Section 2
Labor Market Equilibrium and Wage Determinants
By Boundless
Equilibrium in the labor market requires that the marginal revenue product of labor is equal to the wage rate, and that MPL/PL=MPK/PK.
The wage rate is determined by the intersection of supply of and demand for labor.
Some differences in wage rates across places, occupations, and demographic groups can be explained by compensation differentials.
Theoretically there is a direct connection between job performance and pay, but in reality other factors often distort this relationship.
In a perfectly competitive market, the wage rate is equal to the marginal revenue product of labor.
A shift in the supply or demand of labor will cause a change in the market equilibrium.
Unions are organizations of workers that seek to improve working conditions and raise the equilibrium wage rate.