The Labor Market and the Distribution of Income

In the idealized market society that John Bates Clark envisioned, the wage is determined by the supply and demand for labor. The demand for labor is the Value of the Marginal Product of labor in the society as a whole. The supply of labor is determined by the population and the preferences of workers with respect to more income and consumption versus more holidays and shorter work hours. Here is a picture to illustrate the idea:

Figure 9: Division of Income Between Work and Property

The equilibrium is shown by the orange lines: the equilibrium wage is $500 per labor week, as in our earlier examples, and the equilibrium quantity of labor hired is something less than 500 units of labor. The total income of the workers is shown by the rectangular area shaded light green, and the total income to proprietors is the triangular area shaded light pink.