Question

If the equilibrium wage for bowling alley managers is \(\$ 16\) per hour, why would a wage of \(\$ 20\) per hour result in a labor surplus? Why would a wage of \(\$ 12\) per hour lead to a labor shortage?

Short answer

$20/hr causes surplus by reducing demand; $12/hr causes shortage by increasing demand and reducing supply.

Step-by-step solution

Identify Equilibrium Wage

The equilibrium wage, where supply equals demand for labor, is given as $16 per hour. It means that at $16 per hour, the quantity of labor demanded by employers is equal to the quantity supplied by workers.

Understand Wages Above Equilibrium

If the wage is set above the equilibrium wage (e.g., $20 per hour), employers are less willing to hire as many workers because it costs more per hour. Simultaneously, more workers are willing to work for the higher wage, resulting in a greater supply of labor than demand, hence a surplus.

Understand Wages Below Equilibrium

Conversely, a wage set below the equilibrium (e.g., $12 per hour) results in a situation where employers want to hire more workers because it's cheaper, but fewer workers are willing to work for the lower wage. This means demand exceeds supply, creating a shortage of labor.

Key concepts

Understanding Labor Surplus

A labor surplus occurs in a job market when the number of workers willing and able to work exceeds the number of jobs available at a particular wage rate. When the wage is set above the equilibrium wage, it tends to lead to a labor surplus.
Let's take the example of bowling alley managers. If the equilibrium wage is set at \\(16 per hour, this means at this rate, the supply and demand for labor are balanced.
However, if employers set the wage at \\)20 per hour, several things happen:

• Employers are less inclined to hire as many managers because it becomes more expensive to pay each employee.
• Meanwhile, more potential employees are attracted by the higher wage, swelling the ranks of job seekers.

This misalignment, where the supply of labor exceeds the demand, is what causes a labor surplus. The critical factor is that the wage is not at a level where the market clears — meaning all workers willing to work at that wage can find jobs.

Identifying Labor Shortage

A labor shortage unfolds when the demand for workers surpasses the available supply at a specific wage rate. This often occurs when the wage is set below the equilibrium, causing more jobs to be available than there are workers willing to fill them.
Consider again the case of bowling alley managers. With an equilibrium wage of \\(16 per hour, the market, in theory, should have jobs and workers perfectly matched.
However, by setting the wage at \\)12 per hour, two consequences emerge:

• Employers are keen to hire more managers because the lower wage reduces their costs.
• Conversely, fewer individuals are likely to accept or apply for these jobs due to the reduced pay.

This imbalance leads to a labor shortage, where jobs go unfilled because workers find the offered wage unattractive compared to other opportunities or their own wage expectations.

Supply and Demand in Labor Market

The concepts of supply and demand are foundational to understanding wage determination in any labor market. The equilibrium wage is where the supply of workers — those willing to work at various wage levels — meets the demand from employers for labor.

• **Supply side**: Workers are part of the supply side of the wage equation. They decide how many hours they are willing to work based on the wages offered.
• **Demand side**: Employers create the demand for labor. They determine how many workers to hire depending on the wage they need to pay versus the productivity and value those employees bring.

When the wage changes, it disrupts this balance:

• If wages rise above the equilibrium, the supply of labor increases, and demand decreases, leading to a surplus.
• If wages fall below the equilibrium, the supply of labor decreases, while demand increases, causing a shortage.

Thus, supply and demand are constantly adjusting to find a balance that satisfies both employers and workers, ideally resulting in an equilibrium where labor supply meets labor demand.