Labor Supply and Labor Demand and the Real World

Labor Supply and Labor Demand

There’s been a lot of talk about the minimum wage lately, and the idea that most people have is that the labor market behaves a like a well-behaved introductory economics market, where a rise in prices is associated with a decrease in quantity, and vice versa. But does the labor market behave the way the textbooks tell us?

Anyone looking at supply and demand for a product faces an identification problem; supply and demand are generally not observable. What is observable is the price and quantity.

The table below looks at the the correlation between the real seasonal average hourly earnings of production workers (Wt) and the seasonal employment to population (16 years and over) ratio (Qt) for 8 non-randomly selected periods beginning in January 1964 when hourly wage data became available, and running through October 2006, after which only preliminary wage data is available. The table also shows the correlation between Wt and Qt of 6 months later, and between Qt and Wt of 6 months later for selected time periods:

Periods___________Wt, Qt_____Wt, Qt+6______Wt+6, Qt
Jan 1964 – Jan 1969_____0.94_____0.95_____0.94
Jan 1969 – Aug 1974____-0.11_____0.34_____-0.54
Aug 1974 – Jan 1977_____0.85_____0.33_____0.39
Jan 1977 – Jan 1981_____-0.25_____0.14_____-0.51
Jan 1981 – Jan 1989_____-0.80_____-0.73_____-0.88
Jan 1989 – Jan 1993_____0.90_____0.92_____0.80
Jan 1993 – Jan 2001_____0.85_____0.80_____0.89
Jan 2001 – Oct 2006_____-0.71_____-0.71_____-0.27

The next table shows the percentage change in these two series over the same time periods:

___________________% ch W__________change in Q
Jan 1964 – Jan 1969_____8.32%__________2.3
Jan 1969 – Aug 1974_____2.46%__________0.2
Aug 1974 – Jan 1977_____-0.06%__________-0.8
Jan 1977 – Jan 1981_____-8.04%__________2.1
Jan 1981 – Jan 1989_____-3.54%__________3.8
Jan 1989 – Jan 1993_____-3.80%__________-1.5
Jan 1993 – Jan 2001_____6.50%__________3
Jan 2001 – Oct 2006_____2.75%__________-1.1

The folks who talk about the labor market as if it’s nothing more than a giant demand curve – insisting that a fall in employment accompanies every rise in prices – would only be pleased under two of the eight periods shown above, namely the Reagan and GW administrations. Under Reagan, real wages fell, but employment rose, and under GW, real wages have risen a bit but employment has fallen.

Workers fared best under LBJ and Clinton. Both quantity of labor, and its price rose, and the correlation between wages and employment was positive.

Both wages and employment increased under Nixon, but not by as much, partly because every time there was much of an increase in employment, wages tended to drop six months later.

Under Ford, the correlation between wages and employment was positive, but unfortunately, that is because both series fell.

Workers didn’t fare particular well under Carter or GW either.

So what does all this mean? Well, on aggregate at least, the labor market is more complicated than folks like George Will would assume.


Average Hourly Earnings
Employment – Population Ratio

If you want a copy of my spreadsheet, let me know.