Your answer presumes that supply and demand agents in the labour market have equal bargaining power, which clearly is not the case, when one party to a deal has excess power they will effect the outcome of the deal to their advantage.
Imagine for a moment you have come from a background of wealth, you can hold out indefinately for a high paid job. You may not have personal wealth, but family members will support you until you can go through the maximum levels of education that are acheivable, and get that dream job.
If you come from a poor background, you have practically no bargaining power, you take any job at any wage that can allow you to subsist (survive), as soon as practical, often before even basic education is completed.
So you can now see why supply/demand do not effect prices in a vacuum. Now you also understand why economists arent very good at describing the real economy, many of them never experienced it.
Exactly. It's precisely due to the positional imbalance between economical actors that the government should intervene in order to level the power relations among different parts. A capitalistic system without any regulation and redistribution mechanisms quickly degrades into an oligarchy of a few offensively wealthy people.
The fact there there is a surplus of work force with respect to labor demand is actually a strong reason for the government to intervene in labor prices. If the labor market is left unregulated, and with technology quickly replacing lots of work posts, wages will tend to drop overtime because employers hold the higher hand and, as you said yourself, there will be plenty of people accepting poorer and poorer work conditions in order to just survive.
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I think it's a shame that many unions have become left wing political organisations, they should be using collective bargaining to protect workers but that seems to have become lost in attempts to have excessive political power.
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