Supply and Demand in the Labor Market

Abstract

This paper presents a survey of recent microeconometric studies of the labor market, focusing on research that emphasizes the possible failure of measured wage rates to separate individual supply and demand decisions. On both the demand and supply sides of the labor market there is evidence that forces from the other side of the market influence employment outcomes through some mechanism other than the wage. On the supply side, this evidence takes the form of correlations between individual labor supply outcomes and market—level measures of employment demand in the individual's local labor market. On the demand side, it takes the form of correlations between firms’ employment decisions and measures of their employees‘ outside opportunities. Both sets of findings are inconsistent with simple supply and demand models, and suggest the need for alternative models of the labor market, which permit an uncoupling of short-run employment decisions from wage rates.