The equilibrium wage rate (W*) is the specific wage level where the number of workers employers want to hire equals the number of people looking for work in a competitive market. It is often called the market-clearing wage.

Key properties of the equilibrium wage:

• It is found where the labour demand and supply curves cross.
• It makes the worker’s marginal revenue product (the value of what they produce) equal to the wage paid.
• At this point, there is no structural unemployment; everyone willing to work at this wage can find a job.
• It acts as the fair market value for labour in a specific industry.

What happens when wages are not at equilibrium:

• If the wage is above W*: There is a surplus of labour. Because there are more workers than jobs, wages typically fall.
• If the wage is below W*: There is a shortage of labour. Because there are more jobs than workers, wages typically rise.

In the real world, things like minimum wage laws, trade unions, and limited information often stop wages from reaching this perfect balance.