Describe two factors that affect labor supply and two factors that affect labor demand?

Answer 1

The determinants of labor demand depend on which model is being observed or utilized. One model is the efficiency wage model is based off the gift exchange theory, and the cost of job loss theory of employment. Gift exchange theory is the idea of the employee productivity is related to the compensation of the job (with diminishing returns). Cost of job loss states that there are significant costs to the employee for losing their job and is motivated by the fear of losing the job. Both theories produce an equilibrium that is above the market wage because its goal is to maximize labor productivity, where the quantity per wage ratio is maximized, rather than to minimize production costs. In the competitive model of the labor market, the firm has a downwardly sloping demand curve where there is a negative relationship between employment and wage; employment decreases as wage increases and vice versa. Also in this model the supply curve for labor is perfectly elastic. This is because in a competitive market the firm is a wage taken and has no control over the wage of the employees. Neither supplier nor demander of labor has any bargaining power to raise or lower wages, thus there is one wage and both parties will be able to participate in the labor market as much as they choose. The determinants of labor supply also depend on which model is being observed or utilized. One way of looking at labor supply is the neoclassical model. This model looks at the indifference curve of an individual in terms of labor versus leisure. It looks at the extensive and intensive margins of labor supply. The extensive margin of labor supply is the decision to go into the labor market, and the intensive margin of labor is the decision of how many hours to work in the labor market. The main concept behind the extensive margin is the reservation wage, which is the lowest wage an individual will work for one hour. The main concept behind the intensive margin is the individual preferences regarding leisure and work. This framework implies that each person will have different labor supply behavior. Another determinant of labor supply looks at the role of institutions and culture to influence how much an individual will work. Evidence for this model is more to do with the implementation of social programs and changing social structures than a predictive model. It looks at increased gender equality to look at the increase in labor participation by women. It also looks at the implementation of child daycare programs that also look at the increase in women labor participation.