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There are two sides to labour economics. Labour economics can generally be seen as the application of
microeconomic or macroeconomic techniques to the
labour market. Microeconomic techniques study the role
of individuals and individual rms in the labour market. Macroeconomic techniques look at the interrelations between the labour market, the goods market, the
money market, and the foreign trade market. It looks at
how these interactions inuence macro variables such as
employment levels, participation rates, aggregate income
and gross domestic product.
Structural unemployment This reects a mismatch between the skills and other attributes of
the labour force and those demanded by employers. If 4 workers each take six months o to retrain before they start a new job, the aggregate un1
people have a limited amount of time in the day, and people are not manufactured.
The labour market also acts as a non-clearing market.
While according to neoclassical theory most markets
have a point of equilibrium without excess surplus or demand, this may not be true of the labour market: it may
have a persistent level of unemployment. Contrasting
the labour market to other markets also reveals persistent
compensating dierentials among similar workers.
Models that assume perfect competition in the labour
market, as discussed below, conclude that workers earn
their marginal product of labour.[1]
Natural rate of unemployment This is the summation of frictional and structural unemployment, 3.1 Neoclassical microeconomic model
that excludes cyclical contributions of unemploySupply
ment e.g. recessions. It is the lowest rate of unemployment that a stable economy can expect to See also: Labour supply
achieve, seeing as some frictional and structural un- Households are suppliers of labour. In microeconomic
employment is inevitable. Economists do not agree
on the natural rate, with estimates ranging from
1% to 5%, or on its meaning some associate
it with non-accelerating ination". The estimated
rate varies from country to country and from time
to time.
Demand decient unemployment In Keynesian
economics, any level of unemployment beyond the
natural rate is most likely due to insucient demand in the overall economy. During a recession,
aggregate expenditure, is decient causing the underutilisation of inputs (including labour). Aggregate expenditure (AE) can be increased, according
to Keynes, by increasing consumption spending (C),
increasing investment spending (I), increasing government spending (G), or increasing the net of ex- The neoclassical model analyzes the trade-o between leisure
hours and working hours
ports minus imports (XM).
{AD = C + I + G + (XM)}
Neoclassical microeconomics of
labour markets
Neoclassical economists view the labour market as similar to other markets in that the forces of supply and
demand jointly determine price (in this case the wage
rate) and quantity (in this case the number of people employed).
However, the labour market diers from other markets
(like the markets for goods or the nancial market) in
several ways. Perhaps the most important of these dierences is the function of supply and demand in setting price
and quantity. In markets for goods, if the price is high
there is a tendency in the long run for more goods to be
produced until the demand is satised. With labour, overall supply cannot eectively be manufactured because
Railroad work.
3.1
for labour. However, they are constrained by the hours utility of income (MUY ), one can conclude:
available to them.
Let w denote the hourly wage, k denote total hours available for labour and leisure, L denote the chosen number of working hours, denote income from non-labour
sources, and A denote leisure hours chosen. The individuals problem is to maximise utility U, which depends on
total income available for spending on consumption and
also depends on time spent in leisure, subject to a time
constraint, with respect to the chooses of labour time and
leisure time:
maximize U (wL + , A)
MUL
dY
,
=
MUY
dL
to subject L + A k.
This can be shown in a graph that illustrates the tradeo between allocating time between leisure activities and
income-generating activities. The linear constraint indicates that there are only 24 hours in a day, and individuals
must choose how much of this time to allocate to leisure
activities and how much to working. This allocation decision is informed by the indierence curve labelled IC.
where Y is total income and the right side is the wage rate.
The curve indicates the combinations of leisure and work
that will give the individual a specic level of utility. The
point where the highest indierence curve is just tangent
to the constraint line (point A), illustrates the optimum
for this supplier of labour services.
3.3
5 INFORMATION APPROACHES
costs equal marginal revenue product, this rm would demand L units of labour as shown in the diagram.
The demand for labour of this rm can be summed with
the demand for labour of all other rms in the economy
to obtain the aggregate demand for labour. Likewise, the
supply curves of all the individual workers (mentioned
above) can be summed to obtain the aggregate supply of
labour. These supply and demand curves can be analysed
in the same way as any other industry demand and supply
curves to determine equilibrium wage and employment
levels.
Wage dierences exist, particularly in mixed and
fully/partly exible labour markets. For example, the
wages of a doctor and a port cleaner, both employed by
the NHS, dier greatly. There are various factors concerning this phenomenon. This includes the MRP of the
worker. A doctors MRP is far greater than that of the
port cleaner. In addition, the barriers to becoming a doctor are far greater than that of becoming a port cleaner.
To become a doctor takes a lot of education and training
which is costly, and only those who excel in academia can
succeed in becoming doctors. The port cleaner however
requires relatively less training. The supply of doctors is
therefore signicantly less elastic than that of port cleanAn advertisement for labour from Sabah and Sarawak, seen in
ers. Demand is also inelastic as there is a high demand Jalan Petaling, Kuala Lumpur.
for doctors and medical care is a necessity, so the NHS
will pay higher wage rates to attract the profession.
Monopsony
pected of acting to over-inate share values to the detriment of the long-run welfare of the rm. Another solution, foreshadowed by the rise of temporary workers in
Japan and the ring of many of these workers in response
to the nancial crisis of 2008, is more exible job contracts and terms that encourage employees to work less
than full-time by partially compensating for the loss of
hours, relying on workers to adapt their working time in
response to job requirements and economic conditions instead of the employer trying to determine how much work
is needed to complete a given task and overestimating.
Another aspect of uncertainty results from the rms imperfect knowledge about worker ability. If a rm is unsure about a workers ability, it pays a wage assuming
5 Information approaches
that the workers ability is the average of similar workers.
This wage undercompenstates high ability workers and
In many real-life situations the assumption of perfect in- may drive them away from the labour market. Such pheformation is unrealistic. The rm does not necessarily nomenon is called adverse selection and can sometimes
know how hard a worker is working or how productive lead to market collapse.
they are. This provides an incentive for workers to shirk There are many ways to overcome adverse selection
from providing their full eort since it is dicult for in labour market. One important mechanism is called
the employer to identify the hard-working and the shirk- signalling, pioneered by Michael Spence.[4] In his clasing employees, there is no incentive to work hard and sical paper on job signalling, Spence showed that even
productivity falls overall, leading to more workers being if formal education does not increase productivity, high
hired and a lower unemployment rate.
ability workers may still acquire it just to signal their abilOne solution used recently (stock options) grants employees the chance to benet directly from the rms success.
However, this solution has attracted criticism as executives with large stock option packages have been sus-
ities. Employers can then use education as a signal to infer worker ability and pay higher wages to better educated
workers. It may appear to an external observer that education has raised the marginal product of labor, without
7.1
Wage slavery
5.1
Search models
7
designated as the economics of the family, has sought to
study within household decision making, including joint
labour supply, fertility, child raising, as well as other areas
of what is generally referred to as home production.[8]
One of the major research achievements of the last 20 Main article: Wage slavery
years has been the development of a framework with dy- Further information:
Economic exploitation and
namic search, matching, and bargaining.[5]
Contemporary slavery
Criticisms
10 FURTHER READING
one concerned philosopher, that the conception of the [18] Thye & Lawler 2006.
workers labour as a commodity conrms Marxs stigmatisation of the wage system of private capitalism as 'wage- [19] As long as politics is the shadow cast on society by big
business, the attenuation of the shadow will not change
slavery;' that is, as an instrument of the capitalists for
the substance, in The Need for a New Party (1931),
reducing the workers condition to that of a slave, if not
Later Works 6, p163
below it.[24]
[20] Ferguson 1995.
8
9
See also
References
10 Further reading
Richard Blundell and Thomas MaCurdy, 2008.
labour supply, The New Palgrave Dictionary of
Economics, 2nd Edition Abstract.
Freeman, R.B., 1987. Labour economics, The
New Palgrave: A Dictionary of Economics, v. 3, pp.
7276.
John R. Hicks, 1932, 2nd ed., 1963. The Theory of
Wages. London, Macmillan.
Handbook of Labor Economics. Elsevier. Amsterdam: North-Holland. Links to one-page chapter
previews for each volume:
Orley C. Ashenfelter and Richard Layard, ed.,
1986, v. 1 & 2;
Orley Ashenfelter and David Card, ed., 1999,
v. 3A, 3B, and 3C
Orley Ashenfelter and David Card, ed., 2011,
v. 4A & 4B.
Mark R. Killingsworth, 1983. Labour Supply. Cambridge: Cambridge Surveys of Economic Literature.
Jacob Mincer, 1974. Schooling, Experience, and
Earnings. New York: Columbia University Press.
Anindya Bakrie & Morendy Octora, 2002. Schooling, Experience, and Earnings. New York, Singapore National University : Columbia University
Press.
Nicola Acocella,Giovanni Di Bartolomeo and Douglas A. Hibbs, 2008, Labor market regimes and the
eects of monetary policy, in: Journal of Macroeconomics, 30: 13456.
9
Glen G. Cain, 1976, The Challenge of Segmented
Labor Market Theories to Orthodox Theory: A
Survey Journal of Economic Literature, 14(4), pp.
12151257.
Assar Lindbeck and Dennis J. Snower 1986. Wage
Setting, Unemployment, and Insider-Outsider Relations, American Economic Review, 76(2), pp. 235
239.
E McGaughey, 'Behavioural Economics and Labour
Law', 2014, SSRN
Simon Head, The New Ruthless Economy. Work and
Power in the Digital Age, Oxford UP 2005, ISBN 019-517983-8
L. Ali Khan, The Dignity of Labour, 2011
Miller, Doug, Towards Sustainable Labour Costing
in UK Fashion Retail (February 5, 2013). Available
at SSRN
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External links
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