Term Paper

“Labor Market”

Course no. : 1208

Course name: Introduction to Economics

Submitted to
Mohammad Safiqul Islam
Professor
Department of Economics
Jahangirnagar University
Submitted by
Marjuka Ahmed Chowdhury
Roll- 18411049
Section- A
Department of International Relations
Faculty of Security and Strategic studies
Bangladesh University of Professionals

Date of Submission: 11th November, 2018

 Labor Market

Acknowledgement

I would like to express my very great appreciation to our Introduction to Economics Course
teacher Professor Mohammad Safiqul Islam sir for his valuable and constructive suggestions
during the planning and writing of this term paper. His willingness to give his time so generously
has been very much appreciated.

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Table of Content

Topic Page no.

Abstract 4

Introduction 5

Research Purpose 5

Methodology 5

Analysis: Theory of Labor Market Allocation 6

Labor Demand 6

Labor Supply 6

Market Equilibrium 7
Imperfect Competition 8

Technology 10

Future direction 10

Conclusion 10

Reference 11

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Abstract

In economics, Work is a part of life for almost all people around the world. Though the types of work
people do and the conditions under which that work is done vary endlessly, people get up each morning
and choose to use their human capital in ways that generate some sort of productive good or service or
that help prepare them to be productive economic citizens in the future. Some of this work is done in the
privacy of the home, where beds are made, children are raised, and lawns are mowed. While this unpaid
productive activity is essential to a well-functioning economy, this research paper addresses work time
and skills that are sold in markets in exchange for wages and other compensation.

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Introduction

The labor market, also called as the job market, refers to the supply and demand for labor in which
employees provide the supply and employers the demand. It is a major ingredient of any kind of economy
and is intricately tied in with markets for capital, goods and services. First, the demand for any type of
labor services is dependent on, the demand for the final product that it is used to produce. This means that
highly trained and productive workers are only as important in production in an economy as there is
demand for the product they produce. Second, because labor cannot be discrete from the particular
persons who deliver the resource, the scope of responses to labor market decisions is broad and affects
outcomes in significant ways. The sale of labor services generates the majority of household income
around the world—income that is used to sustain workers and their families. This means that labor
markets determine, to a large extent, what resources a household has available and thus the quality of life
for the members of the household. Decisions become very complicated when workers and their
households begin considering not only job market choices but also premarket education and training that
might be required to prepare individuals for particular occupations.

Research Purpose

The purpose of this term paper is to go through the sole and unique nature of labor markets and to
consider how these markets will amplify in response to changes in the nature of the work people do over
time. Use of labor, like any economic resource, has to be considered carefully in light of productivity and
opportunity costs. Though many factors affect this decision-making process, generally labor is allocated
by market forces that determine wages and employment.

Methodology

This term paper has been written following qualitative research methodology and secondary data has been
used. The sources of information are books, articles published in different journals, newspaper articles,
online articles, blogs and online reports. The collected data from the sources were coded and categorized
according to the objective of the study.

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Analysis

Theory of Labor Market Allocation

As with all markets, buyers (employers or contractors) and sellers (employees) communicate their needs
and offers with one another and exchange labor services for wages and other compensation. Some
important assumptions underlie this model. First, assume that the wage and other monetary compensation
is the most important determinant of behavior. This allows the construction of a model that has wages on
the y-axis and quantity exchanged on the x-axis. Everything else held fixed, buyers and sellers will
respond most directly to price signals exchanged between the two groups. Second, assume that workers
are somewhat homogeneous—that is, that workers can be easily substituted for one another in any
particular market. (Differences across workers will be explored later in this research paper.) Third,
assume that workers are mobile and can move to places where there is excess demand for labor with their
particular skills and away from places where there is excess supply of labor with their particular skills.
Finally, assume that wages are flexible; they can move up or down in response to market signals.

Labor Demand

Employers seek workers based on workplace needs and based on the demand for the good or service
being produced. In addition to the market wage, employers consider the productivity of labor, the ability
to substitute across other inputs in the production process, and the prices of other inputs when making
hiring decisions.

Labor productivity is determined by a variety of factors, including human capital investments made by
the worker himself or herself or the employer, skills and talents, and the quantity of capital and
technology that the worker has at his or her disposal. As might be assumed, the greater the investment
made in an individual worker, the greater his or her productivity. Like with any other investment
opportunity, the investor spends money now (e.g., gets a master’s degree in social work or an MBA),
hoping to eventually reap the benefits, in terms of greater income earning potential, in the future.

Labor Supply

Workers seek jobs in the basis of their own skills and talents and based on the variety of factors that help
to determine their income needs. Preferences over alternative jobs are significant. Some workers seek
jobs that provide them with a sense of pride, accomplishment, and satisfaction. In other cases, workers
have a preference for maximizing their own personal income, and so they search for jobs that are high
paying, regardless of their other characteristics. Happily, the diversity of jobs combined with the

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heterogeneity of workers and their preferences generates labor markets that provide incentives for
employers and for workers. Jobs that are distasteful to many workers for one reason or another (washing
windows on skyscrapers or cleaning out pig sties) attract workers who are less averse to the negative
aspects (heights or smells), and/or the work commands wage premiums that accrue from smaller pools of
available workers. Thus, workers sort toward jobs that best meet their particular preferences and
monetary needs.

Market Equilibrium

When economists say about equilibrium, they are using the term as any other scientist would—as a state
of the world that, once reached, will not change unless a cabalistic force acts upon it. Equilibrium price
and quantity in a labor market is reached when there is no further tendency for wages or quantity of labor
bought and sold to change, unless there is a change in the market that affects the demand curve or the
supply curve.

Consider Figure 14.1. At W2, Q3 workers are demanded, and Q3 workers are supplied. Note that if the
wage is W1, the quantity of workers demanded is greater than the quantity of workers supplied. There is a
shortage of labor; the quantity of labor employers are willing and able to hire is greater than the quantity
of labor people are offering for sale. Wages will rise as firms outbid one another to attract the workers
they need. On the other hand, at W3, the quantity of workers demanded is less than the quantity of
workers supplied. There is a surplus of labor; the quantity of labor employers are willing and able to hire
is less than the quantity of labor people are offering for sale. Wages will fall as workers have to accept
lower wages if they hope to gain employment. Thus, the only point at which wages and employment will
not be under pressure to rise or fall is at W2, and it is defined as the current equilibrium in this market.

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Imperfect Competition

The perfectly competitive market model applies when there are many, many workers in a market that also
supports many, many employers. However, what if this is not the case? What if there is a single large
employer that dominates the market for a particular type of labor? For example, major league baseball
employs almost all of the professional baseball players in the United States. How does this situation
impact the distribution of resources in a labor market?

Figure 14.1   Perfectly Competitive Market for Labor and Firm Level Employment

Monopsony power refers to the ability of a single employer to control the terms of employment for all of,
or a portion of, its workforce. The first significant examples of monopsonies emerged during the
industrial revolution when factories (coal mines, steel mills, etc.) opened in small towns; the mine or the
factory became the most significant employer in the town or local area, and workers had few other job
opportunities. Because workers had limited alternative employment options, the firms were able to pay
lower wages and exploit the workforce in a variety of other ways. In some cases, firms also established
company stores that became monopolies in the provision of goods and services. Thus, the workers were
subject to monopsony power in the terms of their employment and monopoly power in the markets in
which they spent their income.

In response to this exploitation of workers by monopsonistic employers, workers formed

unions—collective organizations of sellers that formed to gain some bargaining power in
negotiations with their employers over the terms of their contracts. These unions gained
legal status in most countries around the world in the late nineteenth and early twentieth

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centuries. However, in some countries that are at the earlier stages of industrialization,
unionization and other types of worker movements may still be illegal or nonexistent.
Consider the model in Figure 14.2. The labor demand curve, described as for the perfectly
competitive market in Figure 14.1, depends on the output market in which the firm sells its
final product and the productivity of its workers. However, now rather than paying a wage
imposed by the free marketplace, firms have the ability to set wages at the lowest level
possible. Firms are not assumed to be wage discriminators; all workers are paid the same
amount per quantity supplied. (Wage discrimination is possible but is not considered here.)
The key is that firms pay the lowest price they possibly can, given by the market supply
curve at the optimal level of employment, and then increase the wage for all by the
smallest amount possible, moving up the supply curve, when employment is increased by a
small amount.

Figure 14.2 Monopsony Labor Market

Using Figure 14.2, suppose the current level of employment is Q0 and the wage is W0. If the labor
monopsonist chooses to increase employment by one worker, labor costs increase by the amount of the
wage payment to the new worker but also by the increased wage that has to be paid to all of the existing
workers. Firms cannot discriminate and so must pay the same higher wage to all workers of the same type
if a marginal worker is to be hired. Thus, the increase in the costs of employment to the firm in this

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market when a marginal worker is hired is greater than just the wage paid to the new worker; the marginal
labor cost (MLC) of hiring one additional unit of labor is greater than the wage paid to that one marginal
unit. The MLC curve lies everywhere above the supply curve because at any quantity of labor, MLC is
greater than the wage.

Technology

As technology gives greater opportunities to prolong worker productivity, it also provides applications
that replace worker effort with machines, computers, and robots. This tension between capital and labor
as substitutes in production (capital equipment and technology replacing humans in production processes)
and as complements in production (capital equipment and technology increasing the productivity of
humans in production processes) will not be determined effortlessly and will need to be considered on a
case by case basis across the economy as new technology.

Future Directions

Labor markets are complicated and dynamic, and so the possibilities for future directions are never-
ending. The Bureau of Labor Statistics projects significant changes in the labor force in the coming years,
as follows. Fewer younger workers will be available to enter the labor force, and most of the growth in
the supply of labor will come from new immigrants to the American economy. On the demand side,
manufacturing jobs will continue to move overseas, while job growth in the green economy and service
sector will continue to increase (Toossi, 2007). joining with these demographic and sector shifts, many
other factors will help to ordain the nature of labor markets in the coming decades.

Conclusion

In a perfect world, labor markets allocate human effort in production toward its most productive use. This
term paper explained that allocation process by exploring the behavior of buyers and sellers in markets
for human resources and then introduced the role of government policy makers in altering these market-
determined outcomes.

The key to understanding the nuances of labor market behavior is in remembering that work is a
fundamental source of human dignity. Though economists often focus on labor as a productive resource,
which it of course is, there are aspects of the relationship between employer and employee that are clearly
emotional, value laden, and culturally determined.

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Reference

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the status of the profession, 20052006. Academe. Available at
http://www.aaup.org/AAUP/ pubsres/academe/2006/MA/sal
2. Becker, G. S. (1965). A theory of the allocation of time. Economic Journal, 75(299), 493-
517.
3. Becker, G. S. (1971). The economics of discrimination (2nd ed.). Chicago: University of
Chicago Press.
4. Becker, G. S. (1981). A treatise on the family. Cambridge, MA: Harvard University
Press.
5. Bergman, B. (1986). The economic emergence of women. New York: Basic Books.
6. Blau, F. (1984). Discrimination against women: Theory and evidence. In W. A. Darity,
Jr. (Ed.), Labor economics: Modern views (pp. 53-89). Boston: Kluwer-Nijhoff.
7. Borjas, G. J. (1987). Self-selection and the earnings of immigrants. American Economic
Review, 77, 531-553.
8. Freeman, R. B., & Medoff, J. L. (1984). What do unions do? New York: Basic Books.
9. Goldin, C., & Katz, L. F. (1998). The origins of technology-skill complementarity.
Quarterly Journal of Economics, 113, 693-732.
10. Heckman, J. J. (1974). Life cycle consumption and labor supply: An explanation of the
relationship between income and consumption over the life cycle. American Economic
Review, 64, 188-194.

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