Economics of the Labor Market. Free Essay Example.

Labor market refers to a place or position where employees and workers interact with each other. In this market, employees are in constant competition to hire the best workers while the workers are in constant search for the best and most satisfying form of employment (Boeri, 2013). A labor market is thus an economy governed by the rules of demand and supply of labour. The demand is for both best workers and worthy jobs while supply is also about the available jobs and workers willing to take on the jobs (Boeri, 2013). This supply and demand is influenced by the dynamics of bargaining power.

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The labor market is both local and international and is always made of small interacting labor markets with workers and employees of various dimensions, skills and qualifications, and within some geographical location accessible to all the players in the market (Wilkinson, 2013). The players interact and exchange information concerning the wages rate, levels of competition, conditions of employment, and the job location (Benjamin, 2012). The market can only exist where there is goods or services offered and where there is demand for this goods from buyers and the supply from sellers (Wilkinson, 2013). In the labor market, its the labor that is exchange with the negotiations occurring between the employee and the worker in order to determine the positioning of the worker in a particular job, with specified wages, condition of employment and the due benefits.

The demand for labor is basically from employees for their needs to increase creation of goods and the services they deal in. Employees decide on the workers they are going to hire based on a number of factors which include, the cost of labour, the current and projected levels of production, the productivity of the work force, and last but not least, the price that the firm has anticipated and allocated for its inputs (Boeri, 2013). Job opportunities arises when, either the firm is replacing leaving employees, or those that have passed on at the same time opportunities can arise from the expansion of the firms

Labor Supply

Labor supply is the number of willing workers who are able to work multiplied by the number of hours they are willing and able to give to their respective jobs. In other words, it is the measure of the people able and willing to offer their services to an industry for a given return (Loveridge, 2012). The curve of labor supply for any kind of industry is always upwards sloping. This is so because, as the wages for jobs increases, more workers are drawn into that industry as attracted by the available incentives for higher pay (Loveridge, 2012). Such people may not necessarily be moving from other jobs since most people seeking jobs are unemployed; and even if they were, the jobs they previously held are taken up by other who was unemployed.

The expansion of the current labor supply is always determined to a larger extend by the elasticity of labor supply which in turns affects the rise of the current wage rates or salaries (Loveridge, 2012). Economists like to think of labor supply as a sole problem where workers weigh the opportunity cost of the various job options at their disposal (in the labor market) that can fill and fit the available time they have and thus choose to allocate time the most suitable option leaving everything else.

Everyone has 24 hours each day. There is just so much a person can choose to allocate time for, their raising of children, sleep, play, engage in volunteer works, or do some economically beneficial works (Grossbard, 2015). This simply means that there are only two ways that an individual can use their time, for leisure or for work. Leisure is a form of consumption of goods, in that individuals can form utility direct from it.

There are two aspects of leisure demand that determine understanding of labor supply (Keeley, 2013). First, leisure is a normal good, and with all things constant, there will be an increase in leisure demand if people have more income. Secondly, the opportunity cost of leisure or the price paid to enjoy leisure is the wages they would have earned should they have worked. A worker earning $10 per hour, for instances, gives up the ten dollars for any hour they spend on leisure. The ten dollars foregone are thus the opportunity cost of enjoying leisure for an hour more than should be (Keeley, 2013). Applying the same reasoning, people earning more than the ten dollars face even higher prices for leisure.

Attachment to the Labor Market

Individual part on the employment market deals with human decision regarding participation to the work force and supply of labor at the going rate (Benjamin, 2012). It evaluates the different factors that affect men and womens decision concerning labor supply. As such, it concentrates on all the human factors that affect labor supply, from population size, gender, race, age among others. At the same time, it explains the basic framework in the income-leisure model. In this regard the model can be applied on both the hour and the participation dimension (Benjamin, 2012). Based on these assessment, the individual supply curve of labor can be analyzed.

Definition of terms

The Working-age Population: are the individuals of over 15 years of age able and willing to work.

The Labor workforce: is defined as the population above the age of 15 years who are either employed or looking for employment (Keeley, 2013).

Employment: refers the status of being in a gainful and profit/benefits generating engagement in a firm or industry.

Unemployment: Refers to the status of being without employment. Meaning one is not in any gainful engagement that guarantees any form of returns or income

A Job Vacancy is a vacant position in an industry for a given period of time that seeks placement through recruitment. It is available for workers outside the firms location (Keeley, 2013)

Skill Gaps refers to the situation the current employees or the potential employees do not have the capacity to meet the required skills to perform a particular job in order to meet the firm or industrys needs (Keeley, 2013).

Literature Review

The theory of labor supply

The labor supply theory quantifies the individual attachment to the labor market in terms of participation and the amount of hours they are willing to give to the work force.

Labor Participation

Labor participation is the decision by workers to participate in income generation by doing work rather than taking leisure (Benjamin, 2012). Labor force participation affects among others;

Unemployment; meaning that people are willing to look for jobs which reduces the rate of unemployment in a certain population.

The composition of the work force; meaning that the working population is diverse with all kind of age groups, race, genders, etc.

The size of the labor force; the willingness of people to participate in the supply of labor means that the size of the labor force will increase (Benjamin, 2012).

However, the willingness and the decision to participate in labor supply is not an isolated affair but one that is influenced by a number of factors. At this point, it is paramount to define the eligible population that can participate in the labor force, legally (Boeri, 2013). They include

Civilians; Men and women

non-institutionalized; free people, meaning those not in prison or mental institutions

Individuals above the age of 15 years.

The other category is of those that form the potential participant in the labor force (Boeri, 2013). This include, those already in the labor force or those who have not joined the labor force. Those not in the labor force may be either students, retired persons or the discouraged workers who are not looking for work anymore (Loveridge, 2012). While those in the labor force are categorized as those already working or those looking for employment

Participation Rate

It is clear that labor participation rate is directly proportional to the labor force (both employed and unemployed) and indirectly proportional to the working population (Loveridge, 2012).

The Rate of Labor Participation = (Employed + Unemployed)/ Working the Population

However, it would be wrong to assume that the decline in unemployment is good news while an increase in unemployment is bad news, as this could sometimes mean that if unemployment rate falls, there are more discouraged potential labor force participants (Wilkinson, 2013).

Participation rate is the size of the active labor force in the economy, or labor market. It is people that are employed or seeking employment. Those not looking for employment are not categorized under this participation rate (Wilkinson, 2013). These could be people who are discouraged and stop looking for employment since jobs are impossible to come by say during an economic recession.

Participation rate is an essential metric in the determination of unemployment data as unemployment data reflects on the number of people who are in spite of them actively looking for employment they are unable to secure a job (Loveridge, 2012). It is imperative in exploring the unemployment rate. Those not interested in working are included in the unemployment rate but in the participation rate. Therefore, one should evaluate both the participation and unemployment rates to understand and interpret the status and dynamics of employment.

The Hours-Of-Work Aspect of Labor Supply

Labor supply theory assumes or has that workers should, and have the luxury of deciding the number of hours they have to work (Benjamin, 2012). However, this choice is limited by the factors of wage. There are evidence and studies that show that such an assumption is misguided on so many levels. These studies show that as much as the worker has a say in the amount of hours they put into their jobs, the employer has an influence on that decision too. Most firms have a fixed costs of employment that is associated with the coordination of workers activities who work at for different hours during the weekly hours (Benjamin, 2012). By weekly hours, it means the hours per day, week or year.

The curve of labor supply increases elasticity depending on the time over which working hours variable is defined (Benjamin, 2012). As such, labor supply is almost inelastic if one considered the working hours per week but becomes more elastic once the working hours are considered per year. The per year working hours consideration is sometimes very oppressive to many people who get paid on an annual basis than those who get paid in a weekly basis. It would be easier for a worker to remember the amount of hours they worked in the previous week than it would be for one to remember the amount of hours they have worked for in a years time (Benjamin, 2012).

There is a limit to the amount of hours an employee is required or allowed to work in a given week. Generally, the requirement is about 8 hours and 48 hours for both daily and weekly limits respectively