The Labor Market in Economics

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  • 0:02 Intro to Labor Markets
  • 2:30 Supply and Demand in…
  • 4:12 Market Forces and the…
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Every wonder why a CEO with a bachelor's degree makes more than a teacher with a master's degree? As this lesson explains, labor is just like any other good in an economic world and is subject to supply and demand.

Scarcity in Labor

The roles of producer and consumer are flipped when it comes to resource markets, and labor is no exception. In order to provide whatever goods or services that a firm makes, it requires input materials, and one of those input materials is labor. After all, even the most automated factories in the world need someone to press a button every once in a while. And what about the people who design the robots for those automated factories? Surely, their jobs are safe and, probably, in pretty high demand.

Economists classify any sort of job, whether it's physical labor, sitting at a desk, or operating a vehicle, as labor and, just like any other good or service, it is subject to the same rules of supply and demand. In fact, wages and salary are nothing more than the price paid for the work done. In fact, it may not surprise you to learn that there are labor markets, which refers to when labor is exchanged for wages, just as if it were any other commodity.

To better understand how labor markets work, we'll look at two very different labor markets during this lesson: the labor market for teachers and the labor market for CEOs.

Why CEOs Make More than Teachers

Speaking of salaries, perhaps no two groups get more attention paid to their salaries than CEOs and teachers, and often for two very different reasons. Some CEOs make hundreds of times the amount of money in their salary as their employees do. And that's without cushy perks like stock options, company jets, and the ability to work from just about anywhere. Meanwhile, the median pay for a first-year teacher in some parts of the country was as low as around $36,000 in 2015, with only a tiny percentage of teachers ever making more than $100,000 a year. While some people may argue that teachers get summers off, the actual reality is that teachers often work 60 hours a week during the school year, meaning they end up working almost 160 hours more per year than most 40-hour-per-week people. Almost every few weeks you can find an article in the news decrying that teachers make so little, while even more frequently you can find someone saying that CEOs make too much. So, what gives?

In short, it's classic supply and demand. The supply of people qualified to work as teachers is massive; literally, millions of them exist. It is an extremely well-supplied labor market. Therefore, consumers, in this case, schools, can afford to pay a much lower price for their work. Also, as you're prone to hear when talking to a teacher, they don't do their work for the money. Jaded as it sounds, don't think for a second that schools forget that their labor is overwhelmingly passionate about their work.

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