CHAPTER ONE

INTRODUCTION TO LABOR
ECONOMICS

Compiled by: Beyene I.

1.1.Introduction to Labor Economics
LABOUR – is one of the primary factors of production.
 Labour is the collect name given to the productive
service, embodied in human physical efforts, skill,
intellectual power. e.t.c.
• This means that labour input is not homogeneous
according to the principle of economics production.
• Resources are relatively scarce or limited
• this means that the desire of consumer, business and
governmental unit for goods and services exceed our
productive capacity
 …Introduction
• Since resources are scarce and the want
unlimited, society is obliged to manage this
resource efficiently.
• Labour economics therefore looks at ways
labour as a resource could be efficiently
utilized.
 1.2.DEFINITION LABOUR
ECONOMICS
• is the branch of economics which studies
the workings and outcomes of the market for
labour services
deals with the behavior of employers and
employees
It is the study of the labour force as an element in
the process of production.
 …DEFINITION
• Labour economics is the study of ;
the factors affecting efficiency of workers
their development between different industries and
occupations and
the determination of their pay.
 1.3. Labor economics and issues discussed in labor economics

Important topics addressed by labor economics

includes:
 the determination of income distribution
 the economic impact of unions
 the allocation of a worker’s time to the labor market
 the hiring and firing decisions of firms
 labor market discriminations,
 the determinants of unemployment
 the workers decision to invest in human capital, and
the like
 1.4. Labour market and the economy

• Labor Market: Interaction between buyers and

sellers of labors (i.e., firms and individuals);
• Just as there are markets for cars, bread and steel,
there is a market for the services people provide.
• The quantity and quality of labor that individuals
supply is an important factor in determining the
economy’s level of production and rate of
growth.
 …Labor and Economy
 People with jobs, people looking for jobs and
businesses seeking employees make up what is
known as the labor market.
 This interaction between people supplying
labor services and businesses demanding
workers’ services is what determines the
wages and salaries paid to employees and the
total number of people employed.
 …Labor and Economy
• An important aspect of the labor market is the
contribution made by the unique skills and
abilities of all types of people.
• These talents can be changed and enhanced
through education or training, making the labor
force an evolving talent pool from which
businesses hire.
• Using skills effectively and training people to
meet new demands in the marketplace help
make the production process more efficient.
 …Labor and Economy
• Another important aspect of the labor market is
the mobility of the workers that it comprises.
• This mobility is important when employers
match
skills to job openings.
• In practice, however, people may be unwilling to
move where the jobs are located or unwilling to
train for a new career.
• In these cases, the mobility in the labor market
and the output of the economy slow down as
people remain unemployed and jobs go unfilled.
 1.5.Labour market Actors

• There are three main groups of agents in the labor

market; workers, firms and the government.
• All these actors follow their own objectives.
 Utility maximization -workers need to decide
whether to work or not to work, how many
hours to work, which occupation to enter, etc.
• Each of these decisions of all workers determines
the quantity and quality of labor supplied in the
economy.
 …Actors
 Profit maximization -firms need to decide how
many and which types of workers to hire and fire,
how much the working hours to be, weather to
provide safe working condition, etc.
• Each of these decisions of all firms determines the
demand for labor in the economy.
 The government can exercise a wide range of
policies that includes imposing of taxes on
worker’s earnings, setting minimum wage
legislation, levying profit tax on firms.
 Affect the demand and supply of labor-price/wage
 1.6.IMPORTANCE OF LABOUR
ECONOMICS
• The study of labour economics is importance for the
following reasons.
1. It helps economists to understand labour related
problems
 e.g
Issues on fair wage or salaries workers
welfare of workers
labour productivity
workers safety
gender related matters, job security and Job
satisfaction.
 …IMPORTANCE
2. The study important in providing data for economic
planning and policy
• It helps economists to know the contribution of
labour services to peoples income (wages and
salaries).
• There is evidence that in most economy, labour input
is the most of economic resources.
3. The study of labour economics helps us to understand
the nature of the market in which labour services are
bought and sold.
 1.7.Distinctive Features of Labor

• There are some related characteristics that make

labor distinctive from other factors of production
and make efficient labor use a difficult issue for
employers.
 Productivity of labor depends greatly on the
motivation of the workers.
 Skills of workers cannot be separated from the
owners of these skills.
 Workers have discretion over how the work is done.
 Workers can be rented rather than purchased.
 Time specifity