Understanding the Labor Market and Its Components
Market of Work and Its Components
Work: Intellectual and physical contributions made by individuals, such as Mr. H’s production of goods and services. Salary: Payment received by employees for their contributions to production.
Classification of the Population According to Work Access
Population of 16 years or more: The entire population that is of legal age to work.
- Labor Force: Includes persons of working age who are employed or seeking employment. It is divided into:
- Employed: Active people who have a job, either for someone else or self-employed.
- Unemployed: Active people who are looking for work but haven’t found a job.
- Inactive Population: Individuals of working age who, for various reasons, are not seeking work (students, retirees, homemakers, etc.).
The Labor Supply and Demand
In a perfectly competitive market, supply and demand have the following characteristics:
- Supply of Work: The total amount of work offered in an economy depends on:
- The size of the labor force. A larger population will have a larger supply of work.
- The number of hours each person is willing to work, which depends on salary, among other factors.
- Demand for Work: Companies need workers to carry out their activities. Demand depends on employee salaries and productivity.
- Equilibrium: Perfect equilibrium is achieved at the intersection of the supply and demand curves.
Working Conditions
These are the terms agreed upon between a person who voluntarily performs work under the direction of another, in exchange for remuneration.
Marginal Productivity of Labor
The salary that employers are willing to pay depends on the marginal productivity of the workers. Marginal productivity of labor increases with the additional output obtained as a consequence of incorporating new employees.
Improvements in Wages and Productivity
If producers hire more employees in the same amount of time, employers will be willing to pay more for their work. Productivity depends on several factors, not just human capital, but also the quality of production and available technological advantages. Better training for workers, improvements in production equipment, and technological advancements have significantly boosted labor productivity in developed countries in recent decades. Therefore, improvements in productivity explain the higher salaries of employees in wealthy countries compared to countries where these advances have not occurred, and where general salary levels are lower.
Market Imperfections of Work
Labor markets are influenced by factors that deviate from the model of perfect competition. Both companies and trade unions influence wages through collective bargaining. The government also influences the labor market by legislating, setting minimum wages, etc. Work is not a homogeneous product. Neither all jobs nor all workers are equal. This leads to wage disparities in the real world.
Factors Explaining Wage Inequality
- Compensating Differentials: Jobs with unpleasant or dangerous conditions (e.g., night shift workers) often have higher salaries than jobs with similar skill requirements but without those drawbacks.
- Differentials in Talent and Abilities: Individuals highly valued by society (e.g., elite athletes, movie stars) contribute something special to their work, making them highly sought after.
- Differences in Human Capital: A more prepared and experienced person normally contributes more to production and therefore receives a higher salary.
- Efficiency Wages: These are incentives used by some companies to motivate their employees and increase productivity.
- Discrimination: Regardless of education level, some individuals receive higher salaries without justification, due to past or present discriminatory practices.