CHAPTER 1

Chapter One
Introduction
As you know in other economics courses, labour is of the most important
factors of production. Hence manpower Economics deals with the study of
the workings and outcomes of the labour market. Manpower economics is
one of the most relevant and interesting parts of economics courses. A
good grasp of manpower economics is vital for designing and
understanding manpower policies and for manpower planning and more
generally for appreciating how a modern economy functions.
1.1 Definition and Nature of Labour economics
Labor Economics focuses on how individuals make decisions that directly or

indirectly intersect with the workplace, as well as on how these decisions are
valued in the labor market. Directly, labor economists study questions such as
how individuals search for jobs, decide what job offers to accept, how much
effort they exert on the job, and how individuals value characteristics of the job
beyond just how much the job pays. Indirectly, labor economists study
questions such as how individuals invest in their skills -- be it through job
training programs or education -- as well as how the labor market influences
investment in children and marriage decisions.
Labor economics is the study of how the labor force interacts with
production processes, and how labor market outcomes are influenced by
labor market institutions.
Labour economics is simply defined as the study of the workings and

outcomes of the labour market.
Labour markets or job markets are defined as function through

the interaction of workers and employers.
Labour economics looks at the suppliers of labour services (workers) and

the demanders of labour services (employers), and attempts to
understand the resulting pattern of wages, employment, and income.
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In economics, labour is a measure of the work done by human beings. It
is conventionally contrasted with such other factors of
production as land and capital. There are theories which have developed a
concept called human capital (referring to the skills that workers
possess, not necessarily their actual work).
Three agents can be identified in the labour market as workers, firms

and the government. All these actors of the labour market follow their
own objectives. With the objective of achieving utility maximization,
workers need to decide whether to work or not, how many hours to work,
which skills to acquire, which occupation to enter, whether to join a labour
union or not, how much effort to allocate to the job and when to quit a job.
Each of these decisions of all the workers in the economy constitutes the
quantity and quality of labour supplied in the economy - labour supply
curve.
Pursuing the motive of profit maximization, firms need to decide how

many and which types of workers to hire and fire, how much the working
hours to be, how much capital to employ, and whether to offer safe
working conditions. Each of these decisions of all the firms in the economy
generates the demand for labour in aggregate - labour demand curve.
However, the motives of workers and firms are conflicting in the sense
that, when the incentives change, the two agents react differently for such
a change. When the wage rate is high, for instance, workers respond by
supplying more of their services while the willingness of firms to demand
labour declines, and vice versa. But such a conflict of interests is resolved
when the labour market reaches an equilibrium point, at which the
demand for labour by firms is exactly equal to the supply of labour by
workers.
In reality, however, the labour markets are not left to work by their own. It
is widely believed that economic transactions in the labour market are
both voluntary and mandatory: When both parties gain out of the
transaction, the labour market will facilitate the mutually beneficial
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transaction. Under such a case the transaction will be undertaken
voluntarily. Although some transactions take place accordingly, still some
other may cause one or more parties to lose and entail the redistribution
of income from the gainers to the losers. The third agent, the government
enters into the labour market so that the re-distributional transaction will
be mandatory. In facilitating the mandatory transactions, the government
can exercise a wide range of policies that include imposing taxes on
workers’ earnings, subsidizing the training of workers, setting minimum
wage legislating levying profit tax on firms and encouraging or restricting
immigration. In brief when the economic transactions are mutually
advantageous, both parties participate in the labour market voluntarily.
But when the labour market fails to facilitate mutually beneficial
transactions, the compensation of losers must take place through the
intervention of the government.
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1.2 Labour and its peculiarities as factor
Some of the most important characteristics of labour are as

follows:
Labour is different from the other factors of production. Unlike the other
factors, it is a living thing. As such, it has its own characteristics. They are
given by Marshall as follows:
1. Labour means Human Exertion: Labour means only human exertion
and not the exertion of the cattle or machine. Labour always involves the
mental or physical pain and sacrifice. For example, when a man works and
is busy for a few hours, s/he becomes tired and so s/he needs rest.
2. A Man’s Labour is part of himself: This means the labour cannot be
separated from the labourer. When the labourer sells her/his labour s/he
has to deliver it in person and he cannot sell his labour like land and
capital.
3. Labour Power and Labour Co-exist: The labour power exists as long
as the labourer exists. It becomes invalid or disappears when the labourer
retires or expires.
4. Labour is Perishable: The labour power withheld once is lost forever
and cannot be stored. It cannot be regained. A day without work is gone
irrevocably. As there is no stock, the labourer has to sell his labour
immediately irrespective of the price. Labour is a flow of service of
labourer.
5. Labour has low Bargaining Power: Usually labourers have no
reserve and are compelled to accept low wages. But the development of
the trade unions has considerably improved the bargaining power of the
labour in recent times.
6. Labour has Intelligence and Judgment: Labour is something more
than mere toil and exertion, for labourers being human beings, have
intelligence and judgement and further the toil and exertion can be more
easily undertaken by machines rather than by men. Thus the
distinguishing mark of labour as factor of production is the exercise of
intelligence and judgment.
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7. Labour restricted by Social Factors: The labour as human beings
have much attachment to the language, custom, religion, place, culture
etc., and consequently they do not move out so easily.
8. Both a Means and an End: A labourer is both a means of production
and an end of it.
Efficiency of the Labour can be Increased: The efficiency of labour can
be raised through training, education and experiences.
10. Labour has Decision Power: A labour can make rational decisions
regarding his job. Capital and land do not possess greater decision-making
capacity.
1.3 Characteristics of the Labour Market
The neoclassical model of supply and demand suggests we can study

labour markets just like we study the market for other commodities. If so,
why have a separate field for labour economics? Because the labour
market has a number of characteristics that differentiate it from many
other markets and cause it to function differently from a spot market
1. Stakeholders with a variety of goals
Labour: non-union and union labour; different types of unions (i.e.

industrial or professional).
Management: stockholders, chief executive officers, middle
management.
Government: federal, provincial and local levels; differences in the units
that make and enforce the law and operate government programs.
2. Sociological constraints
Family and community ties affect labour mobility and the role of women
in the labour market. Social norms influencing what is considered an
appropriate wage and who should do certain jobs
 Institutional constraints (unions):
 Legislative constraints: employment standards laws; human rights

and antidiscrimination legislation; laws on health and safety and
workers’ compensation, etc.
 Market imperfections: imperfect information, asymmetric

information, transactions costs, uncertainty and risk
3. Complex price
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It reflects a variety of factors: returns to investments in education,
training, mobility; compensation for risk or undesirable working
conditions; a rent from a union or an industrial wage premium;
discrimination. Perform a variety of functions: allocates labour efficiently
across industries, occupations, regions; encourages optimal investments
in human capital; provides incentives for performance, work effort,
productivity; should provide an adequate standard of living and alleviate
poverty and discrimination.
4. Strong moral overtone
Labour services and the labourer are not separable - dignity, perceptions
of self-worth, prestige, and well-being are tied to wage. A job is an
important aspect of “who you are”.
Alternative Perspectives of the Labour Market

The labour market has a number of features that distinguish it from other
markets. The traditional neoclassical model: oversimplification unable to
account for many labour market phenomena.
Alternative perspectives:
I. Institutionalism: emphasis on the descriptive realism and the roles of

institutions, customs, and socio-political factors.
II. Dualism: based on segmented labour market tradition – primary and

secondary.
III. Radicalism: emphasis on the class conflicts as the main determinant of

the labour market outcomes.

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Chapter One

1.1 Definition and Nature of Labour economics

Labor Economics focuses on how individuals make decisions that directly or

Labour economics is simply defined as the study of the workings and

Labour markets or job markets are defined as function through

Labour economics looks at the suppliers of labour services (workers) and

Three agents can be identified in the labour market as workers, firms

Pursuing the motive of profit maximization, firms need to decide how

Some of the most important characteristics of labour are as

1.3 Characteristics of the Labour Market

The neoclassical model of supply and demand suggests we can study

1. Stakeholders with a variety of goals

Labour: non-union and union labour; different types of unions (i.e.

 Institutional constraints (unions):

 Legislative constraints: employment standards laws; human rights

 Market imperfections: imperfect information, asymmetric

4. Strong moral overtone

Alternative Perspectives of the Labour Market

I. Institutionalism: emphasis on the descriptive realism and the roles of

II. Dualism: based on segmented labour market tradition – primary and

III. Radicalism: emphasis on the class conflicts as the main determinant of

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