Chapter 2

Overview of Labor Market

Definition, Facts and Trends
• Buyers and sellers are searching throughout the entire nation for each
other, we would describe the market as a national labor market.

Example: Taxi driver and taxi companies both don’t confine

themselves to taxi market only…….

in which the sellers of labor are represented by a union, operate under

a very formal set of rules that partly govern buyer–seller transactions.
The Labour force and Unemployment
Labor Force, Unemployed
• The term labor force refers to all those over 16 years of age who are employed,
actively seeking work, or expecting recall from a layoff.

• Those in the labor force who are not employed for pay are the unemployed.

• People who are not employed and are neither looking for work nor waiting to be
recalled from layoff by their employers are not counted as part of the labor force.
• The total labor force thus consists of the employed and the unemployed
 Adaptation to Change
• Over the last half-century, the number of some kinds of jobs has expanded
and the number of others has contracted. Both workers and employers
have had to adapt to these changes in response to signals provided by the
labor market.

Earnings of Labour Nominal & Real Wage

The wage rate is the price of labor per working hour

 Nominal and Real Wage
The nominal wage is what workers get paid per hour in current dollars; nominal wages
are most useful in comparing the pay of various workers at a given time. Real wages,
nominal wages divided by some measure of prices, suggest how much can be purchased
with workers’ nominal wages.

The CPI
One problem is that consumers change the bundle of goods and services
The more difficult issue has to do with the quality of goods and services.
After considering these problems, some economists believe that the CPI has overstated
inflation by as much as one percentage point per year.6 While not everyone agrees that
inflation is overstated by this much, it is instructive to recalculate real-wage changes by
supposing that it is.
Wages, Earnings, Compensation, and Income
• The term wages refers to the payment for a unit of time, whereas
earnings refers to wages multiplied by the number of time units
(typically hours) worked. Thus, earnings depend on both wages and
the length of time the employee works.

• Total compensation, on the other hand, consists of earnings plus

employee benefits—benefits that are either payments in kind or
deferred.
How labor Market Wors
 Firms operate with three markets
The labor , capital and product.

It is useful to remember that the major labor market outcomes are related to
(a) the terms of employment (wages, compensation levels, working conditions)
and
(b) the levels of employment.

In analyzing both these outcomes, one must usually differentiate among the various
occupational, skill, or demographic groups that make up the overall labor market.
Any labor market outcome is always affected, to one degree or another, by the forces
of both demand and supply
How Labor Market Works
 Demand for Labor
First, higher wages imply higher costs and,
usually, higher product prices. The demand of
product declines and ultimately employment
level decreases. It is called SCALE EFFECT.
Second, with increase in wage, employers will
tend towards capital intensive techniques.
This is SUBSTITUTION EFFECT.
Diff between movement along the curve and
shift in the curve
 Changes in Other Forces Affecting Demand
demand for the product rises. Technology, factor prices
unchanged, so, demand of labor would rise. It will shift
demand curve to right.
The second effect of a fall in capital prices would be
a substitution effect, whereby firms adopt more
capital-intensive technologies in response to
cheaper capital.
The Supply of Labor Determination of Wage
Market Clearing
Wage of a Typical Firm Disturbing the Equilibrium
What could happen to change the market-clearing wage once it has been
reached? Changes could arise from shifts in either the demand or the supply
curve.