ABSTRACT
This chapter introduces key mechanisms underlying labor market outcomes by analyzing the supply and demand for labor. On the demand side, firms hire labor up to the point where the marginal value of an additional worker equals the wage, assuming perfect competition. On the supply side, individuals choose how many hours to work based on trade-offs between income and leisure, generating labor supply curves that may bend backward as wages rise. The chapter distinguishes between the intensive margin (hours worked) and extensive margin (labor force participation), and explores empirical findings suggesting low elasticity for prime-age men. It also addresses equilibrium in labor markets, the role of institutions like unions and collective bargaining, and the impact of minimum wages. The analysis incorporates monopsony power, showing how minimum wages can increase employment in non-competitive labor markets. The chapter offers a bridge between micro and macro labor economics, touching on taxes, migration, gender norms, and retirement policy.
