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Labor market

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 / monopsonistic competition.