Introduction: Economics of Labor Markets

Updated on May 19, 2018
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Labor Market Outcomes

The Economics of Labor Markets
Most people allocate considerable amounts of time to the labor market. We so often decide when to work and how many hours to devote. The economic consequences of these decisions can drastically vary overtime. Labor Economics is (the study of how labor markets work), which helps us understand some of the social and economic problems facing modern societies. It helps us determine why some labor market outcomes are more likely to be observed than others. Consider for example; that workers and firms typically enter the labor market with varying degrees of conflicting interests. On the one hand; workers are typically willing to supply their services for higher wages. We also know that firms are more willing to hire workers for lower wages; conversely, holding back from hiring when labor is expensive. That’s because firms wish to maximize their profits, and are more willing to hire workers for lower wages. But very few workers will offer their services under these conditions. While firms are profit maximizing, they also take advantage of lower wages in the labor market, perhaps more so willing to hire workers.

In a free-market economy, equilibrium (the state where influence from economic forces are same) is achieved when supply equals demand. Labor Economists refer to this balancing act of economic forces in the market for labor where (workers are searching for jobs) while (firms are searching for workers) as the equilibrium in the market for labor. The two sides also are limited to the set of ground rules made by government regulations. The government can tax workers and firms, enact legislation to increase the supply of workers in the labor market, alter the course of transactions made between the two sides and reform labor laws to assimilate immigration from other countries. It’s important for us to understand these relationships. In order to take a closer look, we turn to the fictional illustration of the Hydro-Electric Dam of Sheffield County to illustrate the interplay between the three leading actors of the labor market.

The Hydro-Electric Dam of Sheffield County
In November 1965, The City of Sheffield decides to build a Dam in order to form a reservoir used to generate electricity. It was perhaps the largest such project in all of Sheffield. There was one problem with the construction of this Hydro-Electric Dam of Sheffield County, the reservoir was located far from where many high-skilled workers lived. The Sheffield county workforce consisted of very low-skilled workers, including those willing to supply their labor in the market for the construction of the Hydro-Electric Dam of Sheffield County. The project also offered higher wages; shifting the demand for labor, resulting in higher wages for county’s local residents. The construction would begin in late 1968, following the county’s approval of the project. The city was then able hire several subcontractors in order to compete the construction of the Hydro-Electric Dam of Sheffield County.

The construction went on for a few more years, and the subcontractors would hire some 23,000 workers during the summers between 1968 through all of 1972 and with the project’s subcontractors hiring an additional 8,000 workers. Many were engineers who had worked on similar Hydro-Electric Construction projects around the world. This led to a sizable increase in the demand for labor, indicating that the subcontractors were looking to hire more workers at any given time. It also increased the supply of workers on the market for labor. We can imagine; the Sheffield County labor market would have moved to a new equilibrium, one represented by the interaction between the increase in the demand for labor, relative to the original supply of mostly low-skilled workers in the market for labor. This would also increase both the employment and wages for the county’s residents. Employment spiked, earnings rose. In other words, the construction of the Hydro-Electric Dam of Sheffield County would have temporarily increased employment and wages during the construction period. It turns out, that the increase in the labor supply experienced by the Sheffield County labor market had occurred for two distinct reasons. (1) The substantial fraction of Sheffield County residents were willing to supply their labor when the wages in the labor market were higher, (2) as a result of the increase in the rate of population growth during the construction period of the Hydro-Electric Dam of Sheffield County. That’s because people from other cities had moved to the City of Sheffield in order to take advantage of the economic opportunities available. The increase in population growth was temporarily, reverting back to its long-term trend once the construction was complete.

The local county government approved the project. We were able to see how the Hydro-Electric Dam of Sheffield County had a significant role in labor market outcome. Firms who saw the increased opportunities in building the Hydro-Electric Dam of Sheffield County also increased their demand for labor. While workers in the same way responded to the change in demand by increasing the quantity of labor supplied in the Sheffield County labor market. In essence, we have in effect, constructed a simple model of the labor market outcomes for Sheffield County. It predicts that the construction of the Hydro-Electric Dam of Sheffield County would have temporarily increased wages and employment in the Sheffield County labor market. It’s also characterized by an upward slopping labor supply, a downward slopping labor demand, and the assumption that an equilibrium then settles the supply of labor and the demand for workers in the Sheffield County labor market.

Conclusion
In reference to this fictional illustration; the three labor market participants; firms (in which case are the subcontractors), workers (the high-skilled engineers and low-skilled working laborers), and governments in which case are (local Sheffield county authorities). This was an example of our fictional storytelling of the Sheffield City labor market.We typically assume that firms wish to maximize their profits, that workers like to increase their well-being, and that governments influence the decisions of workers and firms. Labor market outcomes therefore, depend not only on the willingness of workers who supply their labor, but rather also on the willingness of firms to hire more workers. The firm’s demand for labor, much like the inputs to the production process is also “derived demand” that is derived from the desires of it’s consumers. We know that governments also have a leading role on labor market outcomes. Governments impose taxes, supplement subsidies, and regulate the set of ground rules in the labor market. Finally, how we do in the labor market determines the types of good and services we can afford to consume.


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