Introduction to Labor Markets

The economic theory of consumption highlights scarcity as one of the main determinants of decision making among consumers. In the same manner, firms make decisions to increase on reduces prices, among other decisions based on the current market incentives. In both situations, it all comes down to decisions that must be made in the decision-maker's best interest. Things are not very clear. They go back to data from similar situations and compare the most probable outcomes.

Labor markets are one of the main concepts of modern economies, especially when it comes to making decisions that influence a firm's growth and the general economy. Labor is defined as the amount of physical, mental, and social effort used to produce goods and services in an economy. It is crucial in the supply of expertise, manpower, and services necessary in creating a finished product out of raw materials. Traditionally, the labor market deals with human workers and human capital. However, with the rise of technology, machines are coming up to take some of the people's main roles. Nevertheless, people still remain crucial to the markets since they are in charge of running these machines. In other words, there would be not machines if people are not involved. It is people who make an informed decision based on what affects society at large.

At the end of the day, it is people who consume the goods and services provided. They receive wages and use the same to buy the goods and services, even those they don't produce themselves. If possible, people would be making everything they need from the comfort of their homes to not spend anything but what they need. But as we mentioned, scarcity at the beginning of this subject is the reason people work hard every day. Most people are motivated by the need to live a comfortable life, which includes having everything the market can afford. Human needs are too many that they overwhelm the little resources available. In other words, human needs are unlimited, whereas resources to meet them are limited. Hence, there is a need for a good relationship between households and markets. People provide labor and the human-powered needed to run firms, whereas markets offer the products and services necessary to meet the modern demands of life. Those who don't have the desired skills or abilities often don't get paid living wages, whereas those with the highest setting to skills (mostly education) get the highest paying jobs. And in many countries, minimum wages have been set to make sure their workers get enough wages to cover living costs.

There are four main factors of production that influence supply. The main one is labor, which provides the desired input in terms of firm needs. The second factor is land, which represents natural resources or raw materials needed in an economy. Then there is the capital, which stands for capital goods like machinery, equipment, and chemicals used in the production process. The fourth fact is entrepreneurship, which is the drive to profit from innovations. It is in labor that issues like investing in the human capital rise. Modern economies have discovered the importance of investing in people through training and proper education systems. Societies that are seen to advance more economically are defined by how much they invest in their people. Qualified labor leads to the production of desired goods and encourages faster growth. Market economies use these components of supply to meet consumer needs.

In simple terms, the economy runs smoothly and efficiently if their members on a particular job that put their skills to maximum use. Efficiency in economies calls for the properly-outlined production process, which is mostly determined by labor. When people are paid according to their worth, they are incentivized to work more and produce more. Today, one of the main economic drives is to ensure the best match between skills, jobs, and pay, which keeps the supply of labor dynamic. This leads to some form of natural unemployment at every stage of economic growth. For instance, the aspect of frictional unemployment gives workers the ability to quit a job as they seek a better one.

Measuring labor

We can all agree that labor is one of the main and most important aspects of economic growth and development, and it can be measured. This is done through the labor force of the labor pool. One must be available, willing to work, and have searched for work to be considered part of the labors. Labor forces come in different sizes based not only on the number of adults but also on the possibility of them getting a job. They appear in the number of people employed and unemployed in a country.

People are not automatically counted just because they don't have a job. Many are jobless because they are not looking for employment. For instance, stay-at-home mums and dads, retired students, are unemployed due to the nature of their current life. There are also discouraged workers who have given up on looking for work.

The real unemployment rate takes into account everyone who would like to have full-time employment. And this rate includes discouraged workers, those working part-time since they are not fully employed, and everyone else who fall in this bracket. Economy analysts use the labor force to help discover this rate. Then they use the unemployment formula, which is the number of unemployed people divided by the labor force as provided in the economy. The result is the number of people who don't have a job by they are actively looking for one.

Another approach is using the labor force participation index, which is the labor force divided by the civilian non-institutionalized population. The result is the number of people available and looking for work.

It is hard to look at the labor force without considering productivity, which is the number of goods and services that the labor force creates. In case a specific amount of labor and fixed amounts of goods created are a lot, that is called high productivity. High productivity means greater profits; it gives the workers, company, industry, and country a competitive advantage.

Types of labor and the theory Labor market

There are many ways of categorizing labor. The main factor considered is the levels of skills. In this case, we have unskilled labor, which does not require training. It mostly includes manual labor such as farmworkers, but it can also include service work like janitorial. The next category is semi-skilled, which calls for some education or training, like manufacturing jobs.

Another categorization concerns the nature of the relationship with the employer. Most workers are based on wages, which means there is a boss to supervise them. They receive a set of weekly benefits, which are there wages and incentives. Other work under contract labor, which includes a contract that specifies how much work should be produced. The worker determines how much they can don, and they are paid either on commission or standard set fee. There are not benefits in this case.

Thirdly, there is slave labor, which is illegal. The worker is forced to work under bad conditions. This category may also include child labor, where children are forced to work – they may or may not be paid.

The labor market is a term used by economists to describe all the different markets of labor. There are many labor markets in any economy, without any that can stand alone. Instead, there are defined by the different markets in which they operate. As discussed above, labor is the backbone of economic growth and development. It differs by the type of work, e.g., retail sales are different from a scientist. It is also differentiated by skill level where we have entry and more experienced workers, and the location. It is general knowledge that markets for administrative assistance are more local or regional compared to university presidents' markets in terms of location. Even though there are many differences in the labor markets, they all tend to operate in the same manner. For instance, if there is a positive growth in the economy and wages rise in one market, it tends to affect others. It is these similarities that economists refer to when they are talking about the labor market.

The market, just like any other, is characterized by demand and supply. Firm demand labor and employers are willing to pay for this labor. It is not the employer who likes you or has a social conscience, but because labor is something that brings forth revenue. It is one of the most important things an employer invests in. How much a firm is willing to pay depends on the employee's skills and experience on board. The first rule of labor markets is that firms never pay more for a worker than the value of their marginal productivity. This is the only way firms can make a real profit. If, for instance, a worker produces two widgets per hour and the firm sells each for $3, the worker is bringing in $6 per hour. A profit-maximizing firm will pay the worker up to $6, not anything higher because that is how much the worker is worth the company.

These figures also follow the calculation of marginal product, which is the additional output a firm can produce by adding one worker to the process of production. The employer will often pay for labor by the hour, which means the marginal product is the additional output the firm gets when they add one more worker to their production line. But for this definition to work, there are some assumptions you will need to follow. For instance, you may have to assume that workers are homogeneous, meaning they come from the same backgrounds, have the same experience and skills, and put in the same effort. Hence, marginal product depends on the capital and technology that the workers have to use. For instance, a typist can type more pager per hour with an electric typewriter when using a manual typewriter. And they can make even more pages using a personal computer and a word processing software. In other words, technology has a significant impact on the labor market.

The labor market allocation theory

A labor market is seen as a market where people offer their skills to employers, who, in turn, pay them in wages, salaries, and other forms of compensation. Those who participate in the labor market include anyone who is looking to offer their services for compensation, and any individual or organization looking for people to perform some labor for them. It is, therefore, a market that includes firms looking to employ and people seeking employment.

The standard labor theory, as seen above, is like any other resource. In general, the market determines how labor is allocated and how much it should cost. This is to say the market determines where a person should work and the minimum/maximum compensation they should receive. This is where the theory of market allocation comes in.

Labor market theory is simply a model whose main task is to simplify reality so that we can understand a complex idea. In this case, there are some assumptions that this model will make. The labor market theory assumes that the most important motivation in people's labor market is a wage, which includes other monetary compensations. It also assumes that workers are fungible; they are mobile; and that wages are flexible.

Like any other, in a labor market, the relationship between sellers (people looking for employment) and buyers (firms employing) is significant. Note that reality can be oversimplified when using the assumptions above in relation to these factors to get the general idea of how things are. The model will not predict the correct outcome if the assumptions are true in any specific use. Most important, demand and supply for labor follow the general economic laws of demand and supply. When there is too much demand for labor by firms, the prices go high, and if there is too little demand, the prices go high. This means, demand for labor increases as wages decrease and vice versa. It is important to understand these concepts and everything that relates to labor, including human capital and unemployment, for success in this course.

Author: James Hamilton