Factor markets: labour

The labour market is a factor market where labour services are traded for wages.
Like other markets, it has a demand side (employers) and a supply side (workers).
Wage rate is the price of labour, determined by the interaction of supply and demand.

The demand for labour is derived from the demand for goods and services that labour helps to produce.
It’s influenced by productivity of labour, technological change, and the price of other inputs of production.
Wage elasticity of labour demand measures how responsive the demand for labour is to changes in the wage rate.

The supply of labour depends on the population, willingness to work, qualifications and skills, and availability of leisure alternatives.
Wage elasticity of labour supply refers to the responsiveness of workers to changes in wages.

The equilibrium wage rate is where the quantity of labour demanded equals the quantity of labour supplied.
Wage differentials occur due to differences in skill levels, geographical location, job security and the attractiveness of a job.

Market failure can occur in the labour market through the existence of monopsony power, information asymmetries, and the presence of externalities.
A monopsony in the labour market exists when a single employer dominates the market, giving them the power to set wages below the equilibrium level.
The presence of positive externalities (e.g. social benefits from having a well-educated workforce) or negative externalities (e.g. costs to society of occupational illness) can also lead to market failure.

Governments may intervene to correct market failures through minimum wage legislation, skills training, income redistribution and health and safety regulation.
The effectiveness of these interventions can have mixed results, and may lead to unintended consequences such as unemployment or reduced competitiveness.