The labour market is just like any other market.
It has two core elements to it:
Supply and Demand
Supply = the workforce and the accumulation of their skills (I.e. employees)
Demand = the demand for labour represents the quantity of such labour that is demanded by either the private or public sector (e.g. businesses wish to hire staff). It is whats known as a derrived demand, as the demand for labour depends on the demand for goods and services.
One more interesting aspect about the labour market in australia and most western countries, is that we have a minimum wage (or a price floor). This can sometimes result in unemployment if it is too high (see diagram)
Ew refers to the equilibrium wage which occurs naturally when the supply of labour falls in equilibrium with the demand for labour - as it would in any labour market.
Howevor, as we have a minimum wage, we don't realise this Equilibrium wage. Instead a price floor of Mw (Minimum wage) is imposed.
In this case, demand does not equal supply and we have unemployment. Demand for labour is only at point Mq, yet a far greater quantity of people wish to work at that minimum wage.
The line UE represents the level of unemployment which results from having such a minimum wage.
A few notes:
this is an extremely simplified model which relies on assumptions which are unrealistic and effects the validity of this model. That being said, it does demonstrate why unemployment can result from a minimum wage, and does show why we have no qualms about lowering the real wage if it will reduce unemployment.
