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Labour economics seeks to understand the functioning and dynamics of the
markets Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Sweden Art, entertainment, and media Films *Market (1965 film), ''Market'' (1965 ...
for
wage labour Wage labour (also wage labor in American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of varieties of the English language native to the United States. Curren ...

wage labour
. Labour is a commodity that is supplied by labourers in exchange for a wage paid by demanding firms. Because these labourers exist as parts of a social, institutional, or political system, labour economics is often regarded as a sociology or political science. Labour markets or job markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers) and the demanders of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and income. These patterns exist because each individual in the market is presumed to make rational choices based on the information that they know regarding wage, desire to provide labour, and desire for leisure. Labour markets are normally geographically bounded, but the rise of the internet has brought about a 'planetary labour market' in some sectors. Labour is a measure of the work done by human beings. It is conventionally contrasted with other
factors of production In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
, such as
land Land is the solid surface of Earth that is not permanently submerged in water. Most but not all land is situated at elevations above sea level (variable over geologic time frames) and consists mainly of Earth's crust, crustal components such a ...
and
capital Capital most commonly refers to: * Capital letter Letter case (or just case) is the distinction between the letters that are in larger uppercase or capitals (or more formally ''majuscule'') and smaller lowercase (or more formally ''minusc ...
. Some theories focus on
human capital Human capital is a concept used by human resource professionals to designate personal attributes considered useful in the production process. It encompasses employee knowledge Knowledge is a familiarity or awareness, of someone or someth ...

human capital
, or
entrepreneurship Entrepreneurship is the creation or extraction of value. With this definition, entrepreneurship is viewed as change, generally entailing risk beyond what is normally encountered in starting a business, which may include other values than simply ...
, (which refers to the skills that workers possess and not necessarily the actual work that they produce). Labour is unique to study because it is a special type of good that cannot be separated from the owner (i.e. the work cannot be separated from the person who does it). A labour market is also different from other markets in that workers are the suppliers and firms are the demanders.


Macro and micro analysis of labour markets

There are two sides to labour economics. Labour economics can generally be seen as the application of
microeconomic Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also ...
or
macroeconomic Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), producti ...
techniques to the labour market. Microeconomic techniques study the role of individuals and individual firms 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 influence macro variables such as employment levels, participation rates, aggregate income and
gross domestic product Gross domestic product (GDP) is a monetary Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the ...
.


Macroeconomics of labour markets

The labour market in macroeconomic theory shows that the supply of labour exceeds demand, which has been proven by salary growth that lags productivity growth. When labour supply exceeds demand, salary faces downward pressure due to an employer's ability to pick from a labour pool that exceeds the jobs pool. However, if the demand for labour is larger than the supply, salary increases, as employee have more bargaining power while employers have to compete for scarce labour. The
Labour force The workforce or labour force is the labour Labour or labor may refer to: * Childbirth Childbirth, also known as labour or delivery, is the ending of pregnancy where one or more babies leaves the uterus by passing through the vagina or b ...
(LF) is defined as the number of people of
working age Working age is the range of ages at which people are typically engaged in either paid or unpaid work Unpaid labor is defined as labor that does not receive any direct remuneration. This is a form of 'non-market work' which can fall into one of t ...
, who are either employed or actively looking for work (unemployed). The labour force participation rate (LFPR) is the number of people in the labour force divided by the size of the adult
civilian noninstitutional population In the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located in North America. It consists of 50 U.S. state, states, a Washing ...
(or by the population of working age that is not institutionalized), LFPR = LF/Population. The non-labour force includes those who are not looking for work, those who are institutionalized (such as in prisons or psychiatric wards), stay-at-home spouses, children not of working age, and those serving in the military. The
unemployment Unemployment, according to the (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid or but currently available for work during the . Unemployment is measured by the unemplo ...
level is defined as the labour force minus the number of people currently employed. The unemployment rate is defined as the level of unemployment divided by the labour force. The employment rate is defined as the number of people currently employed divided by the adult population (or by the population of working age). In these
statistics Statistics is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of data Data (; ) are individual facts, statistics, or items of information, often numeric. In a more technical sens ...

statistics
, self-employed people are counted as employed. The skills required in a labour force can vary from individual to individual, as well as from firm to firm. Some firms have specific skills they are interested in, limiting the labour force to certain criteria. A firm requiring specific skills will help determine the size of the market. Variables like employment level, unemployment level, labour force, and unfilled vacancies are called stock variables because they measure a quantity at a point in time. They can be contrasted with flow variables which measure a quantity over a duration of time. Changes in the labour force are due to flow variables such as natural population growth, net immigration, new entrants, and retirements. Changes in unemployment depend on inflows (non-employed people starting to look for jobs and employed people who lose their jobs that are looking for new ones) and outflows (people who find new employment and people who stop looking for employment). When looking at the overall macroeconomy, several types of unemployment have been identified, which can be separated into two categories of natural and unnatural unemployment. ''Natural Unemployment'' * Frictional unemployment – This reflects the fact that it takes time for people to find and settle into new jobs that they feel are appropriate for them and their skill set. Technological advancement often reduces frictional unemployment; for example, internet search engines have reduced the cost and time associated with locating employment or
personnel selection Personnel selection is the methodical process used to hire (or, less commonly, promote) individuals. Although the term can apply to all aspects of the process (recruitment, selection, hiring, onboarding, acculturation, etc.) the most common meaning ...
. * Structural unemployment – the number of jobs available in an industry are not sufficient enough to provide jobs to all persons who are interested in working or qualified to work in that industry. This can be due to the changes in industries prevalent in a country or because wages for the industry are too high, causing people to want to supply their labour to that industry. * Natural rate of unemployment (also known as full employment) – This is the summation of frictional and structural unemployment, that excludes cyclical contributions of unemployment (e.g. recessions) and seasonal unemployment. It is the lowest rate of unemployment that a stable economy can expect to achieve, given that some frictional and structural unemployment is inevitable. Economists do not agree on the level of the natural rate, with estimates ranging from 1% to 5%, or on its meaning – some associate it with "non-accelerating
inflation In economics, inflation refers to a general progressive increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a r ...

inflation
". The estimated rate varies between countries and across time. ''Unnatural Unemployment'' * Demand deficient unemployment (also known as cyclical unemployment) – In
Keynesian economics Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomics, macroeconomic theories and Economic model, models of how aggregate demand (total spending in the economy) strongl ...
, any level of unemployment beyond the natural rate is probably due to insufficient goods demand in the overall economy. During a recession,
aggregate expenditureIn economics, aggregate expenditure (AE) is a measure of national income. Aggregate expenditure is defined as the current value of all the finished goods and services in the economy. The aggregate expenditure is thus the sum total of all the expendi ...
is deficient 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 exports minus imports (X−M), since AE = C + I + G + (X−M). * Seasonal unemployment -- unemployment due to seasonal fluctuations of demand for workers across industries, such as in the retail industry after holidays that involve a lot of shopping are over.


Neoclassical microeconomics of labour markets

Neoclassical economists Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are driven by the supply and demand In microeconomics, supply and demand is an economic model In econo ...
view the labour market as similar to other markets in that the forces of
supply and demand In microeconomics Microeconomics is a branch of that studies the behavior of individuals and in making decisions regarding the allocation of and the interactions among these individuals and firms. Microeconomics focuses on the study ...

supply and demand
jointly determine the price (in this case the wage rate) and quantity (in this case the number of people employed). However, the labour market differs from other markets (like the markets for goods or the financial market) in several ways. In particular, the labour market may act as a non-clearing market. While according to neoclassical theory most markets quickly attain a point of equilibrium without excess supply 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 differentialWage differential is a term used in labour economics Labour economics seeks to understand the functioning and dynamics of the markets for wage labour. Labour is a commodity that is supplied by labourers in exchange for a wage paid by demanding ...
s among similar workers. Models that assume
perfect competition In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
in the labour market, as discussed below, conclude that workers earn their
marginal product In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods an ...
of labour.


Neoclassical microeconomic model – Supply

Households are suppliers of labour. In microeconomic theory, people are assumed to be rational and seeking to maximize their
utility function As a topic of economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumpti ...
. In the labour market model, their utility function expresses trade-offs in preference between leisure time and income from time used for labour. However, they are constrained by the hours 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, π denote income from non-labour sources, and ''A'' denote leisure hours chosen. The individual's problem is to maximise utility ''U'', which depends on total income available for spending on consumption and also depends on the time spent in leisure, subject to a time constraint, with respect to the choices of labour time and leisure time: :\text \quad U(wL + \pi, A) \quad \text \quad L + A \le k. This is shown in the graph below, which illustrates the trade-off between allocating time to leisure activities and allocating it to income-generating activities. The linear constraint indicates that every additional hour of leisure undertaken requires the loss of an hour of labour and thus of the fixed amount of goods that that labour's income could purchase. Individuals must choose how much time to allocate to
leisure Leisure has often been defined as a quality of experience or as free time. Free time is spent away from , , , , and , as well as necessary activities such as and ing. Leisure as an experience usually emphasizes dimensions of perceived fr ...

leisure
activities and how much to
working Working may refer to: * Work (human activity), intentional activity people perform to support themselves, others, or the community Arts and media * Working (musical), ''Working'' (musical), a 1978 musical * Working (TV series), ''Working'' (TV se ...

working
. This allocation decision is informed by the
indifference curve In economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societies. ...

indifference curve
labelled IC1. The curve indicates the combinations of leisure and work that will give the individual a specific level of utility. The point where the highest indifference curve is just tangent to the constraint line (point A), illustrates the optimum for this supplier of labour services. If consumption is measured by the value of income obtained, this diagram can be used to show a variety of interesting effects. This is because the absolute value of the slope of the budget constraint is the wage rate. The point of optimisation (point A) reflects the equivalency between the wage rate and the
marginal rate of substitution In economics, the marginal rate of substitution (MRS) is the rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility As a topic of economics, utility is used to model w ...
Frank, Robert H.; ''Microeconomics and Behavior''. McGraw-Hill/Irwin, 6th Edition: 2006 of leisure for income (the absolute value of the slope of the indifference curve). Because the marginal rate of substitution of leisure for income is also the ratio of the marginal utility of leisure (MUL) to the marginal utility of income (MUY), one can conclude: : = , where ''Y'' is total income and the right side is the wage rate.

''Effects of a wage increase''
If the wage rate increases, this individual's constraint line pivots up from X,Y1 to X,Y2. He/she can now purchase more goods and services. His/her utility will increase from point A on IC1 to point B on IC2. To understand what effect this might have on the decision of how many hours to work, one must look at the
income effect The theory of consumer choice is the branch of microeconomics that relates Preference (economics), preferences to consumption expenditures and to supply and demand, consumer demand curves. It analyzes how consumers maximize the desirability of the ...

income effect
and
substitution effect In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...

substitution effect
. The wage increase shown in the previous diagram can be decomposed into two separate effects. The pure income effect is shown as the movement from point A to point C in the next diagram. Consumption increases from YA to YC and – since the diagram assumes that leisure is a
normal good In economics, a normal good is a type of a Good (economics), good which experiences an increase in demand due to an increase in income. When there is an increase in a person's income, for example due to a wage rise, a good for which the demand rise ...
– leisure time increases from XA to XC. (Employment time decreases by the same amount as leisure increases.)

''The Income and Substitution effects of a wage increase''
But that is only part of the picture. As the wage rate rises, the worker will substitute away from leisure and into the provision of labour—that is, will work more hours to take advantage of the higher wage rate, or in other words substitute away from leisure because of its higher
opportunity cost In microeconomic theory Microeconomics (from Greek prefix ''mikro-'' meaning "small" + ''economics'') is a branch of economics Economics () is the social science that studies how people interact with value; in particular, the Produc ...
. This substitution effect is represented by the shift from point C to point B. The net impact of these two effects is shown by the shift from point A to point B. The relative magnitude of the two effects depends on the circumstances. In some cases, such as the one shown, the substitution effect is greater than the income effect (in which case more time will be allocated to working), but in other cases, the income effect will be greater than the substitution effect (in which case less time is allocated to working). The intuition behind this latter case is that the individual decides that the higher earnings on the previous amount of labour can be "spent" by purchasing more leisure.

''The Labour Supply curve''
If the substitution effect is greater than the income effect, an individual's supply of labour services will increase as the wage rate rises, which is represented by a positive slope in the labour supply curve (as at point E in the adjacent diagram, which exhibits a positive wage
elasticity Elasticity often refers to: *Elasticity (physics), continuum mechanics of bodies that deform reversibly under stress Elasticity may also refer to: Information technology * Elasticity (data store), the flexibility of the data model and the clu ...
). This positive relationship is increasing until point F, beyond which the income effect dominates the substitution effect and the individual starts to reduce the number of labour hours he supplies (point G) as wage increases; in other words, the wage elasticity is now negative. The direction of the slope may change more than once for some individuals, and the labour supply curve is different for different individuals. Other variables that affect the labour supply decision, and can be readily incorporated into the model, include taxation, welfare, work environment, and income as a
signal In signal processing Signal processing is an electrical engineering subfield that focuses on analysing, modifying, and synthesizing signals such as audio signal processing, sound, image processing, images, and scientific measurements. Sig ...
of ability or social contribution.


Neoclassical microeconomic model – Demand

A firm's labour demand is based on its marginal physical product of labour (MPPL). This is defined as the additional output (or physical product) that results from an increase of one unit of labour (or from an infinitesimal increase in labour). (See also
Production theory basicsProduction is a process of combining various material inputs and immaterial inputs (plans, know-how) in order to make something for consumption (output). It is the act of creating an output, a good or service which has value and contributes to the ...
.) Labour demand is a derived demand; that is, hiring labour is not desired for its own sake but rather because it aids in producing output, which contributes to an employer's revenue and hence profits. The demand for an additional amount of labour depends on the
Marginal Revenue Product Marginal may refer to: * ''Marginal'' (album), the third album of the Belgian rock band Dead Man Ray, released in 2001 * ''Marginal'' (manga) * '' El Marginal'', Argentine TV series * Marginal seat or marginal constituency or marginal, in politi ...
(MRP) and the
marginal cost In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...

marginal cost
(MC) of the worker. With a perfectly competitive goods market, the MRP is calculated by multiplying the
price A price is the (usually not negative) quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or by ...

price
of the end product or service by the Marginal Physical Product of the worker. If the MRP is greater than a firm's Marginal Cost, then the firm will employ the worker since doing so will increase
profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic en ...
. The firm only employs however up to the point where MRP=MC, and not beyond, in neoclassical economic theory. The MRP of the worker is affected by other inputs to production with which the worker can work (e.g. machinery), often aggregated under the term "
capital Capital most commonly refers to: * Capital letter Letter case (or just case) is the distinction between the letters that are in larger uppercase or capitals (or more formally ''majuscule'') and smaller lowercase (or more formally ''minusc ...
". It is typical in economic models for greater availability of capital for a firm to increase the MRP of the worker, all else equal.
Education Education is the process of facilitating learning, or the acquisition of knowledge, skills, value (ethics), values, morals, beliefs, habits, and personal development. Educational methods include teaching, training, storytelling, discussion ...

Education
and training are counted as "
human capital Human capital is a concept used by human resource professionals to designate personal attributes considered useful in the production process. It encompasses employee knowledge Knowledge is a familiarity or awareness, of someone or someth ...

human capital
". Since the amount of physical capital affects MRP, and since financial capital flows can affect the amount of physical capital available, MRP and thus
wages A wage is the distribution from an employer Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where work is paid for, where one party, which may be a corporation, for profi ...
can be affected by financial capital flows within and between countries, and the degree of capital mobility within and between countries. According to neoclassical theory, over the relevant range of outputs, the marginal physical product of labour is declining (law of diminishing returns). That is, as more and more units of labour are employed, their additional output begins to decline. Additionally, although the MRP is a good way of expressing an employer's demand, other factors such as social group formation can the demand, as well as the labour supply. This constantly restructures exactly what a labour market is, and leads way to cause problems for theories of inflation.


Neoclassical microeconomic model – Equilibrium


''A firm's labour demand in the short run (D) and a horizontal supply curve (S)''
The marginal revenue product of labour can be used as the demand for labour curve for this firm in the short run. In competitive markets, a firm faces a perfectly elastic supply of labour which corresponds with the wage rate and the marginal resource cost of labour (W = SL = MFCL). In imperfect markets, the diagram would have to be adjusted because MFCL would then be equal to the wage rate divided by marginal costs. Because optimum resource allocation requires that marginal factor costs equal marginal revenue product, this firm would demand L units of labour as shown in the diagram. The demand for labour of this firm can be summed with the demand for labour of all other firms 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 In microeconomics Microeconomics is a branch of that studies the behavior of individuals and in making decisions regarding the allocation of and the interactions among these individuals and firms. Microeconomics focuses on the study ...

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 differences exist, particularly in mixed and fully/partly flexible labour markets. For example, the wages of a
doctor Doctor or The Doctor may refer to: Personal titles * Doctor (title) Doctor is an Academic degree, academic title that originates from the Latin word of the same spelling and meaning. The word is originally an Agent noun, agentive noun ...
and a port cleaner, both employed by the
NHS The National Health Service (NHS) is the umbrella term for the publicly funded healthcare systems of the United Kingdom (UK). Since 1948, they have been funded out of general taxation. There are three systems which are referred to using the " ...
, differ greatly. There are various factors concerning this phenomenon. This includes the MRP of the worker. A doctor's 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 significantly less elastic than that of port cleaners. Demand is also inelastic as there is a high demand for doctors and medical care is a necessity, so the NHS will pay higher wage rates to attract the profession.


Monopsony

Some labour markets have a single employer and thus do not satisfy the perfect competition assumption of the neoclassical model above. The model of a monopsonistic labour market gives a lower quantity of employment and a lower equilibrium wage rate than does the competitive model.


Asymmetric information

In many real-life situations, the assumption of perfect information is unrealistic. An employer does not necessarily know how hard workers are working or how productive they are. This provides an incentive for workers to from providing their full effort, called
moral hazard#REDIRECT Moral hazard In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economi ...
. Since it is difficult for the employer to identify the hard-working and the shirking employees, there is no incentive to work hard and productivity falls overall, leading to the hiring of more workers and a lower unemployment rate. One solution that is used to avoid a moral hazard is
stock options In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...
that grant employees the chance to benefit directly from a firm's success. However, this solution has attracted criticism as executives with large stock-option packages have been suspected of acting to over-inflate share values to the detriment of the long-run welfare of the firm. Another solution, foreshadowed by the rise of
temporary work Temporary work or temporary employment (also called gigs) refers to an employment situation where the working arrangement is limited to a certain period of time based on the needs of the employing organization. Temporary employees are sometime ...
ers in Japan and the firing of many of these workers in response to the financial crisis of 2008, is more flexible 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 firm's imperfect knowledge about worker ability. If a firm is unsure about a worker's ability, it pays a wage assuming that the worker's ability is the average of similar workers. This wage under compensates high-ability workers which may drive them away from the labour market as well as at the same time attracting low-ability workers. Such a phenomenon, called
adverse selection In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant ...
, can sometimes lead to market collapse. One way to combat adverse selection, firms will try to use
signalling In signal processing Signal processing is an electrical engineering subfield that focuses on analysing, modifying, and synthesizing signals such as audio signal processing, sound, image processing, images, and scientific measurements. Sig ...
, pioneered by
Michael Spence Andrew Michael Spence (born November 7, 1943, Montclair, New Jersey Montclair () is a township A township is a kind of human settlement In geography, statistics and archaeology, a settlement, locality or populated place is a community ...
, whereby employers could use various characteristics of applicants differentiate between high-ability or low-ability workers. One common signal used is education, whereby employers assume that high-ability workers will have higher levels of education. Employers can then compensate high-ability workers with higher wages. However, signalling does not always work, and it may appear to an external observer that education has raised the marginal product of labour, without this necessarily being true.


Search models

One of the major research achievements of the 1990-2010 period was the development of a framework with dynamic
search Searching or search may refer to: Computing technology * Search algorithm In computer science, a search algorithm is an algorithm (typically involving a multitude of other, more specific algorithms ) which solves a search problem. Search al ...
, matching, and bargaining.


Personnel economics: hiring and incentives

At the micro level, one sub-discipline eliciting increased attention in recent decades is analysis of internal labour markets, that is, ''within'' firms (or other organisations), studied in personnel economics from the perspective of personnel management. By contrast, external labour markets "imply that workers move somewhat fluidly between firms and wages are determined by some aggregate process where firms do not have significant discretion over wage setting." The focus is on "how firms establish, maintain, and end employment relationships and on how firms provide incentives to employees," including models and empirical work on incentive systems and as constrained by
economic efficiency In , economic efficiency is, roughly speaking, a situation in which nothing can be improved without something else being hurt. Depending on the context, it is usually one of the following two related concepts: * or : any changes made to assist on ...
and risk/incentive tradeoffs relating to personnel compensation.


Discrimination and Inequality

Inequality Inequality may refer to: Economics * Attention inequality Attention inequality is a term used to target the inequality of distribution of attention across users on social networks, people in general, and for scientific papers. Yun Family Foundat ...
and
discrimination Discrimination is the act of making unjustified distinctions between people based on the groups, classes, or other categories to which they belong or are perceived to belong. People may be discriminated on the basis of Racial discrimination, r ...
in the workplace can have many effects on workers. In the context of labour economics, inequality is usually referring to the unequal distribution of earning between households. Inequality is commonly measured by economists using the
Gini coefficient In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption o ...

Gini coefficient
. This coefficient does not have a concrete meaning but is more used as a way to compare inequality across regions. The higher the Gini coefficient is calculated to be the larger inequality exists in a region. Over time, inequality has, on average, been increasing. This is due to numerous factors including labour supply and demand shifts as well as institutional changes in the labour market. On the shifts in labour supply and demand, factors include demand for skilled workers going up more than the supply of skilled workers and relative to unskilled workers as well as technological changes that increase productivity; all of these things cause wages to go up for skilled labour while unskilled worker wages stay the same or decline. As for the institutional changes, a decrease in union power and a declining real minimum wage, which both reduce unskilled workers wages, and tax cuts for the wealthy all increase the inequality gap between groups of earners. As for discrimination, it is the difference in pay that can be attributed to the demographic differences between people, such as gender, race, ethnicity, religion, sexual orientation, etc, even though these factors do not affect the productivity of the worker. Many regions and countries have enacted government policies to combat discrimination, including discrimination in the workplace. Discrimination can be modelled and measured in numerous ways. The oaxaca decomposition is a common method used to calculate the amount of discrimination that exists when wages differ between groups of people. This decomposition aims to calculate the difference in wages that occurs because of differences in skills versus the returns to those skills. A way of modelling discrimination in the workplace when dealing with wages are
Gary Becker Gary Stanley Becker (; December 2, 1930 – May 3, 2014) was an American economist who received the 1992 Nobel Memorial Prize in Economic Sciences. He was a professor of economics and sociology at the University of Chicago, and was a leader of t ...
's taste models. Using taste models, employer discrimination can be thought of as the employer not hiring the minority worker because of their perceived cost of hiring that worker is higher than that of the cost of hiring a non-minority worker, which causes less hiring of the minority. Another taste model is for employee discrimination, which does not cause a decline in the hiring of minorities, but instead causes a more segregated workforce because the prejudiced worker feels that they should be paid more to work next to the worker they are prejudiced against or that they are not paid an equal amount as the worker they are prejudiced against. One more taste model involves customer discrimination, whereby the employers themselves are not prejudiced but believe that their customers might be, so therefore the employer is less likely to hire the minority worker if they are going to interact with customers that are prejudiced. There are many other taste models other than these that Gary Becker has made to explain discrimination that causes differences in hiring in wages in the labour market.


Criticisms

Many sociologists, political economists, and heterodox economists claim that labour economics tends to lose sight of the complexity of individual employment decisions. These decisions, particularly on the supply side, are often loaded with considerable
emotional baggageEmotional baggage is an everyday expression that correlates with many varied but similar concepts within social sciences, self-help movements, and other fields: its general concern is with unresolved issues of an emotional nature, often with an impli ...
and a purely numerical analysis can miss important dimensions of the process, such as social benefits of a high income or wage rate regardless of the marginal utility from increased consumption or specific economic goals. From the perspective of
mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to he ...
, neoclassical models are not meant to serve as a full description of the psychological and subjective factors that go into a given individual's employment relations, but as a useful approximation of human behaviour in the aggregate, which can be fleshed out further by the use of concepts such as
information asymmetry In contract theory In economics, contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of information asymmetry. Because of its connections with both agency (law), agency and incentive ...
,
transaction cost In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a Market (economics), market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companie ...
s,
contract theory In economics, contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of information asymmetry. Because of its connections with both agency (law), agency and incentives, contract theory ...
etc. Also missing from most labour market analyses is the role of unpaid labour such as unpaid internships where workers with little or no experience are allowed to work a job without pay so that they can gain experience in a particular profession. Even though this type of labour is unpaid it can nevertheless play an important part in society if not abused by employers. The most dramatic example is child raising. However, over the past 25 years an increasing literature, usually 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.


Wage slavery

The labour market, as institutionalised under today's market economic systems, has been criticised, especially by both mainstream
socialists Socialism is a political Politics (from , ) is the set of activities that are associated with Decision-making, making decisions in Social group, groups, or other forms of Power (social and political), power relations between individuals, s ...
and
anarcho-syndicalists Anarcho-syndicalism is a political philosophy Political philosophy is the philosophical study of government, addressing questions about the nature, scope, and legitimacy of public agents and institutions and the relationships between them. It ...
,.... who utilise the term
wage slavery Wage slavery is a term used to describe a situation where a person's entire livelihood A person's livelihood (derived from ''life-lode'', "way of life"; cf. Old German, OG ''lib-leit'') refers to their "means of securing the basic necessities (food ...
as a
pejorative A pejorative or slur is a word In linguistics, a word of a spoken language can be defined as the smallest sequence of phonemes that can be uttered in isolation with semantic, objective or pragmatics, practical meaning (linguistics), meaning ...
for
wage labour Wage labour (also wage labor in American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of varieties of the English language native to the United States. Curren ...

wage labour
. Socialists draw parallels between the trade of labour as a commodity and
slavery Slavery and enslavement are both the state and the condition of being a slave, who is someone forbidden to quit their service for an enslaver, and who is treated by the enslaver as their property Property is a system of rights that give ...
.
Cicero Marcus Tullius Cicero ( ; ; 3 January 106 BC – 7 December 43 BC) was a Ancient Rome, Roman statesman, lawyer, scholar, philosopher and Academic skepticism, Academic Skeptic, who tried to uphold optimate principles during crisis of ...

Cicero
is also known to have suggested such parallels. According to
Noam Chomsky Avram Noam Chomsky (born December 7, 1928) is an American linguist Linguistics is the scientific study of language A language is a structured system of communication used by humans, including speech (spoken language), gesture ...

Noam Chomsky
, analysis of the psychological implications of wage slavery goes back to the
Enlightenment Enlightenment, enlighten or enlightened may refer to: Age of Enlightenment * Age of Enlightenment, period in Western intellectual history from the late 17th to late 18th century, centered in France but also encompassing: ** Midlands Enlightenment ...
era. In his 1791 book ''On the Limits of State Action'', classical
liberal Liberal or liberalism may refer to: Politics *a supporter of liberalism, a political and moral philosophy **Liberalism by country *an adherent of a Liberal Party Arts, entertainment and media *''El Liberal'', a Spanish newspaper published betw ...

liberal
thinker
Wilhelm von Humboldt Friedrich Wilhelm Christian Karl Ferdinand von Humboldt (, also , ; ; 22 June 1767 – 8 April 1835) was a philosopher, , , diplomat, and founder of the , which was named after him in 1949 (and also after his younger brother, , a ). He is espe ...

Wilhelm von Humboldt
explained how "whatever does not spring from a man's free choice, or is only the result of instruction and guidance, does not enter into his very nature; he does not perform it with truly human energies, but merely with mechanical exactness" and so when the labourer works under external control, "we may admire what he does, but we despise what he is." Both the Milgram and Stanford experiments have been found useful in the psychological study of wage-based workplace relations. The
American American(s) may refer to: * American, something of, from, or related to the United States of America, commonly known as the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is ...
philosopher A philosopher is someone who practices philosophy Philosophy (from , ) is the study of general and fundamental questions, such as those about Metaphysics, existence, reason, Epistemology, knowledge, Ethics, values, Philosophy of mind, mi ...

philosopher
John Dewey John Dewey (; October 20, 1859 – June 1, 1952) was an American philosopher A philosopher is someone who practices philosophy. The term ''philosopher'' comes from the grc, φιλόσοφος, , translit=philosophos, meaning 'lover of wisdom ...
posited that until " industrial feudalism" is replaced by "industrial
democracy Democracy ( gr, δημοκρατία, ''dēmokratiā'', from ''dēmos'' 'people' and ''kratos'' 'rule') is a form of government in which people, the people have the authority to deliberate and decide legislation ("direct democracy"), or to cho ...

democracy
," politics will be "the shadow cast on society by big business". Thomas Ferguson has postulated in his
investment theory of party competitionThe Investment theory of party competition is a political theory Political philosophy is the philosophical study of government A government is the system or group of people governing an organized community, generally a State (polity), ...
that the undemocratic nature of economic institutions under capitalism causes elections to become occasions when blocs of investors coalesce and compete to control the state. As per anthropologist
David Graeber David Rolfe Graeber (; February 12, 1961September 2, 2020) was an American anthropologist and anarchist activist. His influential work in economic anthropology, particularly his books '' Debt: The First 5000 Years'' (2011) and '' Bullshit Jobs' ...

David Graeber
, the earliest wage labour contracts we know about were in fact contracts for the rental of chattel slaves (usually the owner would receive a share of the money, and the slave, another, with which to maintain his or her living expenses.) Such arrangements, according to Graeber, were quite common in New World slavery as well, whether in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
or
Brazil Brazil ( pt, Brasil; ), officially the Federative Republic of Brazil (Portuguese: ), is the largest country in both South America and Latin America. At 8.5 million square kilometers (3.2 million square miles) and with over 211 mill ...

Brazil
. C. L. R. James argued that most of the techniques of human organisation employed on factory workers during the industrial revolution were first developed on slave plantations. Additionally,
Marxists Marxism is a method of socioeconomic Socioeconomics (also known as social economics) is the social science that studies how economic activity affects and is shaped by social processes. In general it analyzes how modern society, societies soci ...
posit that labour-as-commodity, which is how they regard wage labour, provides an absolutely fundamental point of attack against
capitalism Capitalism is an economic system An economic system, or economic order, is a system A system is a group of interacting Interaction is a kind of action that occurs as two or more objects have an effect upon one another. The idea o ...

capitalism
. "It can be persuasively argued," noted one concerned philosopher, "that the conception of the worker's labour as a commodity confirms Marx's stigmatisation of the wage system of private capitalism as 'wage-slavery;' that is, as an instrument of the capitalist's for reducing the worker's condition to that of a slave, if not below it.". This Marxist objection is what motivated Nelson's essay, which claims that labour is not, in fact, a commodity.


See also


References


Further reading

*
Richard Blundell Sir Richard William Blundell CBE The Most Excellent Order of the British Empire is a British order of chivalry, rewarding contributions to the arts and sciences, work with charitable and welfare organisations, and public service outside t ...
and Thomas MaCurdy, 2008. "labour supply," ''
The New Palgrave Dictionary of Economics ''The New Palgrave Dictionary of Economics'' (2018), 3rd ed., is an twenty-volume reference work on economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, ...
'', 2nd Editio
Abstract.
* Freeman, R.B., 1987. "Labour economics," ''
The New Palgrave: A Dictionary of Economics ''The New Palgrave Dictionary of Economics'' (2018), 3rd ed., is an twenty-volume reference work on economics published by Palgrave Macmillan. It contains around 3,000 entries, including many classic essays from the original Inglis Palgrave Dictiona ...
'', v. 3, pp. 72–76. * , 1932, 2nd ed., 1963. ''
The Theory of Wages ''The Theory of Wages'' is a book by the British economist John Richard Hicks, John R. Hicks published in 1932 (2nd ed., 1963). It has been described as a Classic book, classic microeconomic statement of wage determination in competitive markets. I ...
''. 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 Peter Richard Grenville Layard, Baron Layard FBA (born 15 March 1934) is a British labour economist, currently working as programme director of the Centre for Economic Performance at the London School of Economics. Layard was Senior Research O ...

Richard Layard
, ed., 1986, v
1

2
:Orley Ashenfelter and
David Card David Edward Card (born 1956) is a Canadian Canadians (french: Canadiens) are people identified with the country of Canada. This connection may be residential, legal, historical or cultural. For most Canadians, many (or all) of these connecti ...

David Card
, ed., 1999, v
3A3B
an
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 Jacob Mincer (July 15, 1922 – August 20, 2006), was a father of modern labor economics Labour economics seeks to understand the functioning and dynamics of the Market (economics), markets for wage labour. Labour is a commodity that is suppli ...
, 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. * * * * * Simon Head, ''The New Ruthless Economy. Work and Power in the Digital Age'', Oxford UP 2005, * * *


External links


Ageing workers
EU-OSHA The European Agency for Safety and Health at Work (EU-OSHA) is a decentralised agency of the European Union with the task of collecting, analysing and disseminating relevant information that can serve the needs of people involved in safety and h ...

The Labour Economics Gateway
– Collection of Internet sites that are of interest to labour economists

* ttp://www.upjohn.org/ W.E. Upjohn Institute for Employment Research
ILO: ''Key Indicators of the Labour Market (KILM).'' 5. ed. Sept. 2007

LabourFair Resources
– Link to Fair Labour Practices
Labour Research Network
– Labour research programme treating various fields
Labour Research Department
– Independent labour economics research organisation {{Authority control Factors of production