OVERVIEW OF LABOR MARKET

(1)
 Definition of Labor Markets

“Application of economic analysis to the

behaviour of (and relation between) employers
(demand side) and employees (supply side)”

“… and understanding of Government/other

agencies (e.g., unions), and their interaction in
the labour market through policy analysis”
 Three actors in the labor market
• 1. Employee/workers: persons who want to
maximize their well-being tend to supply more
time and more effort to those activities that
have a higher payoff.-> labor supply curve is
often upward sloping.
• 2. Employer/eg. firms: They want to maximize
profit by making the production decisions –
and hence hiring and firing decisions- that
best serve the consumers’ needs.
 Three actors in the labor market
• Employers view that consumer is king. The
employer’s demand for labor is a derived
demand, a demand derived from the desires
of consumers.
• The relation between the price of labor and
how many workers firms are willing to hire is
summarized by the downward-sloping labor
demand curve.
 Three actors in the labor market
• Employees and employers enter the labor
market with conflicting interest. When they
are “balanced out”, the labor market reaches
an equilibrium.
• In a free-market economy, equilibrium is
attained when supply equals demand.
 Three actors in the labor market
• 3. The government: the government can tax
workers’ earnings, subsidize the training,
impose a payroll tax on firms, allow foreign
labor, set the minimum wage, and produce
the other labor legislations. All these actions
will change the equilibrium that will
eventually be attained in the labor market.
 Types of labor market:
• National and local labor markets
• Internal and external labor market
A firm uses an internal labor market if:
• external hiring is used primarily for entry-level
jobs, and
• higher level positions are filled by promotion
from within the firm.
Internal labor markets exist because the use
of such markets:
• reduces hiring and training costs,
• improves employee morale and motivation,
and
• reduces the effect of uncertainty.
 Primary vs. Secondary labor
markets
• primary labor market - high wages and stable
employment relationships.
• secondary labor market - low wages and
unstable employment relationships.
Labor Force Status

10
Table 2.1: Labor Force Participation Rates by
Gender, 1950-2007
 Figure 2.2: Unemployment Rates for the
Civilian Labor Force, 1946-2006 (detailed data
in table on next slide)
 Unemployment
Rates for the Civilian
Labor Force, 1946-
2006 (Data
displayed Graphically in
Figure 2.2)
Figure 2.3: Employment Distribution by Major
Nonfarm Sector, 1954-2007 (detailed data in table
on next slide)
 Employment Distribution by Major
Nonfarm Sector, 1954-2007
(data displayed graphically in Figure 2.3)
 The Labor Force and
Unemployment
• Labor force: refers to all those over 15/16
years of age who are either employed,
actively seeking work, or expecting recall from
a layoff
• Not in Labor Force: People who are not
employed and are neither looking for work
nor waiting to be recalled from layoff by their
employers
 The Labor Force and
Unemployment
• Labor Force consists of the employed and the
unemployed
• Employed: refers to all those over 15/16 years
of age who are employed for pay
• Unemployed: refers to those over 15/16 years
of age who are not employed for pay
 The Labor Force and
Unemployment
• Labor Force Participation Rate (LFPR)=
(The Labor Force / Population) x 100
• Unemployment Rate =
(The Unemployed/the Labor Force) x 100
 Four major flows between
labor markets
• Employed workers become unemployed by
quitting voluntarily or being laid off (being
involuntarily separated from the firm, either
temporarily or permanently)
• Unemployed workers obtain employment by
being newly hired or being recalled to a job
from which they were temporarily laid off.
 Four major flows between
labor markets
• Those in the labor force, whether employed
or unemployed, can leave the labor force by
retiring or otherwise deciding against taking
or seeking work for pay (dropping out)
• Those who have never worked or looked for a
job expand the labor force by entering it,
while those who have dropped out do so by
reentering the labor force.
 Relation between population and
labor market agents
• Tight  Jobs in general are plentiful and hard
for employers to fill and that most of those
who are unemployed will find other work
quickly.
• Loose  Workers are abundant and jobs are
relatively easy for employers to fill.
• In the US, 5 percent unemployment rate is
considered tight while if it is more than 5
percent is considered loose.
 The earnings of labor
…EARNINGS act as the SIGNAL to determine “incentives” (invest in
education (skill formation), participation,…) for resource allocation
of the labor force.

…EARNINGS come along in the form of WAGES

…WAGES: Hourly WAGE RATE/ Daily WAGE RATE

 Worker’s Labor Income (usually, annual measure)

Wages are THE UNIT OF PAYMENT

Total COMPENSATION: Earnings + Employee Benefits (In kind or
deferred payment)
 The earnings of labour
TOTAL INCOME is…

GROSS INCOME (before tax credits / deductions)

OR
NET INCOME (after taxation / deductions)
….
…where income is part of INDIVIDUAL’S NET (disposable) INCOME
…or………………………HOUSEHOLD NET (disposable) INCOME
…or………………………PER CAPITA NET HOUSEHOLD INCOME.
…often…………………yearly amount
…or…………………….monthly amount.
 Wage, earnings, total compensation
… and income
NOMINAL Wages //REAL Wages

…NOMINAL WAGE RATE: Flat rate offered per hour (e.g. $6,66) in
current amounts. At any given point in time, we can compare
different offered wages to different skill levels in a given
industry (or the economy) using current amounts
…REAL WAGE RATE: Takes into account the changing purchasing
power of nominal quantities by taking into account the
changing general price level in the economy. We can compare
the real purchasing power of wages over time within and
between skill groups.
EXAMPLE: 1980 1990 2000
Nominal (W) $6.84 $10.19 $15.38
CPI 82.4 130.7 172.0
Real (W) $ 8.30 $ 7.80 $ 8.94

Note: Real (W)=(Nominal wage/CPI) x 100=($ 6.84/82.4)x100=$8.30

 How do Labour Markets work?
Q= F ( L , K)
That is…Q is the OUTPUT given L and K & technology F(.):
…therefore, LABOR MARKETS are an integral part of any dynamic
economy.
Labor Market OUTCOMES:
(a) Terms of Employment (wages, contract)
(b) Level of Employment (hours, years,…)
Conclusion:
Labor is an input in the process of production to combine with
physical capital…