How has the pandemic impacted the labor market and demand for labor? Wages?
Labor is a derived demand for the products and services offered in markets. In order to understand labor demand, we must understand how supply and demand determine equilibrium wage rates for industries and how individual firms respond (Butters & Asarta, 2019).
In labor markets for industries, shift factors will cause changes in supply and demand. Chief among these factors is demand for products and services produced by firms. If demand for cloth masks increases, the demand for labor and other factors of production will increase. In a competitive market, supply and demand will determine the equilibrium wage rate and quantity of labor demanded.
At the firm level, market wage rate is a given and represents the marginal cost per hour of an additional worker. Supply is perfectly elastic and a horizontal line at the market determined wage rate.
Diminishing marginal returns factor into how much labor a firm will higher at the given wage rate. In the short run, one or more of the factors of production are fixed. Therefore, adding more labor initially increases output of goods and services at an increasing rate. As more labor is added, overall output increases, but at a decreasing rate because of diminishing marginal returns. Factories are fixed and equipment used is also fixed. At some point, output will reach a maximum and then rapidly decrease with too much labor.
Firms will translate output into marginal revenue product by multiplying output by the price products or services will sell for in markets. To maximize use of labor, firms will figure out marginal revenue product of labor. In other words, the change in revenue is compared to the marginal cost of labor. Labor will be hired until the marginal revenue product of labor equals marginal cost or wage rate.
In practice, demand for labor is a bit more complicated. Firms do not or should not maximize revenue because increasing revenue also means increasing costs. At some point, bringing in an extra dollar of revenue far exceeds a dollar in cost. Firms should focus on maximizing profits. Therefore, firms will aim for maximum profit and back into production schedules and resource demand to achieve that profit level. Firms will adjust if monthly or quarterly profit targets deviate from plan or change because of market conditions.
For further consideration, how has the pandemic impacted the labor market and demand for labor? Wages?
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