Employment

Terminology

The term labour market is a construct that is used to represent the mechanism by which a country's agggregate levels of employment and unemployment are determined by the interaction of the aggregate levels of the supply of, demand for, and price of labour.

The labour market

Overview

It is made up of a large number of different markets that can be categorised in a variety of ways. Dual labour market theory distinguishes between a "primary segment" of employment for sustained periods such as is referred to as a career, and a "secondary segment" of temporary employment in short-term jobs , and a distinction is sometimes made between external labour markets and those that are internal to employing organisations .

Employment legislation

Employment legislation imposes statutory requirements upon the relations between employers and employees concerning matters that include working hours, health and safety at work, minimum wage rates, dismissal restrictions and redundancy payments. The levels of employee protection provided by the legislation vary from country to country .

Labour market statistics

For statistical purposes the population is divided into three categories:

• the employed population;
• the unemployed population; and,
• the economically inactive population.

The first two categories together comprise the labour force employed or working population, consisting of those people of working age who are available for employment (including, in principle, workers in the shadow economy). The third category includes those falling outside the chosen working age definition, the disabled, and those not seeking work for other reasons (sometimes referred to as discouraged workers). It also includes those who provide unpaid services to households. The percentage of the population of working age who are members of the working population is termed the labour activity rate.

National employment statistics are compiled from employer and household surveys , according to internationally-agreed principles , but differing in practice from country to country, making comparisons hazardous. The composition of the labour force is normally recorded by sex, industry and occupation .

Labour market economics

Overview

The labour market occupies a special place in the interactive network of markets that make up an economy, and it has special implications for the welfare of its people. It affects productive and economic efficiency by its allocation of human resources among alternative activities, and it influences the way that people choose between consumption and leisure.

Most labour markets differ significantly from the perfect market of economic theory. The labour force is often far from homogeneous, the information available to the parties is usually far from complete, and some degree of market power is often present. The Walrassian auctioneer is not an apt analogy for the market process, and the deal that is arrived at has the characteristics of an incomplete contract, in that the responsibilities of employer and employee are not exhaustively specified. For employment that requires training, the existence of an interval between a decision to supply and its implementation introduces additional uncertainties. Those departures from the ideal model affect the process by which the supply of labour is reconciled with its demand.

The supply of labour

The motive to seek employment may be expected to be determined by the wage rate on offer and upon personal preferences as between employment and other activities. (In this context the alternative to employment is referred to as “leisure”, although in fact it includes childcare, housework and voluntary work). Two effects are at work. On the one hand, an increase in the income that is offered can increase the attractiveness of employment as the result of the substitution effect (so called because it induces a substitution in which leisure is sacrificed for the sake of getting employment). On the other hand, additional income tends to motivate an increase in the consumption of leisure (as well as of other benefits) , creating what is termed an income effect. Eventually, as income increases, the income effect can be expected to outweigh the substitution effect, so that further income increases reduce the motive to seek employment

The size of the labour force of a closed economy is affected by the age structure of the population and its participation rate, and the participation rate is affected in turn by the income and substitution effects of wage rate changes and by fertility rates and life expectancy changes. . In open economies, migration may also have a significant influence. Thus the supply of labour may be expected, first to increase with each increase in the wage rate offered, but eventually to fall in response to further increases.

The demand for labour

The demand for labour derives solely from the demand for the products on which it can be employed. The demand for a particular skill by a hypothetical sole employer of that skill would depend, not only upon the demand for the product on which it is to be employed, but also upon substitutes for that skill such as investment in automation. Such an employer may be expected to increase its employment provided that the net cost of doing so would be less than the consequent increase in revenue. Since increases in the revenue from the firm’s product may be expected to depend upon its cost of production, the firm’s demand for the skill may be expect to rise with reduction in the cost of employing it, and vice versa. (In most industries, that effect may also be a consequence of the short-term operation of the law of diminishing returns.) The total demand for that skill by a market of competing employers at a given wage rate would be the sum of the numbers that each would employ at that rate. In a competitive market, each employer may be expected to take the going rate (as determined by the process of bringing supply into line with demand) as given, and adjust employment accordingly.

Unemployment

Failure of the labour market to "clear" (ie to match supply with demand) can lead to losses of output and income as result of unemployment or of the misuse of skills. It happens when employers fail to find available skills, and when would-be employees fail to find available vacancies (the temporary occurrence of which is said to lead to “frictional unemployment”). It also happens when there are no vacancies for an available skill because of unanticipated changes of industry structure (which can result in what is termed “structural unemployment”). Unemployment can also be the result, according to Keynesian theory, from a deficiency in aggregate demand; and, according to classical theory, from the maintenance of wage rates above the market – clearing level. The concept of the the natural rate of unemployment refers to the unemployment rate that is characteristic of an economy whose growth rate is in line with its long-term trend. It is a characteristic that is held to depend mainly upon the existence of institutions and practices that prevent the labour market from clearing by deterring employers from recruiting or reducing the incentives for the unemployed to seek employment. They include legislation imposing restrictions upon dismissal, compensation payments for permitted redundancies, restrictions upon working hours, and income support payments to the unemployed; and are collectively known as "labour market rigidities", or as the absence of labour market price flexibility. As might be expected, the evidence suggests that economies with flexible labour markets experience faster growth and a greater ability to recover from external shocks than those with more rigid labour markets (although the investigation of those effects is hampered by the difficulty of measuring price flexibility)..

References

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