Economics of the Labour Market

Abstract

The "demand for labor" is usually understood by economists to mean the demand for labor services by a firm, an industry, or the economy at a given real wage. In a capitalist economy, labor becomes a commodity that is bought and sold on the market just like any other commodity, such as bread or butter. Labor is a unique commodity, however, and when an employer buys labor, he or she obtains a worker's "labor power" which is the amount of services that the employer gets from the worker. These services depend on the power the employer has over the worker. If there is high unemployment, for example, the worker is in a weak position and greater labor services can be extracted from him or her. The amount of labor services that the employer obtains (not only in terms of hours of work, but in terms of the efficiency of those services) also depends on the nature of the employment contract, the real wage paid to the worker, the conditions of employment, and the attitude of the employer to the worker (and vice versa). Labor services consist of three components: the number of workers (employees), the average hours worked per worker, and the efficiency per hour of the worker. There are several institutional and legal constraints on employers in most developed countries. For example, there may be laws against discrimination, equal pay legislation, minimum wages (henceforth, the term wages refer to real wages), occupational health and safety requirements , hiring and firing restrictions, and penalty rates for overtime. The demand for labor is a derived demand: Firms wish to hire workers to produce goods and services that they sell in order to earn profits. Alfred Marshall, in his Principles of Economics (1930) suggested that labor demand becomes more responsive to wage changes if the substitution possibilities between labor and capital increase. In other words, the easier it is to