Equilibrium in the Labor Market

Equilibrium in the labor market refers to a situation where the demand for labor equals the supply of labor, and there is no excess demand or excess supply of labor. In other words, the labor market is in balance, and there is no upward or downward pressure on wages.

Expected Real Wage

The expected real wage is the wage rate that workers expect to receive for their labor. It is the nominal wage adjusted for inflation. Workers base their expectations on various factors such as their skills, experience, education, and the market conditions.

Effective Real Wage

The effective real wage is the wage rate that workers actually receive for their labor. It is the nominal wage adjusted for inflation. The effective real wage depends on various factors such as the demand for labor, the supply of labor, and the bargaining power of workers.

Equilibrium in the Labor Market and Real Wage

Equilibrium in the labor market requires that the expected real wage in wage setting be equal to the effective real wage. When the expected real wage is higher than the effective real wage, there is excess supply of labor, and workers are willing to work at a lower wage rate. On the other hand, when the expected real wage is lower than the effective real wage, there is excess demand for labor, and employers are willing to pay a higher wage rate to attract workers.

Conclusion

In conclusion, equilibrium in the labor market requires that the expected real wage in wage setting be equal to the effective real wage. When the labor market is in equilibrium, there is no excess demand or excess supply of labor, and the wage rate is stable.