Harvard economist Claudia Goldin explains how labor markets work in the Septmber 2004 issue of the Minneapolis Fed's The Region(woodrow.mpls.frb.fed.us/pubs/region/04-09/goldin.cfm). Here's an excerpt:
REGION: Married women roughly tripled their hours in the workforce between 1950 and 1990, while men and single women barely changed their participation. Several standing theories try to explain the trend through declines in wage discrimination, liberation from housework by labor-saving technology, etc. What is your understanding of this phenomenon?
GOLDIN: ... When you have a complicated problem such as this one, it’s very useful to organize one’s thoughts along the lines of simple supply and demand. Is it supply shifts, and what do we put on the supply side? Or is it demand shifts, and what exactly are we putting on the demand side?
...the starting point that I always use is Jacob Mincer’s. In one of his most famous papers written in the 1960s, Mincer was trying to understand changes in female labor force participation from the 1940s to the 1960s.
His working hypothesis was that we have a supply function of female labor and we have a demand function, and the demand function is shifting across a relatively stable supply function. The demand shifts were much greater than the supply shifts. What is the information we have available to us to assess this? Well, we have the fact that the real wages of women were rising at the same time that female labor force participation was increasing.
Behind the labor supply function are several variables and parameters of which the substitution and income effects are among the most important for study. Individuals make decisions about whether the value of their time in some other activity—let’s say in home production or in leisure—is greater or less than their value in the market. And as this real wage rises, more and more are going to get pulled into the labor force.
Mincer realized that there is a little bit of a problem here because if the wages of women are rising, then it’s most likely that the wages of men are rising, and if that’s true, then we have to consider the fact that there’s also an income effect. That’s how he viewed this: That the increase in female labor force participation is going to depend largely on whether the substitution effect is greater than the income effect.
In the period he was looking at, voilà,À, the impact of the substitution effect was monumentally greater than the income effect, and therefore he could go a long way in explaining this increase without considering any of these enormous complications.
That's just the beginning, as Goldin goes on to discuss her work on the gender gap, again applying simple (but clearly powerful) supply and demand arguments:
The back-of-the-envelope calculations in my book long ago were that from 1890 to 1930 supply-side factors were most important, whereas from 1940 to 1960 demand-side factors were most important. Well, that was the period Mincer was looking at, when this demand curve was shifting out over a very elastic female labor supply function. In the earlier period when the income effect was much stronger you have a far steeper supply function. So you can send that demand curve out to Neptune and it’s not going to have a very great effect on quantities. Prices are going to change but quantities aren’t.
And from 1960 to 1980, supply factors and demand factors are sort of sharing the load. What about from 1980 to 2000, which I didn’t do because I finished the book [Understanding the Gender Gap: An Economic History of American Women] in the late 1980s. I think it’s probably the case that demand factors have regained more importance, but I must confess that I haven’t looked at it. The important thing is to understand what the substitution elasticity is and what the income elasticity is.
It is worth reading the whole article to get this eminent economic historian's views on education, slavery, discrimination, and many other topics.