go up in others too. When economists talk about the labor market, they are describing these similarities.

The labor market, like all markets, has a demand and a supply. Why do firms demand labor? Why is an

employer willing to pay you for your labor? It’s not because the employer likes you or is socially conscious.

Rather, it’s because your labor is worth something to the employer--your work brings in revenues to the firm.

How much is an employer willing to pay? That depends on the skills and experience you bring to the firm.

If a firm wants to maximize profits, it will never pay more (in terms of wages and benefits) for a worker than the

value of their marginal productivity to the firm. We call this the first rule of labor markets.

Suppose a worker can produce two widgets per hour and the firm can sell each widget for $4 each. Then the

worker is generating $8 per hour in revenues to the firm, and a profit-maximizing employer will pay the
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