Labor Market - The Main Features Neoclassical Economics

Study of labor markets is a big concern for economists, looking for explaining incentives of firms and people to negotiate wages, on a context of social and technological change. Additional factors such as labor discrimination among firms, consumers and even workers affects labor market and creates disparities that make market work inefficiently, aside the existence of increasing human capital growth among groups after decades of access education and social mobility. The following essay explores the essential features of labor market explained by neoclassical economics, divided in three parts: The explanation of how labor market works as a bargaining process of firms and workers looking for a equilibrium wage, the unemployment scenario in labor market and structural changes caused by human capital development explained by Becker (1971) and discrimination among workers caused by market participants.

The labor market functions based like any market of goods and service where people with different ages, different socioeconomic features and different skills offer their time to exchange for a salary. The other part comes from demand labor from enterprises whose need different skill in a place and moment and with certain productivity expected to produce goods and services. Both of participants behave based on individual maximization criteria, where incentives of workers are looking for a greater wage as reward for their productivity, and firms are hiring a greater amount of skilled work with the lowest wage possible. However if the price of work does not match with expectation of both parties, it will go up or down to obtain a market equilibrium. This situation balances out conflicting desires of workers and firms, coinciding the amount of workers that accept working at certain wage and firms agree to pay that wage However, when all labor demand is unable to hire the available workforce who`s seeking job at certain salary and productivity, the gap between job applicants with no job and total population available for working is named unemployment.

One of reason for what this is happening, is a result of wage stickiness, created by unions and public state institutions to maintain social welfare of workers and not allow wage moving to equilibrium state. Also, unemployment moves by cyclical factors where economic performance is in a negative terrain caused for a drop in consumption and investment demand and no job positions are required at moment, being necessary remove personal. Also temporary movements of workers of switch to better jobs and firms to select employers may delay a job applicant to obtain a new job position, being named these cases of frictional unemployment.

The technological changes and access to education has developed the human capital. Becker (1964) explains human capital is the amount of skills and experience that contribute to economic growth and help to improve social development, income distribution, and change in work dynamics among others. People with higher education, skills and experience, can be more productive and receive a better salary. However education is not the only factor of accumulation of human capital, being experience, another variable that improves skills in people. Mincer (1974) found a difference between the growth of income related with age and labor experience, being the second variable as the time elapsed between the moment individual left school and current time of life of working. The higher level of schooling is obtained much earlier compared with other people with the same level of schooling, higher is the income obtained, supporting results of Becker of construction of human capital in society and economic growth. Additional factors that affected amount employed and wages are discrimination on groups, as result of human thoughts, expectations and cultural beliefs. That discrimination may come from legal discrimination based on groups by race, sex, religion or political inclinations.

The economic discrimination may come among workers for dislike of his peers of a different group, by firms who pays differently a person from social and cultural features with same productivity compared with non discriminated groups. Also, a third kind of discrimination is derived from consumer preferences to certain products made from one type of groups, affecting wages paid to compensate that impact from demand side The logic of economic behavior in discrimination can be studied from individual analysis that studies maximization behavior when discrimination is included in decision making or collective analysis, where groups acts collectively against each other. Becker (1971) make emphasis of role of employers when hold a “taste for discrimination”, meaning the existence of a penalty value to employ minority groups. Hence, these workers have to compensate employers with a higher productivity at a given wage or accepting a lower wage for same identical productivity.

Another approach for explaining discrimination is studied by Arrow (1973), focusing on statistical theory of discrimination. The premise of statistical discrimination imply information asymmetry of employer at moment to value skills of job applicants, using observable characteristics such as gender or race to infer the expected productivity of applicants. After evaluate multiple candidates with these characteristics and find a signal of productivity of each applicant and compare it with its mean, then the expected applicant productivity should place weight on both signal and mean.

The elements of labor market are created by firms and workers in a bargaining process to obtain the best wage to hire personal and receive an income. This process balances out amount of people who desire to work at certain wage and firms agree to pay that cost. However, unemployment arises in economies as result of changes in business cycles for expectations that generates a drop fall aggregate demand or temporary changes from people and firms to look for a new job with imperfect information from both parts. The role of human capital in society has contributed explaining how labor market can change across countries and groups with different school level and experience. Discrimination in labor market concern to economist as a market inefficiency caused by employers, employees and consumers when select personal based on certain characteristics from different groups.