Home Views & Opinions Labour Markets – An introduction

Labour Markets – An introduction

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What is a labour market?
A labour market is a place where employers and employees interact to demand and supply labour.
What is labour demand?
Labour demand refers to employer’s willingness and ability to demand labour. Willingness here means they want/are willing to hire labour and ability refers to the fact that they are able to pay a wage to hire the labour as well. Labour demand graphs are from the employer’s perspective.
What is labour supply?
Labour supply refers to the employee’s willingness and ability to work. Willingness here means that they are willing to work for the wage/non-wage factors offered by the firm and ability means they are part of the working age population and have the skills/knowledge required for the particular job. Labour supply graphs are from the employee’s perspective.
Wage and Non-Wage factors:
Wage factors are the monetary rewards you receive in exchange for the labour you supply. These include salary, performance related pay, bonuses, commission etc. Non-wage factors are the non-monetary rewards that you receive from the job such as job satisfaction, satisfactory working conditions, job security, fringe benefits (healthcare, company car etc). Wage and non-wage factors add up to make up the net advantage of a job which define how attractive a job is.
Equilibrium/Market wage rate:
This is the wage rate at which employers are willing to hire labour and employees are willing to supply labour/work. It is the wage rate where the demand of labour meets the supply of labour and an equilibrium or a common point is made (between demand and supply of labour). The wage rate is a measure of the value of a particular occupation i.e. the higher the market wage rate the more value the job has and vice versa.
Labour Demand:
1- Changes in the wage rate cause contraction and extension of demand. This causes movement along the same curve.(An increase in wage rate causes labour demand to decrease and vice versa-inversely proportional)
2- Changes in other factors (excluding wage rate) cause shifts in demand that cause the curve to shift inward or outward. In this case the demand shifts at the same wage rate. (An increase in labour demand causes the curve to shift outward at the same wage rate)
Why is Labour demand called derived demand?
Economists classify the demand for labour as derived demand. This is because when the demand for the goods and services the labour produces increases, more labour will be demanded to fulfill the demand for goods and services. Hence we say that the demand for labour is derived from the demand of goods and services.
Labour Supply
1- Changes in the wage rate cause extension and contraction of demand. This causes movement along the same curve. (An increase in wages causes labour supply to increase and vice versa-directly proportional)
2- Changes in other factors (excluding wage rate) causes shifts in supply that cause the curve to shift outward or inward. In this case the supply shifts at the same wage rate. (An increase in supply causes the curve to shift outward at the same wage rate