Supply of and Demand for Labour:

The quantity  of  labour supplied (L^s  ) by households  depends upon the prevailing wage rate.  Ifwage  rate  is  too low  certain  individuals may opt out ofthe market while at higher wage  rate  individuals  may put in more working  hours. Thus there  is  a direct  relationsGp between labour supply  and wage rate. Remember that when we talk of  unemployment, we mean 'involuntary unemployment'; we exclude  voluntary unemployment. The  'lab force' or  'workforce' is  the sum  of  employed and unemployed persons. Unemploymdnt rate  is defined as  the percentage  of  labour  force that is  not employed.

The  quantity  of  labour demanded (L^D ) is a downward sloping curve of wage  rate. By interaction of  the supply and demand curves of labour the equilibrium wage rate is determined. Wage  rate can be measured in nominal or  real terms. By nominal wage (w)  we mean wage accounted  in money terns. On  the other hand, by real wage we mean  nominal wage adjusted  for price  change (w/P).  Thus if  there  is  an increase  in price  level (P)  and nominal wage  rate does not increase then there  is  a decrease in  real wage rate.