Section 2
Labor Market Equilibrium and Wage Determinants
By Boundless
Equilibrium in the labor market requires that the marginal revenue product of labor is equal to the wage rate, and that MPL/PL=MPK/PK.
![Thumbnail](../../../../../../figures.boundless-cdn.com/20501/square/factor-compensation.jpeg)
The wage rate is determined by the intersection of supply of and demand for labor.
![Thumbnail](../../../../../../figures.boundless-cdn.com/20510/square/police-poland-2-ab.jpeg)
Some differences in wage rates across places, occupations, and demographic groups can be explained by compensation differentials.
![Thumbnail](../../../../../../figures.boundless-cdn.com/20546/square/roductivity-and-real-wages.jpeg)
Theoretically there is a direct connection between job performance and pay, but in reality other factors often distort this relationship.
![Thumbnail](../../../../../../figures.boundless-cdn.com/20548/square/factor-compensation.jpeg)
In a perfectly competitive market, the wage rate is equal to the marginal revenue product of labor.
![Thumbnail](../../../../../../figures.boundless-cdn.com/20496/square/labour-supply-small.jpg)
A shift in the supply or demand of labor will cause a change in the market equilibrium.
![Thumbnail](../../../../../../figures.boundless-cdn.com/20568/square/lyoxford20060328-kaihsutai.jpeg)
Unions are organizations of workers that seek to improve working conditions and raise the equilibrium wage rate.