labor market
Labor Market is a place where labor is exchanged for wages. These places are identified and defined by a combination of the following factors:
1. Geography (local, regional, national, international),
2. Industry,
3. Education, licensing or certification and
4. Function or occupation.
Labor market characteristics are also social matters. Sociological and demographic change; social class movements, gender awareness, youth cultures, attitudes to age, family size and employment heritage, ethic and cultural background - may all influence who enters, leaves or is restricted from taking up and keeping particular kinds of employment. These are relevant to labor markets. Overall we should be concerned to understand
· structures and processes influencing how work is distributed in the “defined labor market”.
· how pay is distributed and pay levels and relativities between various jobs and groups
· how patterns of work are changing and the level, structure and distribution of employment.
The Economic Labor Market Model
Supply, demand and pricing concepts can be applied to labor market operations. Typically this paradigm assumes that wages regulate supply/demand for labor affecting inflation and employment within an economy. But there is no single, homogeneous and perfect market for labor. Rather there are many differentiated, interrelated markets based on skill, occupation, geographical location and institutional/social frameworks.
Assumptions of the model include:
· Deriving income expectations from the person’s “utility function”. The supply of labor (how many offering themselves for work and for how long is determined by wages that are offered).
· Work as a “dis utility “with wages being the reward/compensation for lost leisure and subordination under a contract to an employer. Sometimes - overtime premiums are paid - but why in only some cases?
· Wages are a cost and for employers wanting to maximize profits – labor’s marginal productivity value is significant.
With fixed level of capital , at some point the output of each extra unit of labor will start to fall off , so as the argument goes - the wage paid will be equal to the value of the marginal productivity of the last unit of labor. Supply and demand for labor (quantitatively and qualitatively) operate competitively through wages (pricing). At an “equilibrium point” everyone is willing to work at that wage.
In reality, assumptions about free labor markets where supply, demand, price and individuals/firms interplay and compete to maximize their position - are too simple. Individuals and employers make choices within their labor markets. Results may be interrelated and interdependent but the choices are constrained by many social and other factors – including “labor market” institutionalization. Formal and informal rules, regulations and practice prevail over the marginal productivity of labor formula.
Salamon points out that the free market wages may be constrained by:
Reservation wage Levels
Unemployment benefit and a national minimum wage fix income points below which few will be prepared to work.
Efficiency wage Levels
There is little evidence that organizations generally use a lowest wage mechanism as a regulator - indeed some may adopt a high wage strategy. A range of pay rates for a given labor market will apply rather than one price. Employers, in one way or another, survey prevailing rates for the type of work they have and the scarcity values they perceive. To secure the staff commitment, effort and talent they need, they may pay above what they regard as “the going rate” or minimum level.
Collective Bargaining
Where trade unions are established, within an employing organization and/or a wider institutional framework, collective bargaining processes may determine wage structures for a “class” of employees. Management become less able to treat labor as individual, replaceable units. Collectively negotiated and regulated wage structures may also apply to the individual who, whilst entering into an employment contract as an individual and indeed not necessarily a trade union member, becomes subject to the terms and conditions of employment agreed between an employer and a trade union for that class of employees e.g. railway workers.
Labor Theory of Value
The notion that the value of any good or service depends on how much labor it uses up. First suggested by Adam Smith, it took a central place in the philosophy of Karl Marx. Some neoclassical economists disagreed with this theory, arguing that the price of something was independent of how much labor went into producing it and was instead determined solely by supply and demand.
A flexible labor market is one in which it is easy and inexpensive for firms to vary the amount of labor they use, including by changing the hours worked by each employee and by changing the number of employees.
This often means minimal regulation of the employment (no minimum wage, say) and weak (or no) trade unions. Such flexibility is characterized by its opponents as giving firms all the power, allowing them to fire employees at a moment’s notice and leaving working feeling insecure.
Opponents of labor market flexibility claim that labor laws that make workers feel more secure encourage employees to invest in acquiring skills that enable them to do their current job better but that could not be taken with them to another firm if they were let go. Supporters claim that it improves economic efficiency by leaving it to market forces to decide the terms of employment. Broadly speaking, the evidence is that greater flexibility is associated with lower rates of unemployment and higher GDP per head.
1. Geography (local, regional, national, international),
2. Industry,
3. Education, licensing or certification and
4. Function or occupation.
Labor market characteristics are also social matters. Sociological and demographic change; social class movements, gender awareness, youth cultures, attitudes to age, family size and employment heritage, ethic and cultural background - may all influence who enters, leaves or is restricted from taking up and keeping particular kinds of employment. These are relevant to labor markets. Overall we should be concerned to understand
· structures and processes influencing how work is distributed in the “defined labor market”.
· how pay is distributed and pay levels and relativities between various jobs and groups
· how patterns of work are changing and the level, structure and distribution of employment.
The Economic Labor Market Model
Supply, demand and pricing concepts can be applied to labor market operations. Typically this paradigm assumes that wages regulate supply/demand for labor affecting inflation and employment within an economy. But there is no single, homogeneous and perfect market for labor. Rather there are many differentiated, interrelated markets based on skill, occupation, geographical location and institutional/social frameworks.
Assumptions of the model include:
· Deriving income expectations from the person’s “utility function”. The supply of labor (how many offering themselves for work and for how long is determined by wages that are offered).
· Work as a “dis utility “with wages being the reward/compensation for lost leisure and subordination under a contract to an employer. Sometimes - overtime premiums are paid - but why in only some cases?
· Wages are a cost and for employers wanting to maximize profits – labor’s marginal productivity value is significant.
With fixed level of capital , at some point the output of each extra unit of labor will start to fall off , so as the argument goes - the wage paid will be equal to the value of the marginal productivity of the last unit of labor. Supply and demand for labor (quantitatively and qualitatively) operate competitively through wages (pricing). At an “equilibrium point” everyone is willing to work at that wage.
In reality, assumptions about free labor markets where supply, demand, price and individuals/firms interplay and compete to maximize their position - are too simple. Individuals and employers make choices within their labor markets. Results may be interrelated and interdependent but the choices are constrained by many social and other factors – including “labor market” institutionalization. Formal and informal rules, regulations and practice prevail over the marginal productivity of labor formula.
Salamon points out that the free market wages may be constrained by:
Reservation wage Levels
Unemployment benefit and a national minimum wage fix income points below which few will be prepared to work.
Efficiency wage Levels
There is little evidence that organizations generally use a lowest wage mechanism as a regulator - indeed some may adopt a high wage strategy. A range of pay rates for a given labor market will apply rather than one price. Employers, in one way or another, survey prevailing rates for the type of work they have and the scarcity values they perceive. To secure the staff commitment, effort and talent they need, they may pay above what they regard as “the going rate” or minimum level.
Collective Bargaining
Where trade unions are established, within an employing organization and/or a wider institutional framework, collective bargaining processes may determine wage structures for a “class” of employees. Management become less able to treat labor as individual, replaceable units. Collectively negotiated and regulated wage structures may also apply to the individual who, whilst entering into an employment contract as an individual and indeed not necessarily a trade union member, becomes subject to the terms and conditions of employment agreed between an employer and a trade union for that class of employees e.g. railway workers.
Labor Theory of Value
The notion that the value of any good or service depends on how much labor it uses up. First suggested by Adam Smith, it took a central place in the philosophy of Karl Marx. Some neoclassical economists disagreed with this theory, arguing that the price of something was independent of how much labor went into producing it and was instead determined solely by supply and demand.
A flexible labor market is one in which it is easy and inexpensive for firms to vary the amount of labor they use, including by changing the hours worked by each employee and by changing the number of employees.
This often means minimal regulation of the employment (no minimum wage, say) and weak (or no) trade unions. Such flexibility is characterized by its opponents as giving firms all the power, allowing them to fire employees at a moment’s notice and leaving working feeling insecure.
Opponents of labor market flexibility claim that labor laws that make workers feel more secure encourage employees to invest in acquiring skills that enable them to do their current job better but that could not be taken with them to another firm if they were let go. Supporters claim that it improves economic efficiency by leaving it to market forces to decide the terms of employment. Broadly speaking, the evidence is that greater flexibility is associated with lower rates of unemployment and higher GDP per head.