Students: Trn Thi Quynh Anh & ng Khanh Huyn

As economic strength creates

competitive market, firms and workers attempt to lower
unemployment as much as possible
Foreign Trade University
Monday, December 09, 2014

http://www.washingtonpost.com/blogs/wonkblog/wp/2014/12/0
5/u-s-economy-added-321000-jobs-in-novemberunemployment-rate-holds-at-5-8/
The Principle of the Invisible Hand
In a competitive market, none of the many buyers and sellers have
influence on the market price. Prices are driven by natural behaviors of
market participants and in turn, determine which buyers and sellers
participate in the market. Total surplus is the sum of consumer surplus
and producer surplus. In other words, it is a good or services value to
buyers minus its cost to sellers. By rationing the scarce resources, the
price system, as an invisible force, maximize the benefits of buyers
and sellers. The Principle of the Invisible Hand states that under certain
ideal conditions, the competitive market equilibrium will maximize the
total surplus generated from the available resources. The case of
recent change in the US labor market is an example of the abovementioned principle.
When crisis swept the worlds
greatest economy, demand for jobs
declined substantially. The labor
market was then highly inefficient
as unemployment rate reached
high record - 10% in Oct 2009
(according to Bureau of Labor
Statistic Data). Wage and quantity
of labor was low; so were the
surplus of workers and firms.
However, the last months of 2014
have seen some promising signs of
an economic revival.
Earlier in the recovery, firms were getting more tentatively proactive.
Jobs came back and the labor market became somewhat more
competitive. Average wage improved negligibly. This was largely

attributed to fact that the increase in quantity demanded was for the
low-income workers. As the wage moved along toward the equilibrium
wage on the supply curve, the surplus of suppliers and demanders
both increased. Therefore, total surplus increased, but not much.
Although the growth was not remarkable, the low-income boom paved
the way for the upcoming great increase in wages.
As the US economy is healing
faster, firms need more workers
to gain their potential profits.
The number of jobs added in
November was 321.000 jobs the strongest annual jobs
growth since the late 1990s.
This leads to a shift upward of
the demand curve. That is, with
any given wage, the labor
market
will
provide
more
workers. The unemployed gets
jobs and the former workers
have more job choices. Unemployment rate decreases to 5,8%, a
post-recession low point. The job increase results in a significant
growth in the amount of wage. In particular, high-skilled workers now
can choose which jobs are more preferable considering salary, location,
work hours, In other words, they have more incentives to change
their jobs to gain the best advantage. This puts more pressure on
employers. They have to grant higher wages if they want to retain
their best employees or bid for new applicants. Thus as the demand
curve shifts out, Producer Surplus of the labor market increases.
The increasing wage also signals that firms are earning big profits. As
the economy is stronger, the economic environment is more
competitive. Companies are motivated to increase operation and
manufacture. They have to hire higher-skill workers to improve
productivity. As a result, the demand curve shift upward: Increasing
salary and more recruitment is inevitable. The profits are far big
enough to offset the labor cost and the Consumer Surplus, therefore,
grows.
To sum up, as the demand curve shifts upward, the total surplus grows.
With firms and workers being more proactive in the market,
unemployment rate is lowered and the total surplus tends to be
maximized with available resources.
The stronger economy creates a more competitive market for labor.
The participants in the market (workers and firms) are trying to drive

the wage to equilibrium point, at which no individuals are better off

doing something else. The interaction of their natural behaviors, like an
invisible hand, adjusts the wage to maximize the total surplus of all
participants. In reality, the absolute equilibirum wage of US labor
market will hardly be achieved because unemployment will always
exist . Yet it is undeniable that the wage is still under control of the
Invisible Hand as participants in the markets invariably want to
maximize their surplus.