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Academic Labor Markets


The process by which colleges and universities acquire qualified applicants and hire faculty members, and by which academics seek and gain academic employment, is known as the academic labor market. Few general elements characterize the academic labor market. Depending on their mission, colleges and universities seek faculty with diverse backgrounds to perform different institutional roles. Likewise academics seek different positions depending upon their aspirations and education. The academic labor market fluctuates by demographics, the demands created by student preferences, and alterations in society's employment opportunities. Finally, the academic labor market is also influenced by social norms.

In the mid-nineteenth century American colleges tended to look very much the same. Led by an academic president, colleges employed a handful of faculty members who taught several subjects. In the twenty-first century postsecondary institutions range from community colleges that offer two-year associate degrees in the liberal arts and technical and pre-professional fields to research universities (often called multiversities ) that provide baccalaureate through doctoral education, as well as televised football games. The distinction among these diverse institutions resides in their missions. Many colleges and smaller universities are dedicated primarily to teaching, whereas others attach great significance to their research output. Thus, the institutional mission defines the role of the faculty at a particular institution.

Teaching institutions search for and hire faculty members who are oriented primarily to the student and the classroom. In community colleges, instructors teach approximately fifteen hours, or five courses, per semester. At liberal arts (only baccalaureate degrees) and comprehensive (both baccalaureate and master's degrees) colleges, faculty members teach three or four courses per term. At the other end of the spectrum research universities seek academics who spend as much, if not more, of their time producing scholarship as they do in instructional activities. Since research university faculty members are expected to conduct and publish research results regularly, their teaching load generally consists of two courses each term.

Community colleges, therefore, tend to hire faculty members who are more interested in teaching than in research. Approximately two-thirds of the faculty in these two-year colleges have earned master's degrees, while only 15 percent possess the doctorate. In almost all other types of collegiate institutions, the doctorate, which educates recipients to a life of research, is a requirement for entry. Most four-year and master's degree institutions seek faculty members for their interest in teaching. As a result of their doctoral education, these faculty also often engage in research and publication. However, except for prestigious liberal arts colleges, most do not exist in a "publish or perish" environment.

The competition for faculty appointments at research universities extends beyond the possession of the doctorate. Those aspiring to a faculty position are rarely selected for an interview if they have not published several articles and given several presentations at professional meetings. In days gone by the prestige of a particular dissertation mentor brought a young scholar to the attention of a research university department seeking a new hire. Today, however, while a renowned mentor may still be helpful, an applicant's publishing career is just as important.

Supply and Demand

The institutional demands and professional preferences of faculty applicants are compounded by issues of supply and demand. The faculty supply depends in part on the output of graduate programs across the nation. When faculty positions are plentiful, students flock to graduate schoolas they did in the late 1960s, when college enrollments soared. However, faculty members are not interchangeable across their specialties. If enrollment demands shift away from or towards certain academic programs, as they did in the mid-1970s, colleges and universities must respond by adjusting the distribution of faculty positions. By 1975 the supply of liberal arts faculty overwhelmed demand; thus many new Ph.D.s had to seek nonacademic employment and institutions hired instructors with more prestigious credentials than previously.

The supply of potential faculty members also depends on the professional interests and aspirations of graduate students. In 2000 there were 41,368 doctoral degrees awarded across the various fields, but these were not evenly distributed. Twenty-one percent of the doctorates were awarded in the life sciences, including biology and zoology, while only 2.5 percent were awarded in business. The number of graduates is only half the equation, however. The graduates' aspirations and the availability of nonacademic professional employment further reduce the supply. In engineering, for example, 5,330 doctorates were awarded in 2000, but 70 percent of these graduates intended to enter industry research positions rather than education. Nonacademic employment opportunities are uneven across fields, and thus create either expanded or limited career choices for doctoral graduates. Of all doctoral graduates in 2000, only 38 percent intended to seek a teaching position. The rest planned to enter research and development (31 percent), administration (12 percent), or professional services, such as counseling (12.5 percent). By field, graduates in the humanities aspired to teaching positions most often (74 percent), while only 11 percent of doctoral engineers planned to teach.

Gender and Ethnicity

The supply of faculty also involves gender and ethnicity differentials. Fields differ in attracting men and women, as well as members of various ethnic groups. In the early twenty-first century men continued to dominate some fields, such as engineering, physical science, and, to a lesser degree, business. In the year 2000 women earned 65 percent of the doctorates in education. Some other fields, such as humanities, social sciences, and life sciences, awarded doctorates in even proportions. All fields attract predominately white aspirants, but some fields appear to be slightly more attractive (or receptive) to members of certain ethnic groups. African Americans are slightly more likely to enter education (12.4 %) than other fields, while Asian Americans lean more toward engineering (17.5%).

On the demand side, social norms have affected the hiring of women and ethnic minorities in colleges and universities. The proportion of women within American faculties increased throughout the 1990s. By 1997, women composed 36 percent of all full-time instructional faculty; however, women are more likely to be employed as full-time faculty members within two-year (47%), rather than four-year (33%), colleges. The gender distribution among all part-time faculty gives a slight advantage to men (53%).

Institutions of higher education attempted to recruit faculty of color to campuses throughout the 1980s and the 1990s through affirmative action programs. However, the ethnic distribution still does not reflect national demographics. In 1998, 85 percent of the faculty were white, 6 percent were Asian, 5 percent were African American, and 3 percent were Hispanic. Colleges and universities with enrollments consisting predominantly of one ethnic group (e.g., African American, Hispanic, Native American) tend to employ higher percentages of that ethnic group than other institutions. Approximately 16 percent of African-American faculty members teach in historically black institutions. This pattern reduces the distribution of faculty of color within the general labor market. Finally, high-demand labor markets support the hiring of minorities, whereas a high-supply market merely creates more competition across ethnic lines and seems to favor white candidates.

Salary Issues

Salaries offered to faculty recruits largely depend on the type of institution, the rank at which a faculty member is hired, the field, and, to some degree, gender and ethnicity. Faculty members in public institutions receive 22 percent less compensation than their private-institution colleagues. On the whole, faculty members earn an average of $8,600 more at four-year institutions than at two-year institutions, and two-year college faculty average 55 percent less than doctoral university faculty. Those who work in research earn higher salaries than faculty in teaching institutions. The salary differentials between institutional types largely spring from the imperative to recruit and retain faculty members who are at the forefront of knowledge in their fields.

Although 69 percent of American faculty teach in four-year colleges, 82 percent of Asian-American faculty members are employed at these institutions. Two-thirds of the Asian-American faculty are men. Not surprisingly then, Asian-American faculty average higher salaries than any other ethnic group. Full-time Hispanic faculty members earn slightly below-average salaries, in part because 43 percent of all Hispanic faculty teach in two-year colleges and 48 percent are part-time faculty.

Men still take home more money than women do, regardless of rank. The gender differentiation in salary is sometimes explained by the short length of time women have served as faculty, or by their lower publication rates, resulting in employment at lower ranks. Indeed, only 16 percent of all full-time women faculty are full professors, while 32 percent of all full-time men have attained this rank. However, men comprise 80 percent of all full professors. In 1998 the average female professor earned $8,500 less than her male counterpart. This pay inequity crosses ethnic lines as well. Seventy-one percent of all professors are white men. Within the other ethnic groups, men also dominate the highest rank: 63 percent of all black professors, 85 percent of all Asian professors, and 73 percent of all Hispanic professors are men. Thus, women across all ethnic groups have yet to emerge proportionately into the highest ranks, and thus receive higher salaries.

Salary is also associated with field differentiation. Humanities and education, which attract significant numbers of women, are among the lower-paying fields, whereas engineering, law, and business, fields still dominated by men, produce higher salaries. In the 19992000 academic year, the salary difference between high-paying fields and low-paying fields, on average, was $24,000 for professors and $16,000 for assistant professors.

At the beginning of the twenty-first century few institutions are experiencing the rapid growth in enrollment, and thus the massive faculty hiring, of the late 1960s. Tight institutional finances and the need for flexibility have also changed the demand for faculty. As states cut back their support of public institutions, and as private institutions attempt to hold down escalating tuition costs, the sizable group of retiring faculty has enabled institutions to establish new hiring patterns. Rather than automatically replacing retirees with tenure-track assistant professors, many institutions have instituted non-tenure-track positions or hired part-time faculty to fill the classrooms. In 1997 only 73 percent of the faculty in public four-year colleges were full-time employees, while 59 percent of those at private four-year colleges were full-time. Students are more likely to be taught by part-time faculty at community colleges, where 66 percent of the faculty have part-time status. Private colleges and universities appear to have more opportunity to experiment with non-tenure-track and part-time positions than public institutions. Only 58 percent of their faculty are tenured, as opposed to 66 percent in public colleges and universities.

In ways similar to other labor markets, academe is composed of various types of organizations with differing needs. Its academic staff and its hiring patterns are changing as society changes its demands for education and its norms for equality.

See also: College Teaching; Faculty Members, Part Time; Faculty Performance of Research and Scholarship; Faculty Research and Scholarship, Assessment of; Faculty Teaching, Assessment of.


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Fairweather, James S. 1996. Faculty Work and Public Trust: Restoring the Value of Teaching and Public Service in American Academic Life. Boston: Allyn and Bacon.

Finkelstein, Martin J., and Schuster, Jack H. 2001. "Assessing the Silent Revolution." AAHE Bulletin 54 (2):37.

Finkelstein, Martin J.; Seal, Robert K.; and Schuster, Jack H. 1998. The New Academic Generation: A Profession in Transformation. Baltimore: Johns Hopkins University Press.

Finnegan, Dorothy E.; Webster, David ; and Gamson, Zelda F., eds. 1996. Faculty and Faculty Issues in Colleges and Universities. ASHE Reader Series. Needham Heights, MA: Simon and Schuster Custom Publishing.

Glazer-Raymo, Judith. 1999. Shattering the Myths: Women in Academe. Baltimore: Johns Hopkins University Press.

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Labor Demand

Labor Demand


The demand for labor is usually understood by economists to mean the demand for labor services by a firm, an industry, or the economy at a given real wage. In a capitalist economy, labor becomes a commodity that is bought and sold on the market just like any other commodity, such as bread or butter. Labor is a unique commodity, however, and when an employer buys labor, he or she obtains a workers labor power which is the amount of services that the employer gets from the worker. These services depend on the power the employer has over the worker. If there is high unemployment, for example, the worker is in a weak position and greater labor services can be extracted from him or her. The amount of labor services that the employer obtains (not only in terms of hours of work, but in terms of the efficiency of those services) also depends on the nature of the employment contract, the real wage paid to the worker, the conditions of employment, and the attitude of the employer to the worker (and vice versa).

Labor services consist of three components: the number of workers (employees), the average hours worked per worker, and the efficiency per hour of the worker. There are several institutional and legal constraints on employers in most developed countries. For example, there may be laws against discrimination, equal pay legislation, minimum wages (henceforth, the term wages refer to real wages), occupational health and safety requirements, hiring and firing restrictions, and penalty rates for overtime.

The demand for labor is a derived demand: Firms wish to hire workers to produce goods and services that they sell in order to earn profits. Alfred Marshall, in his Principles of Economics (1930) suggested that labor demand becomes more responsive to wage changes if the substitution possibilities between labor and capital increase. In other words, the easier it is to substitute capital for labor, the greater the share of wages in total costs, and the more responsive the other factors of production are to their prices.

Much of the formal economics literature is based on simple models of firm behavior in a perfectly competitive economy (for a closed economy, that is, without any international trade), assuming that labor is a homogeneous commodity. In a prototype model, a firm is assumed to maximize profits (or minimize costs) subject to a so-called well-behaved production function that depends on homogeneous labor and capital. By simple mathematical manipulation, it is easy to show that the firms demand for labor is a negatively sloped marginal revenue product (MRP) curve, and that employment is determined by equating the marginal revenue product of labor with the wage rate. In such models, it is usually assumed that labor and capital are substitutable (usually in a Cobb-Douglas production function). There are some difficulties, however, in moving from a firm labor-demand function to an industry or aggregate labor-demand function because of the possible interactions between firms, the heterogeneity of labor, and other factors.

In most of these models, it is assumed that the technology of production is given and unchanging. Alternatively, technological change is simply an exogenous variable that falls like manna from heaven on all existing inputs. Labor services are often assumed to be such that hours of work and employees are perfectly substitutable.

The impact of technological change on the labor market and on labor mobility is very significant, but it often has contradictory effects. Technological change is usually defined as being either a change in the product or a change in the process of production. Technological change that leads to the introduction of new products will lead to either new firms being set up or old firms expanding into a new product line, which would lead to increased employment through job creation and job destruction. Job destruction leads to the closing down of firms producing some products that are replaced by new firms producing new products. However, demand for a new product may lessen demand for competing products, leading to a reduction in labor demand elsewhere in the economy. Similarly, a technological change in the production process may lead to the substitution of capital for unskilled labor, and hence to a decrease in labor demand. It may also lead to an increase in the demand for skilled labor, however, due to a complementarity of capital with skilled labor.

In more advanced models, labor is treated as a quasi-fixed input, like a capital good (see Oi 1962; Nickell 1986). In other words, there are significant fixed costs associated with changing employment, due to hiring and firing costs. Usually, it is assumed that these costs of adjustment are quadratic (implying increasing marginal costs of adjustment), so that if there is an increase in the demand for goods the impact on the demand for labor is spread out over a few periods. In the short run, the demand for labor adjusts slowly in response to any external shock. Given that there are costs of adjustment, the firm would find it easier to either adjust the hours of work of existing workers or hire casual part-time workers. It is cheaper, however, to hire and fire casual part-time workers. European countries that have a more regulated labor market, with larger hiring and firing costs, have been found to have a slower adjustment process to shocks. However, the evidence on this is very controversial and needs further research (see Blanchard 2006).

There has been a large amount of econometric work to estimate the impact of a change in real wage rates (corrected for inflation) on labor demand holding the level of production constant using large datasets. Most of these studies have found that elasticity (the percentage change in labor demand in response to a 1 percent change in the real wage rate) lies between 0.15 and 0.75, with a best guess of 0.30. However, studies of the impact of minimum wages on employment suggest that there is no significant impact (see Card and Krueger 1995). David Neumark and William Wascher have found otherwise, however, perhaps because it is mainly unskilled labor, while usual studies of labor demand are for skilled and unskilled labor taken as a whole. The scale elasticity (i.e., the impact of increased output) is almost unity: a 1 percent increase in the level of production (output) leads to a 1 percent increase in labor demand.

Firms demand labor services from employees who provide honest, committed, and productive work at wage rates that the employer determines (either unilaterally or as a bargain between the employer and employee). Ideally, employers would like to employ workers who take a positive long-term interest in their work and make useful suggestions to improve the production process. In general, firms have flexibility in the wage (and other conditions of work, including perquisites) they offer to their employees. There are also theories of deferred payment, tournaments to provide a stimulus to get wage increases, and efficiency wages. It has been shown that employers can get higher productivity from their workers, and hence make higher profits, if they pay a higher real wage. This idea was first put forward in a classic paper by Harvey Leibenstein (1957), who argued that in a developing country, paying higher wages led to workers getting better nutrition and providing better productivity.

This essential link between wages and productivity, or efficiency wages, was extended in a series of papers: In 1984, Carl Shapiro and Joseph Stiglitz put forward the view that higher wages decreased shirking by employees; Steven Salop argued in 1979 that higher wages lowered worker turnover, increased productivity, and increased profits; and Andrew Weiss (in 1980) and George Akerlof (in 1982) both showed that if employers paid higher wages as a partial gift, workers would reciprocate by providing greater effort. Thus, there is no unique negative relationship between the real wage and employment, because an employer who pays a wage in excess of the market wage gets greater productivity. Lowering the wage does not increase employment. Experimental economics, particularly the work of Ernst Fehr and Simon Gächter, has shown the importance of considerations of reciprocity (e.g., fairness, equity, and other issues) in the employment relationship.

In a globalized world, the demand for labor becomes more confused as various activities are outsourced. In other words, the firm can produce a larger quantity of output by either hiring more labor, buying more capital goods, improving its technology, or simply by outsourcing a particular activity. Call centers in less developed countries are good examples of this. Hence, the link between the output of a firm and its demand for labor is no longer constrained by a given production function.

There has been a large amount of econometric analyses of the demand for labor, suggesting, in general, a negative link between wages and employment. There are important policy implications that can flow from the research about minimum wages, but the results are contradictory and controversial (see Card and Krueger 1995; Neumark and Wascher 1992). Similarly, the efficiency wage literature also throws some doubt on a simple negative relation between wages and employment. The literature on hiring and firing costs has been used to suggest that a deregulated labor market would lead to higher employment, but this is still being debated.

SEE ALSO Economics, Labor; Employment; Labor; Labor Force Participation; Labor, Marginal Product of; Labor Market; Labor Market Segmentation; Labor Supply; Wages


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labour-market In a labour-market, human effort (or labour power) is made into a commodity, which is bought and sold under terms which in law are deemed to constitute a contract. The purchase and sale of formally free labour developed extensively with capitalism, but alternative paths to industrialization (such as real socialism) have entailed wage employment, though not strictly a free market for labour. Economists argue that, as with other factors of production, the market for labour can be understood as a special case of the general theory of prices, with the price (wages or salaries) being determined by supply and demand. However, research on actual labour-markets has shown that, in practice, many of the basic conditions assumed by price theory are usually absent. Mobility of workers between jobs is often sluggish or non-existent; the anarchic structure of earnings differentials bears only the loosest relation to labour supply and demand; discrimination, labelling, racism, and sexism are rife. Economic explanations of labour-market processes have to be supplemented, and sometimes replaced, by sociological analysis, creating a promising field for interdisciplinary research.

Neo-classical economic theory views exchanges in the labour-market as voluntary, and engaged in because, for each party, the results of the exchange are better than their other options. The labour-market is a competitive market because there are many potential buyers for each seller and vice versa. The supply of labour from existing and potential workers and the demand for labour from employers interact so as to reach an equilibrium price for labour. If the price of labour rises above equilibrium level for any reason, for example due to a national minimum wage or strong trade-union bargaining, employers will reduce the number of jobs offered. If the price of labour falls, employers will increase the number of jobs offered, all other things being equal. Economic theory of the labour-market also posits that both monopolies and discrimination will disappear in the long run, and are thus unlikely to be enduring constraints to individuals. On the other hand, economic models of the labour-market see workers forming a queue for the available jobs, with employers choosing the best first: people with higher qualifications, more experience, and wider skills will be offered jobs before those with less to offer. It follows that the unemployed will always consist of those with few or no qualifications, fewest skills, and least employment experience; and that people with social, psychological, or other problems will be less readily hired. So the model allows for certain forms of rational discrimination.

Many economic models assume that people have perfect information with which to make rational decisions within given constraints, and adjust their offer and demand prices accordingly. Empirical research has persuaded some economists to recognize that information gathering and analysis are costly in time and money, so that market imperfections arise from incomplete or inadequate information, and satisficing models are accepted as more realistic than maximizing models of behaviour.

Basic to sociological studies of labour-markets is the recognition that, although labour effort is nominally bought and sold, it lacks many of the attributes of other commodities in the capitalist economy. These differences in turn go some way to explaining why the market for labour presents such a confusing picture to the price theorist. At least four factors should be considered here.

First, like any service which is bought, there is scope for ambiguity about what precisely constitutes a satisfactory amount of work (or effort) done in fulfilment of the contract. Ambiguity about what constitutes a fair day's work for a fair day's pay is endemic, especially if there are frequent changes in work tasks. Because this effort bargaining occurs in even the most routine work situations, then values, custom and practice, administrative rules, and the relative power of employer and employees, are all equally as important as the price mechanism in shaping labour-market outcomes.

Second, inequality of wages and conditions reflects the level of organization of the workforce, as well as market competition. Though in legal theory a contract of sale assumes equality of both parties to it, this is inconsistent with the power inequality usual between any worker negotiating individually, and a potential employer. Consequently, in a wide variety of situations and nations since the onset of industrialism, workers have sought to offset this by forming trade unions. Collective bargaining, when it occurs, undermines standard notions of a market by replacing wage-fixing through the price mechanism by wage-fixing through rules. It also brings law and politics into the regulation of labour matters. The acceptability of collective labour contracts and wage-fixing agreements tends to be a potentially destabilizing political issue everywhere in the industrialized world, as is the legality of the unions and associations which represent the collective worker, to say nothing of the sanctions and stratagems used by both sides during the course of industrial conflict. Most societies have therefore sought to surround the labour-market with a body of law and politico-administrative control.

Third, both unions and employers frequently seek to create so-called internal labour-markets: that is, networks and hierarchies of jobs to which access is restricted by entry rules and internal promotion. For example, by enforcing job-entry controls, unions can restrict access to craft training and relatively favourable wages and conditions. Employers likewise can segment their demand for labour by varying benefits and promotion, seeking to reward and retain valued workers, while offering others only non-standard or flexible employment. (Some scholars also claim that internal markets based partly on discrimination and wider prejudice help employers to divide and rule the workplace.) Family and neighbourhood networks frequently reinforce exclusiveness of job access outside the actual workplace, producing extended internal labour-markets.

Fourth, there remain many industries and situations where workers are relatively powerless and unorganized, so that pay and conditions can be expected to be less favourable than if workers use their collective strength. Union organization has typically been found to be difficult among workers in small-firm industries, in the retailing and personal services sector, in part-time and subcontracted labour, and among women, ethnic minorities, and young people. Isolation and powerlessness do much to explain the common research finding of widespread low pay and insecurity of work among such groups.

For some years, so-called dual labour-market theory claimed that labour-markets can be divided into a primary sector, consisting of relatively well-paid internal labour-market jobs; and a secondary sector, comprised of more insecure low-wage employment, which does more closely resemble the competitive model. Theory of this type has encouraged collaborations between those sociologists and economists who are prepared to question the preconceptions of both disciplines. But empirical research by both economists and sociologists suggests that the anomalies and segmentation of labour-markets cannot be accommodated easily into a simple dualism, and is leading to the development of more complex, multi-disciplinary approaches (such as labour-market segmentation theory).

One major form of dualism in the labour-market, however, is well documented if not wholly understood: the persistent divisions in pay, conditions, and types of work between men's and women's employment. For example, economists predicted that equal pay legislation would increase the relative price of female labour, and thus reduce the number of women's jobs offered by employers. In fact, total female employment rose at the same time as the rise in female earnings resulting from equal pay rules. These trends can perhaps be explained by seeing the labour-market as divided into a number of separate markets—for female labour, manual labour, young untrained school-leavers, older workers, professional workers, and so forth—with limited competition between labour-markets. The most developed versions of this theoretical refinement are found in labour-market segmentation theory.

In general terms, therefore, the sociologist's most important contribution to labour-market theory is to identify the cultural, institutional, and structural factors that help determine people's allocation to one or another market, the imperfections of market processes, the reward systems operating in different markets, and the nature of power relationships in the market. Jill Rubery 's essay on ‘Employers and the Labour Market’ (in D. Gallie ( ed.) , Employment in Britain, 1988
) reviews the various theories of labour-markets, examines the evidence for flexible employment, and contains a good bibliography of British and American case-studies. For examples of empirical analyses see Jill Rubery and and Frank Wilkinson ( eds.) , Employer Strategy and the Labour Market (1994

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Labor Market

Labor Market


According to textbooks such as Ronald G. Ehrenberg and Robert S. Smiths Modern Labor Economics (2005), a labor market is the place where labor services are bought and sold. The term labor is equated to the term work, not only manual work but also knowledge work. Sometimes, the place where labor services are bought and sold is a clearly identifiable one such as a construction site or a lawyers office. Other times, the place is ill-defined, as for the work of most readers of this article, who are hired in one location and who perform labor services in a number of others, such as offices, libraries, home offices, airplane lounges, and hotel rooms.

Labor markets are defined in overlapping waysby geography (the New York City labor market), occupation (the labor market for economists), or skill level (the labor market for college graduates).

Whatever the defining criterion may be, labor markets always have two sides: labor demand and labor supply. On the labor demand side are firms (including companies, not-for-profit organizations, and government agencies), which hire labor in order to produce goods and services. On the labor supply side are workers, who sell their time in exchange for compensation which, in standard terminology, is called the wage.

On both sides of the labor market, the relevant parties engage in purposeful behavior. In the core model of economics, companies seek to maximize the net present value of profit, which is the difference between the revenues they take in from the goods and services they sell and the costs they incur in producing those goods and services. Individuals, for their part, are assumed to seek to maximize utility, which depends positively on the goods they are able to buy with their income and negatively on the amount of leisure foregone while working.

The amount of labor demanded and supplied are both functions of the wage. The amount of labor demanded in a labor market decreases with the wage, all other things being equal. This negative relationship arises for two reasons: a higher wage induces existing employers to hire fewer workers than they would have if the wage had been lower, and it may induce some of these employers to go out of business entirely and hire nobody. On the other hand, the amount of labor supplied to a labor market increases with the wage, all other things being equal. Here too, there are two basic reasons: a higher wage in one labor market induces some workers to enter that labor market from other labor markets and also induces some individuals who are outside the labor market (the old, the young, full-time students) to seek work in this labor market.

Of course, other things are frequently not equal; labor demand and labor supply are functions of these other things as well. For instance, an improvement in product market conditions will cause more labor to be demanded at any given wage than before, and heightened prestige for a given occupation will cause more labor to be supplied at any given wage than before.

As with other markets, a labor market is said to clear when the amount of labor demanded equals the amount of labor supplied. It is said to be in equilibrium when the economy tends toward a particular set of conditions and, once there, tends to stay there.

Whether an equilibrium is characterized by market clearing or not depends on which equilibrating forces are free to operate in the labor market in question. In the standard labor market models, three fundamental equilibrating forces are postulated. First, firms are free to hire as many or as few workers as they want depending on wages and other conditions of employment. Second, workers are free within limits to move from one labor market to another or into and out of the labor force depending on wages and other conditions of employment. And third, the wage paid is free to rise or fall depending on supply and demand conditions.

When all three of these equilibrating forces are free to operate, the labor market is expected to clear in equilibrium. Wages and employment will therefore reflect supply and demand conditions.

The market-clearing model provides enormous insight. It explains, for example, why workers in the United States are paid so much, why workers in Mexico are paid so little, and why professional athletes are paid so much more than farm laborers.

These examples also highlight two important types of restrictions on equilibration in labor markets. First, every country imposes restrictions on international migration. Because of the large differences in labor market earnings, a great many workers in Mexico and other countries would like to become American workers, but U.S. immigration law prohibits them from doing so. An estimated 6 million Mexican workers have taken matters into their own hands and have entered the United States illegally. Second, workers differ in terms of their productivity and skills. It is effectively impossible for farm laborers to acquire the skills needed to become professional athletes.

Beyond these barriers to equilibration, which are ubiquitous, there are also settings in which one of the equilibrating forces, the wage rate, is not free to adjust. Wages may be set above the market-clearing level by a variety of institutional forces including minimum wages, trade unions, multinational corporations, public-sector pay policies, and national labor codes. When this happens, the predictable consequence is unemployment. The high rate of unemployment in Europe compared to North America is usually explained in such terms. Infrequently, the wage in a labor market is set not above the market-clearing level but below it. The government of Singapore did this to try to hold down labor costs and maintain international competitiveness. That nations wage-restraint policy was halted only when employers persuaded the government to allow them to raise wages so that they could attract more workers and increase production.

Moving beyond this basic labor market model, a number of other features are at the forefront of labor economics modeling today. Efficiency wage models recognize that a higher wage may increase worker productivity, because existing workers have greater incentives to work more efficiently and/or because firms that pay higher wages attract a larger pool of applicants, from whom they can hire more selectively. Human capital models recognize that workers skills and productivity can be augmented through education and training. Imperfect information and matching models recognize that it takes time and resources for workers to find appropriate jobs and for firms to find appropriate workers. Models of labor market segmentation and dualism recognize that good jobs and bad jobs may coexist for workers of a given skill level. Labor market discrimination models recognize that employers, coworkers, and customers may have prejudicial tastes that they exercise in the labor market. In all of these areas, the consequences for employment and wage levels have been carefully worked out.

Finally, a fundamental aspect of labor market economics is that labor markets do not operate in isolation. Wages and employment levels in one geographic area, occupation, or skill group are determined not just by conditions in that labor market but by conditions in other labor markets as well. Multi-sector labor market models, though more complicated than models of individual labor markets, offer insights that models of single labor markets cannotfor example, the understanding that the solution to urban unemployment may be rural development.

SEE ALSO Employment; Labor Demand; Labor Force Participation; Labor Supply; Wages


Ehrenberg, Ronald G., and Robert S. Smith. 2005. Modern Labor Economics. 9th ed. Boston: Pearson Addison Wesley.

Gary S. Fields

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labour services

labour services were tasks undertaken by tenants as part of their obligations to landowners for the right to farm or use land. These duties came to be seen as part of the rent paid by tenants under the ‘manorial system’ during the Middle Ages. One of the definitions of villein status was performing labour services at the will of the lord because, in theory, the obligations were unrestricted. In practice, the levying of labour services depended on the farming regime of the lord of the manor. When cash crops were especially profitable, as during the 13th cent., lords of the manor increased their directly farmed demesne land and used labour services to take advantage of good weather conditions: for spreading manure, ploughing the arable, repairing and maintaining boundaries and ditches, gathering crops of hay and grain, and carrying them to barns or markets.

Precise statements of labour services owed by landholders to the lord of the manor were set out in ‘custumals’, documents produced in manorial courts under oath. Villeins, tenants of the lord of the manor, resisted attempts to extend labour services. During the 14th cent. landowners found it profitable to commute labour services for fixed cash payments. Declining demesne farming by landowners after the middle of the 14th cent. reduced labour services and they ceased to be a determinant of social status by the 16th cent. A few labour services survived in economically underdeveloped areas until the early 18th cent., as in parts of rural west Lancashire.

Ian John Ernest Keil

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labour-market flexibility

labour-market flexibility A term used to refer to all or some of a variety of features of particular jobs, or of the labour-market as a whole, including: reduced demarcations between categories of worker and flexible job descriptions; the fluidity of workers' movement between jobs, employers, or regions; flexible or non-standard work hours; flexibility of wages; and any other innovation in the organization of employment and patterns of work, such as home-based work, or telecommuting. In this context, wage flexibility more often means wages that rise or fluctuate in line with company profits and financial performance, than the adoption of incentive payment schemes. The concept of flexibility is often laden with positive value-judgements and counterpoised to the notion of labour-market ‘rigidities’, which are regarded as self-evidently noxious in periods of rapid technological change and economic instability. See also FLEXIBLE EMPLOYMENT; JAPANIZATION.

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flexibility, labour-market

flexibility, labour-market See LABOUR-MARKET FLEXIBILITY.

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