*Labor Markets DOI: http://dx.doi.org/10.5772/intechopen.101687*

*Substitution and income effects. (a) the substitution effect dominates the income effect, (b) the income effect dominates the substitution effect.*

**Figure 5.** *Individual labor supply curve.*

The income effect dominates the substitution effect, and the individual is "buying" more leisure hours.

The substitution effect of a higher wage encourages the individual to work more, while the income effect encourages the individual to work less. Therefore, the individual labor supply curve is *backward-bending*.


**Table 2.**

*Individual and market labor supply.*

**Figure 6.** *From the individual labor supply curves to the market labor supply curve.*

#### **3.8 Market labor supply curve**

The individual labor supply can tell us how many hours an individual is willing to work given different wages. We can add together all the labor supply curves of the individuals to obtain the market labor supply curve.

**Table 2** shows the hours of work three different individuals are willing to supply under different wage rates. When the hourly wage rate is \$6, all three individuals are willing to work for 5 hours. Thus, the market's supply of work hours is 5 þ 5 þ 5 ¼ 15 hours. When the hourly wage rate is \$12, all three individuals increase their work hours. The market's supply of work hours is 8 þ 9 þ 9 ¼ 26 hours. When the hourly wage rate increases to \$15, individuals 1 and 3 increase their work hours, while individual 2 reduces work hours because his income effect dominates the substitution effect. The market's supply of work hours is 10 þ 7 þ 11 ¼ 28. The market's supply of work hours is still increasing even individual 2 reduces his work hours.

**Figure 6** shows the individual labor supply curves of individuals 1, 2, and 3. We get the market labor supply curve by horizontally adding up all the individual labor supply curves at any wage rate. Although an individual?s labor supply curve is backward-bending, the market labor supply curves usually are upward sloping, as shown in **Figure 6**. Just like the goods and services markets, higher wages mean a higher quantity supplied of labor.

### **4. The demand of labor**

In this section, we will focus on the behavior of the firms. Firms demand labor to use it as an input to produce output. For example, the demand for App developers is linked to the need to develop new smartphone software. Therefore, unlike goods and services, the demand for labor is a "derived demand."<sup>2</sup>
