper). These factors will influence the slope of the Supply line, in a similar manner to Price Elasticity of Demand. However, we just consider the effect of wage rate.

Just because a large number of workers is available, it doesn't necessarily follow that all those workers will be employed. There may be many more workers available than there are jobs for them to fill. The diagram also contains a Demand line, which indicates how many jobs there are to be filled.

In general, at higher wage rates, there are fewer vacant places, as employers are less willing to pay such high wages. At lower wage rates, employers are willing to employ greater numbers of employees. This explains why the Demand line slopes down towards the right.

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