Factor markets: labour

Factor markets: labour

Labour Market

  • 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.

Demand for Labour

  • 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.

Supply of Labour

  • 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.

Wage Determination

  • 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 in Labour Market

  • 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.

Government Intervention in Labour Market

  • 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.