INTRODUCTION TO ECONOMICS
MARKET THEORY OF EMPLOYMENT
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.
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comparatively recent times this has been replaced by the concept of a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
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
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
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
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
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.
MINIMUM WAGE LAWS
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
EQUAL PAY LAWS
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
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.
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