A labor market has a demand curve (built from MRP, Marginal Revenue Product and Hiring) and a supply curve (people's willingness to work). Shifts work exactly as in When One Curve Shifts, with the wage as the price.
Key idea
Labor demand shifts when the price of (or demand for) the product changes, when productivity changes, or when the prices of other inputs change (a cheaper substitute input lowers labor demand; a cheaper complementary input raises it). Labor supply shifts with the number of workers, people's preferences and the training or licenses required, and pay in other jobs. A change in the wage itself is a movement along both curves.
Why it works
Labor demand is MRP, which is MP times the product's price, so anything that changes either moves the whole curve: a rise in the price of bread raises every baker's MRP. Supply comes from people choosing among jobs and other uses of time. If pay rises in a different occupation, some workers move there, so supply to this one falls at every wage. And as always, the wage in this market is on the axis, so a wage change is a movement, not a shift.
Worked example: Two events for bakers
What happens to bakers' wages and employment? (a) Demand for bread rises, raising its price. (b) A new law requires a two-year baking license.
- (a) Bakers' MRP rises: labor demand shifts right. Wage up, employment up.
- (b) Fewer people can enter: labor supply shifts left. Wage up, employment down.
Answer: (a) wage and employment rise; (b) wage rises, employment falls.
Worked example: A substitute input
Self-checkout machines get much cheaper. What happens to the demand for cashiers?
- Machines and cashiers do the same job: they are substitute inputs.
- Cheaper machines lead stores to use more machines and fewer cashiers at every wage: labor demand shifts left.
Answer: Demand for cashiers falls.
Common mistake
Shifting labor demand when the wage changes, or forgetting that labor demand is derived from demand for the product. A higher wage moves firms up along their demand curve. Check: is the wage the thing that changed? Then it's a movement. Did something change MP or the product's price? Then demand shifts.