Labour Economics

Topics: Supply and demand, Economics, Consumer theory Pages: 5 (1754 words) Published: November 16, 2013


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Labor economics comprises the study of the factors affecting workers. Since all divisions of economics involve workers, it is prudent to evaluate their influence on labor economics and labor market for that matter. Consumption directly affects the supply of labor. If the workers experience an increase in their desire for consumption in relation to leisure, the labor supply curve will shift outwards. The workers will supply more labor at every given wage. The effect of public finance on labor economics may be through government taxation on the workers. If income taxes increase, workers will likely substitute leisure for consumption and supply less labor. Any effects on the supply and demand for labor will ultimately affect the labor market thus are essential in labor economics. Distribution of income may also affect the labor market especially if the distribution is unequal. Inequality in the distribution of income will affect workers and thus affect labor supply. Production of goods and services on the other hand determine the supply and demand for labor. Such effects directly influence the labor market.

Table of Contents

Study of labor economics involves the study of labor force as an element of production. Labor force mainly comprises all those who work for gain. These can be employees, employers, or those people who are self-employed. It may also include the unemployed who are seeking work. Labor economics therefore, studies the factors affecting efficiency of these workers, their deployment between different industries and determination of their pay. The various divisions of economics may have varying effects on labor economics. The five main divisions of economics include consumption, distribution, exchange, production and public finance. This paper evaluates the extent to which the divisions of economics influence the study of labor economics. Effect of consumption on the labor market

Consumption is the division of economics that deals with spending by households and firms. Consumer market may have significant effects on the labor market. There is a relationship between consumption and leisure (free time) in labor economics. If the workers increase their leisure, they will work less meaning that they will buy less. If the workers consume more, they will work more but have much less free time for themselves. Increase in consumer spending leads to more labor supply by the workers. However, their preference for either consumption or leisure depends on the current market wage. The three variables will determine the decision of workers. Workers are the main suppliers of labor in the market. However, their decisions depend of preferences and price. Therefore, Consumption directly affects the supply of labor in the market. However, the market wage is still a determining factor. Workers’ decision to supply labor or not depends on a combination of both their indifference curves and their budget constraints. In most cases, workers will maximize their utility based on the preferences of having more free time or more money. Desire to have more money may arise from the fact that consumer spending is high. This will push the workers to work more thereby increasing labor supply. Increase in wages will cause labor to both increase (substitution effect) and decrease (income effect). Therefore, when wages increase, the combined effect of the substitution and income effect is that the workers will choose more consumption. The effect on labor and leisure are uncertain. However, if we assume a stronger substitution effect, the workers might choose to work more. With increase in the wages, the workers can now afford more goods and services. Higher wages might also give the workers more incentive to work. Effect of income...
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