Wage determination in a competitive labor market, productivity, participation, and equilibrium employment.
Warming up the engine…
Supply and demand applied to work: firms demand labour (downward sloping, from diminishing marginal product) and workers supply it, setting the real wage and employment.
Labour demand: w = MPL ; equilibrium where labour supply meets labour demand
Firms hire until the last worker adds just enough output to cover their wage, so anything that raises productivity (technology, capital, education) raises labour demand and wages. A binding minimum wage above equilibrium creates a gap between how many people want jobs and how many jobs firms offer.
Always draw the wage floor ABOVE the equilibrium wage; a minimum wage below equilibrium changes nothing. Unemployment on the diagram is the horizontal gap between supply and demand at the floor.
Now prove you have it
Move the curve to where you think it lands, and get told exactly which part you got right.
Real-world scenarios on this model
Equilibrium at L 54, w 47.
Equilibrium: L* = 53.8, w* = 47.3
Current equations
A market like any other, except the 'good' is hours of work and the 'price' is the wage. Firms demand labor (more when workers are productive or business is booming); people supply it (more when wages are higher). The intersection sets employment and the going wage.
Source: Borjas, Labor Economics, ch. 2-4