CHAPTER 14 : LABOR MARKET

14.1 Demand and Supply

(A) Demand for Inputs: Firms produce output and bring it to the market. The whole activity is carried out with the intention of earning profits. In order to achieve this, firms have to maximize their returns or revenue and minimize their cost of production. Their ability to control cost of production will depend upon supply and demand conditions in the input market. There is a large variety of raw materials, land, capital, equipment, and labor services employed by the firm. Though demand for such inputs is important in theory, there is a special significance concerning the demand for labor. This is because labor is a human factor of production. Labor is not only a means but also an end of all economic activities. Moreover, labor is a perishable commodity. Every moment in the life span of a worker is precious. Once lost, it is forever irretrievable. Labor as a human factor of production further shows considerable dissimilarity in its quality, experience, age composition, educational and technical skills, degree of mobility, aptitude and preferences etc. This makes the labor market problem highly complex. We will presently take account of some aspects of the demand for labor.

(B) Supply of inputs: The cost of a firm in employing resources also depends upon the supply conditions of the inputs. If we concentrate only on the labor supply problems several difficulties are likely to emerge. Supply of labor normally depends upon the size of the population and the age composition of the working population. This refers only to the quantitative supply of labor power. If we take an account of physical and mental efficiency, educational achievements, technical training etc. there is a variety of dissimilarities in the labor supply conditions. Traditionally classical writers throughout the 19^th century assumed perfect competition in the labor market. In such a market at a fixed rate of wages any number of workers are freely available. Moreover, even a fixed competition wage rate was supposed to be equal to the subsistence needs of an average worker. This is no longer held as true in modern labor markets where strong trade unions are present. Both on the demand and supply sides, the labor market is not governed by purely economic considerations. There are social, ethical and political aspects of labor market which often form part of the discussion. Meanwhile we will restrict ourselves mainly to economic considerations leading to demand for and supply of labor.