Labor is the activity by workers to produce goods or services. It can be measured by wages, hours or efficiency. This data can be used to predict the optimal work force and wages to maximize productivity. Labor economics is about the demand and supply of labor. Labor is about the work, not the person, that is needed. On the macroeconomic level, it can be used to assess and control unemployment and to evaluate the impact of labor on the country's economy.
Labor economics does not take into account the psychology or sociology of individual employment decisions, such as the emotional aspects of unemployment and the social benefits of an income or preferred type of work. Market analyses tend to overlook unpaid labor such as raising a child or caring for a relative. Some late-twentieth century studies have analyzed the role of nonworking spouses, children and the elderly on decision-making.
Labor wages are compensation for work done per unit of time (usually per hour). In microeconomics, the Marginal Revenue Product (MRP) of the worker is determined by multiplying the Marginal Physical Product (MPP) of the worker (the worker's output) by the cost of the service or end product. If the MRP is larger than a company's Marginal Cost (MC) (the cost of producing the end product or delivering the service), employing the worker will increase the employer's profits. In economic theory, a rational company only employs a worker up to the point where MRP equals MC. Beyond this point, the employee will cost the employer more than that person makes for the company. Employees can increase their employability by increasing their productivity (MPP).
A high MRP will result in a higher wage, because the worker's output is more profitable to the employer. Nonhuman inputs affecting the MRP, such as machinery or computers, are referred to as "capital." Qualifications and training can also influence a higher wage and are sometimes called human capital.
In the realm of macroeconomics, interest rates and foreign exchange rates can affect wages. Inflation may increase net wages but will reduce the purchasing power of that income.
A country's labor force is the number of people of working age (by law) who are either employed, self-employed or actively seeking work, excluding those doing civic service or in the army. The participation rate is defined as the number of individuals in the labor force divided by the total number of civilian adults. The labor market differs from commodity markets, in that the labor pool cannot easily be increased or decreased in the same way that goods can be produced or eliminated.
Unemployment is defined as the labor force minus the number of individuals who are currently employed. Frictional unemployment occurs when workers entering the market have to wait to get new jobs or when there is a delay in moving from one job to the next. Structural unemployment occurs where workers are not qualified for the jobs available or are overqualified. The natural rate of unemployment is the aggregate of frictional and structural unemployment, which excludes the effect of the economic cycle, such as in times of economic growth or recessions. The natural rate of unemployment represents a residual rate that is unlikely to be reduced further.
A worker's choice between income and leisure can be predicted based on that person's budgetary requirements, assuming that the worker makes a rational choice about the utility of work. A graph that illustrates production and leisure can demonstrate that workers will only be prepared to increase their production until they have reached the point where their marginal utility of leisure outweighs their marginal utility of income, i.e., when further work will not improve their leisure time. The model does not take into account the fact that they may be persuaded to take less leisure time if they enjoy the job or persuaded to work less hours by maximum working time legislation or the limited availability of work.
An employer's labor requirements can be predicted using the additional output or physical product that results from an increase in labor, known as the marginal physical product of labor (MPL). Besides recruitment, the MPL can also be increased through incentives for existing workers to produce more, such as a bonus scheme, employee stock options and nonmonetary incentives, such as staff outings or meals. Another approach to maintaining a high MPL is to use temporary or agency workers who do not need to be retained beyond the task for which they are needed. This allows labor supply to be matched more closely to demand but runs the risk of low motivation that may reduce the productivity of the workers, reducing the MPL.