Lesson 8


A market is a mechanism, governed by the principles of supply and demand, whereby people are enabled to trade goods and services with each other.  It does this by effectively bringing buyers and sellers together. 

An economy is the means and the workings whereby a society or discrete group of persons is enabled to sustain itself and provide for its material well being.

 An economy primarily based on market or voluntary individual transactions is referred to as a market economy, as opposed for example to a command economy, which is based on central planning and control, a traditional economy, which functions through established historical or anthropological principles of production, distribution and control, or a palace economy in which all wealth is claimed by a ruler and is distributed by him or her through a group of privileged nobles or bureaucrats and thence to the bulk of the people, who comprise a subsistence class with little or no rights or privileges.

Study, by economists, of the market economy has produced a body of theory, which purports to reveal and expound upon the workings of a market economy and which is referred to as market theory.  The aspect of market theory that applies or refers to the employment of labour is the subject matter of this lesson.     


The usual starting point in the market theory of employment is the proposition that each person is unique and to that extent is unequal; no two persons are the same. 

Human labour is one of the so-called factors [or necessary requirements] of production.  Traditionally these are said to be land, labour and capital although various other formulations exist.  Regardless labour is a necessary component in the production of goods and services.

For millennia, slavery was the dominant method of organising a supply of labour.  In comparatively recent times this has been replaced by the concept of a contract of employment entered into by a user and a supplier of labour, at one time referred to as master and servant and now employer and employee. 

All [or almost all] humans possess, to a greater or lesser extent, the ability to labour.  This ability is particularly important.  It is, in the sense that it is a means of acquiring income, the equivalent of the landowner’s possession of land and the capitalist’s possession of capital.  To those who possess neither land or capital and could thus be said to be poor, the right to labour, or more particularly the right to the fruits of one’s labour, is particularly important, since it represents a means of sustaining oneself and providing a possibility of prosperity.

Employment [oft-times referred to as a job], is desired for the rewards that accompany it, not for itself alone.  It is self-interest that pushes people into contracts of employment.

An employer will employ an employee if he foresees that he will be able to earn a profit over and above his costs in so doing and will continue to do so for as long as the return to him to be earned from the product of the employee exceeds its cost.  The cost is the price to the employer of such labour.  This is not necessarily the same as the wage received by the employee.  A variety of factors can increase the cost over and above the wage or salary paid, including such things as taxes, superannuation, insurance and perquisites.

Conversely, an employee will take or remain in a job only as long as the return to him or her is satisfactory.  If, for whatever reason, the employer fails to pass on a sufficient share of the profit to the employee, he or she may quit.  Alternatively the employee may approach or be approached by a competitor [or potential competitor] of the employer, who is willing to pay more either because the competitor is willing to accept less profit or he sees a potential in the employee to produce more.

Freedom to compete and the right to pursue one’s own self interest are thus the two vital ingredients in the market theory of employment.  Allowing for the differentials between various occupations and the particular attributes of individual employees, such system will result in the most efficient and productive use of labour.


People are unemployed for a variety of reasons.  The particular industry may be seasonal with a specific period where no work exists, such as grape-picking or shearing, or it nay have become outmoded, such as typesetting or blacksmithing, or it may have ceased to exist in a particular area, such as occurs upon the exhaustion of a mine.

Unemployment, in the sense of involuntary unemployment, in a fully functioning free market economy is not possible.  Labour is a pre-eminently scarce resource and can accordingly always command a return.  It may be necessary for someone wanting to sell his or her labour to accept relocation or retraining.  Ultimately however it is a question of price.

In so far as an unemployed person refuses to accept the need to relocate or to retrain or to accept a lesser income, at least in the short term, such unemployment is not properly to be regarded as involuntary.



Since it is not possible for an employer to pay an employee more than can be earned by the employer from the product of the employee’s labour, minimum wage laws that seek to impose a wage higher than the value of the employee’s productivity can not succeed.   

A person whose product per hour is worth, for example, $10 can not be paid $15 per hour.  Wage laws that attempt to achieve this effectively prevent such workers from being employed and are the main cause of involuntary unemployment.  This is particularly so if there are additional costs imposed on the employer related to such employment such as insurance, payroll tax or superannuation.



For similar reasons as for minimum wage laws, laws that impose an obligation on employers to pay equally for employees considered, rightly or wrongly, as members of a particular group, to be less productive than other employees, are likewise the cause of involuntary unemployment.  Examples include women and various minorities; the effect of equal pay laws for women causing a reduction in their employment.  Similarly with the employment of aboriginal stockmen on outback stations



Whilst the above represents generally the theorising of market economists with respect to employment, such views are unlikely to be shared by for example Keynesian economists.  This is even more so for those with an anti-market disposition such as socialists or Marxists.


                David Sharp

                      April 2005   

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