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Labor economics seeks to understand the functioning of the labor market.
Labor markets function through the interaction of workers and employers.
The overall labor market differs from markets for goods in several ways.
Perhaps the most important of these differences is the function of supply
and demand in setting prices. 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 labor, overall supply cannot effectively be
manufactured because people have a limited amount of time in the day, and
people are not manufactured. A rise in overall wages will not generally
result in more supply of labor - it may result in less supply of labor as
workers take more time off to spend their increased wages, or it may result
in no change in supply if workers on average decide to save their increased
pay. It is difficult to see how it would increase the supply. Within the
overall labor market, particular labor markets are thought to be subject to
more normal rules of supply and demand as workers are attracted to change
job types in response to differing wages.
Many economists have thought that, in the absence of laws or organisations
such as unions to the interfere, labor markets can be close to perfectly
competitive in the economic sense - that is, there are many workers and
employers both having perfect information about each other and there are no
transaction costs. The competitive assumption leads to clear conclusions -
workers earn their marginal product of labor.
Other economists focus on deviations from perfectly competitive labor
markets. These include job search, training and gaining-of-experience costs
to switch between job types, efficiency wage models and oligopsony /