Classical Labour Market Concept

The classical labour market theory is an economic model that explains how employment and real wages are determined in a competitive labour market. According to classical economists, the demand for labour is decided by the marginal product of labour, which is the output produced by each additional unit. In other words, employers will demand more labour if the marginal product of labour is greater than the cost of hiring an additional worker.

On the other hand, the labour supply is determined by the opportunity cost of leisure. This means that workers will supply more labour if the wage rate exceeds the value, they place on their leisure time. In other words, the higher the wage rate, the more workers will supply labour.

The demand and supply functions of labour can be graphed as follows:

Demand for Labour: D(L) = MP(L) x P
Supply of Labour: S(L) = W

Where:
D(L) = demand for labour
MP(L) = marginal product of labour
P = price of output
S(L) = supply of labour
W = wage rate

The equilibrium condition in the classical labour market is where labour demand equals labour supply. This means that at the equilibrium wage rate, the quantity of labour demanded by employers equals the amount supplied by workers. The equilibrium wage rate is determined at the point where the demand and supply functions intersect, as shown in the following graph:

Here is an example graph of the urban labor market:

In conclusion, classical economists believe that the labour market operates like any other competitive market, with the wage rate determined by the intersection of the demand and supply functions. The demand for labour is determined by the marginal product of labour. In contrast, the labour supply is determined by the opportunity cost of leisure. At the equilibrium wage rate, the quantity of labour demanded equals the amount supplied, resulting in total employment in the labour market.