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Employment is an activity devoted to the production of goods and services that can also provide an opportunity for social participation and a means of gaining psychological satisfaction. It is an essential component of the economic system, in which it is regulated by the labour market and the interactions of that market with the markets for goods and services. Its availability is a matter of social and political importance because of the loss of welfare that is experienced by those that experience unemployment.


The term labour force refers to those members of the population of working age who are available for work
The participation rate is equal to the labour force as a percentage of the population of working age.
The term unemployment is confined to those who are actively seeking work. A discouraged worker is one who is not trying to find work because he believes that no acceptable work is available to him.
The term "voluntary" (or "classical") unemployment refers to unemployment caused by refusal to accept ruling pay rates.
The term "involuntary" (or "Keynesian" unemployment refers to unemployment caused by a deficiency of demand.
Full employment has been deemed to occur when the number of job vacancies exceeds the number unemployed.
"The labour market" is a construct that is used to represent the aggregate effect of the interaction of supply of and demand in each of a large number of separate labour markets.

The labour markets


The application of the term market to dealings between employers and employees is justified by the fact that those dealings serve to reconcile supply with demand and to determine the price that is paid. But, unlike the situation in financial and commodity markets, there is usually little coordination between the prices paid for labour in different places. In other markets, the ruling prices are usually widely known, but an employee is frequently unaware of what other employera are paying, or what his employer is paying to others. In most markets the items traded are well defined but human qualities are less easy to pin down. Also, employment has more important psychological and social effects, is more closely regulated, and is affected more by institutional factors.

Labour market institutions

Market structure

What is referred to as the labour market is not a single coordinated market but a structure made up of markets that are separated by limitations upon labour movement and market interaction. One form of separation arises from differences in the implied contract between employer and employee. In what are termed "primary" labour markets, according to the "dual labour market hypothesis[1], there is an implicit agreement that employment is to continue for a number of years, and often the expectation that continuing good performance by an employee will be rewarded by a succession of pay increases. Employment in "secondary" labour markets, on the other hand, tends to be temporary or short-term, with no expectation of pay increases. Markets may also be separated by differences of skill, technology or occupational qualification. Locational separation may or may not limit market interaction: at one extreme interaction is confined to travel-to-work areas, and at the other it can be global. National labour market structures tend to change with changes in the outsourcing of intermediate products and with the growth of globalisation[2].

Working conditions

(data is from the United Nations International Labour Organisation[3].)

Minimum wages are set in nearly every country in the world. In almost a fifth, (including most industrialised countries) they are set at over $1,000 a month; in over a third (including most Central and East European countries and two thirds of Latin American countries) at between $100 and $500 a month: in just under a third (including most Asian countries) at $30 to $99, and around $30 a month in most African countries. In most cases the rates are by the government following recommendations by independent committees.

Maximum working hours of 40 hours a week apply in the United States, in most other industrialised countries, in most Central and East European countries and in nearly half of African countries (but there are lower limits in France and Belgium at 38 hours and 35 hours respectively). A 48-hour limit predominates in Asia and Latin American countries. There are no national limits in Australia, Denmark, Germany, Ireland, the United Kingdom, India or Pakistan. Most countries' employment laws also place an upper limit on overtime hours beyond the weekly hours limit.

Termination of employment

Income protection

Employment taxes

Labour market statistics

National employment statistics [4] are compiled from employer and household surveys [5], according to internationally-agreed principles [6], but differing in practice from country to country, making comparisons hazardous. The composition of the labour force is normally recorded by sex, industry and occupation [7].

Social aspects of employment

Labour market economics


The labour market occupies a special place in the interactive network of markets that make up an economy, and it has special implications for the welfare of its people. It affects productive and economic efficiency by its allocation of human resources among alternative activities, and it influences the way that people choose between consumption and leisure.

Most labour markets differ significantly from the perfect markets of economic theory. The labour force is often far from homogeneous, the information available to the parties is usually far from complete, and some degree of market power is often present. The Walrassian auctioneer is not an apt analogy for the market process, and the deal that is arrived at has the characteristics of an incomplete contract, in that the responsibilities of employer and employee are not exhaustively specified. For employment that requires training, the existence of an interval between a decision to supply and its implementation introduces additional uncertainties. Those departures from the ideal model affect the process by which the supply of labour is reconciled with its demand.

The supply of labour

The motive to seek employment may be expected to be determined by the wage rate on offer and upon personal preferences as between employment and other activities. (In this context the alternative to employment is referred to as “leisure”, although in fact it includes childcare, housework and voluntary work). Two effects are at work. On the one hand, an increase in the income that is offered can increase the attractiveness of employment as the result of the substitution effect (so called because it induces a substitution in which leisure is sacrificed for the sake of getting employment). On the other hand, additional income tends to motivate an increase in the consumption of leisure (as well as of other benefits) , creating what is termed an income effect. Eventually, as income increases, the income effect can be expected to outweigh the substitution effect, so that further income increases reduce the motive to seek employment

The size of the labour force of a closed economy is affected by the age structure of the population and its participation rate, and the participation rate is affected in turn by the income and substitution effects of wage rate changes and by fertility rates and life expectancy changes. [8]. In open economies, migration may also have a significant influence. Thus the supply of labour may be expected, first to increase with each increase in the wage rate offered, but eventually to fall in response to further increases.

The demand for labour

The demand for labour derives solely from the demand for the products on which it can be employed. The demand for a particular skill by a hypothetical sole employer of that skill would depend, not only upon the demand for the product on which it is to be employed, but also upon substitutes for that skill such as investment in automation. Such an employer may be expected to increase its employment provided that the net cost of doing so would be less than the consequent increase in revenue. Since increases in the revenue from the firm’s product may be expected to depend upon its cost of production, the firm’s demand for the skill may be expect to rise with reduction in the cost of employing it, and vice versa. (In most industries, that effect may also be a consequence of the short-term operation of the law of diminishing returns.) The total demand for that skill by a market of competing employers at a given wage rate would be the sum of the numbers that each would employ at that rate. In a competitive market, each employer may be expected to take the going rate (as determined by the process of bringing supply into line with demand) as given, and adjust employment accordingly.


Failure of the labour market to "clear" (ie to match supply with demand) can lead to losses of output and income as result of unemployment or of the misuse of skills. It happens when employers fail to find available skills, and when would-be employees fail to find available vacancies (the temporary occurrence of which is said to lead to “frictional unemployment”). It also happens when there are no vacancies for an available skill because of unanticipated changes of industry structure (which can result in what is termed “structural unemployment”). Unemployment can also be the result, according to Keynesian theory, from a deficiency in aggregate demand; and, according to classical theory, from the maintenance of wage rates above the market – clearing level. The concept of the the natural rate of unemployment refers to the unemployment rate that is characteristic of an economy whose growth rate is in line with its long-term trend. It is a characteristic that is held to depend mainly upon the existence of institutions and practices that prevent the labour market from clearing by deterring employers from recruiting or reducing the incentives for the unemployed to seek employment. They include legislation imposing restrictions upon dismissal, compensation payments for permitted redundancies, restrictions upon working hours, and income support payments to the unemployed; and are collectively known as "labour market rigidities", or as the absence of labour market price flexibility. As might be expected, the evidence suggests that economies with flexible labour markets experience faster growth and a greater ability to recover from external shocks than those with more rigid labour markets [9](although the investigation of those effects is hampered by the difficulty of measuring price flexibility)..

Employment policy