Labor Economics - Neoclassical Microeconomics of Labour Markets

Neoclassical Microeconomics of Labour Markets

Neo-classical economists view the labour market as similar to other markets in that the forces of supply and demand jointly determine price (in this case the wage rate) and quantity (in this case the number of people employed).

However, the labour market differs from other markets (like the markets for goods or the money market) in several ways. Perhaps the most important of these differences is the function of supply and demand in setting price and quantity. In markets for goods, if the price is high there is a tendency in the long run for more goods to be produced until the demand is satisfied. With labour, overall supply cannot effectively be manufactured because people have a limited amount of time in the day, and people are not manufactured.

The labour market also acts as a non-clearing market.Whereas most markets have a point of equilibrium without excess surplus or demand, the labour market is expected to have a persistent level of unemployment. Contrasting the labour market to other markets also reveals persistent compensating differentials among similar workers. The competitive assumption leads to clear conclusions — workers earn their marginal product of labour.