Labour Demand, Supply & Equilibrium

This Chapter discusses the functioning of labour markets and how they impact supply, demand and wages. Whilst the drive of Governments to secure full employment is recognised, the challenges presented by the realities of the market makes this difficult to achieve and the issues surrounding competing differentials, labour market imperfections and discrimination are outlined. Elasticity of demand and the substitution that can take place between labour and capital are also examined, noting how national legislative policies do not necessarily resolve this dynamic in favour of workers.

The concept of human capital is reviewed, suggesting that it is essentially a set of skills that can be used to increase worker productivity. It can be seen as a stock of knowledge and know-how, mental and physical abilities and/or the capacity to adapt and learn. The nature of change being experienced within national economies as workers seen as highly skilled and ‘rare’ assets in the past seek to address real and perceived barriers in an effort to gain employment in new/emerging business areas is also debated. This highlights the challenges of establishing balanced national policies that address the demands of both established/older workers and new entrants to the labour market.

The Chapter considers the impact of wage structures and how this is affected by the supply/demand fundamentals of the market. With globalisation there are now choices available to businesses which may depress or limit wage rates. Whilst there is a basic wage incentive for workers this will only work as long as workers are content to substitute their available leisure time for labour. Once income levels reach a certain level then workers are more likely to protect their remaining leisure time. The Chapter therefore explores this concept of marginal utility and what it means for both wages and employment rates.

The concept and impact of unemployment on the national labour market is discussed, noting how it can be cyclical or ‘demand deficient’ in nature. The impact of globalisation is noted, demonstrating how it can shape structural unemployment (the changes in national industry structures). This sets the context for an outline of what full employment actually is and how this may never be achieved in reality due to liquidity/flexibility and transition in the labour market. 

The Chapter conducts a brief examination of labour productivity and production frontiers, stressing the importance of productivity growth and how this can essentially be achieved through two key inputs - labour and capital. However, the relative simplicity of this argument is noted, given the social and other factors outlined elsewhere in the Chapter.

The Chapter closes with a review of labour mobility (both geographic and occupational) and how this is now both a national and international economic driver. Geographic mobility can increase the supply of labour, supporting specialisation and delivering a distinct comparative advantage. This supports an examination of labour representation and Trade Unions, outlining how they can play an important role in areas such as collective bargaining and associated pay issues, although this role is declining in many countries.


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