labour market

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labour market

a MARKET which brings together those persons seeking work (the supply of labour) and firms, government and other organizations seeking to fill JOB vacancies (the demand for labour). The labour market in practice is highly fragmented reflecting the diversity of work tasks, which range from unskilled or low-skill work (labourers, drivers, machine operators etc.) to tasks calling for specialist skills and expertise (research scientists, surgeons, managers, etc.). See LABOUR FORCE, INTERNAL LABOUR MARKET, PAY, COLLECTIVE BARGAINING, PAY DIFFERENTIAL, LABOUR MOBILITY.
Labour marketclick for a larger image
Fig. 108 Labour market and wage rates.

labour market

A FACTOR MARKET that provides for an exchange of work for WAGES. The SUPPLY side of the market is represented by individual workers or, more commonly, TRADE UNIONS bargaining on a collective basis. The DEMAND side of the market is represented by firms that are requiring labour as a FACTOR INPUT in the production process (see MARGINAL-PHYSICAL PRODUCT, MARGINAL-REVENUE PRODUCT).

The labour market has certain characteristics that distinguish it from other factor markets. Unlike other FACTORS OF PRODUCTION, such as capital, once workers are hired the rate at which they produce output can vary considerably depending upon the efficiency with which employers organize work tasks and the extent to which workers themselves are motivated to achieve work targets (see X-EFFICIENCY). Furthermore, work is often performed by groups of workers who themselves develop group norms about what is an appropriate work rate.

The determination of wage rates in labour markets depends upon the supply of, and demand for, labour. The supply of labour depends upon the size of the POPULATION, school-leaving and retirement ages, geographic mobility, skills, training and experience (HUMAN CAPITAL); entry barriers to professions and jobs through qualifications requirements, ‘closed-shop’ agreements, etc.; occupational mobility, which depends upon training and retraining facilities; RESTRICTIVE LABOUR PRACTICES and demarcation barriers, which limit the tasks that workers can perform, hours worked, which may be influenced by workers’ willingness to work overtime, and the effects of marginal income tax rates (see LAFFER CURVE). Also, workers may be influenced by non-monetary factors, such as congenial working conditions, in deciding where to work. In addition, trade unions can act as monopoly sellers of labour and restrict the supply of labour in the interests of raising wage rates. The demand for labour is influenced by, for example, the size and strength of demand for the goods and services produced by workers, the proportion of total production costs accounted for by wages, and the degree of substitutability of capital for labour in the production process. In addition, employers’ associations may act as MONOPSONY buyers of labour, restricting the demand for labour in the interests of lowering wage rates.

As a consequence of these factors, the labour market cannot be regarded as a single homogeneous market but must be seen as a number of separate labour markets, each with its own particular characteristics. For example, as Fig. 108 shows, a group of workers such as surgeons, whose skills are in limited supply and the demand for whose services is high, will receive a high wage rate; by contrast, office cleaners, who require little or no training or skills, are usually in plentiful supply in relation to the demand for their services, so their wage rates are comparatively low. The WAGE DIFFERENTIAL between these two groups is Ws-Wo.

Labour markets often operate imperfectly because it is costly for workers to collect information about new employments and for firms to seek new workers. Furthermore, individual workers within any occupational group are not homogeneous units, requiring employers to assess the relative skills and capabilities of individual workers in recruiting labour. In addition, redundancy payments and the desire to ‘hoard’ scarce labour skills may encourage firms to retain surplus labour during short-term downturns in economic activity even when the supply of labour exceeds demand, providing a downward ‘stickiness’ in wages. A similar ‘stickiness’ in wages may occur because of the activities of powerful trade unions which are able to establish national wage rates that prevail even in regions where the supply of labour exceeds demand. Additionally, labour markets may exhibit ‘market failure’ because of distortions arising from the imposition of MINIMUM WAGE RATE legislation that increases wage rates above the ‘going’ rate and the fact that people may not be prepared to offer themselves for employment at the ‘going’ rate (‘voluntary’ unemployment) because they are better off receiving SOCIAL SECURITY BENEFITS than taking paid employment.

Such imperfections mean that the labour market consists of fragmented, non-competing labour groups between which there may be only limited movement of workers. In these circumstances, the wages paid to a worker may exceed the earnings that he or she could command in the ‘next best’ employment, that is, his or her transfer earnings. The difference between such a worker's current earnings and his or her transfer earnings is often termed ECONOMIC RENT and reflects the particular knowledge and skills that the worker possesses and that enhance his or her value to the employer compared with using an alternative worker.

In addition to external labour markets in which firms seek to recruit workers and workers seek jobs, internal labour markets operate within firms. These internal labour markets reflect the demand for and supply of particular skills within a firm and embrace promotions, training and retraining opportunities and discretionary salary awards.

At the aggregate level there is a potential conflict between labour and capital as to which ‘should’ receive the largest share of national income (see FUNCTIONAL DISTRIBUTION OF INCOME, LABOUR THEORY OF VALUE). See COLLECTIVE BARGAINING, SUPPLY-SIDE ECONOMICS, PRICE SYSTEM, EMPLOYMENT LAWS, LABOUR LAWS, ACTIVITY RATE, PART-TIME WORK.