DEFINITION: In a broad sense, labor is the physical effort expended by human beings to transform the material world for some human purpose.
In a narrower economic sense, labor is a commodity offered by a supplier (“employee”) to someone demanding the labor (“employer”) in exchange for some form of compensation, nowadays, usually monetary.
The compensation exchanged for labor is commonly referred to as a “wage.”
ETYMOLOGY: The word “labor” derives, via Middle English and Middle French, from the Latin noun labor, laboris, meaning “work,” “labor,” “toil,” or “effort,” and the Latin verb labōro, meaning “to work,” “to toil,” or “to labor.”
USAGE: Labor has been intensively studied by economists. It is useful to discuss the economics of labor in three separate contexts: as a factor of production, as the basis of economic value, and (in the form of manual labor) as an economic class whose welfare is affected by interactions with various non-economic social, political, and legal institutions.
First, then, is the idea that labor is one among several primary factors of production, other prominent factors including land and capital. As such, labor is often conceived of as constituting a market all its own.
However, labor markets are constrained in various ways. For one thing, most jobs in the modern world require a greater or lesser amount of prior education or training.
Thus, the “labor market” as a whole is in fact fragmented into a multitude of smaller markets for doctors, lawyers, bankers, physicists, chemists, biologists, engineers, airline pilots, air traffic controllers, crane operators, and a plethora of other careers that require extensive training.
Moreover, each of these generic markets is subdivided into several more specific markets, in some cases, many more of them.
For example, in the field of engineering alone, there are separate markets for civil engineers, mechanical engineers, electrical engineers, aerospace engineers, petroleum engineers, computer engineers, nuclear engineers, biomedical engineers, and many more.
Moreover, labor markets may be constrained by geography, in several different ways. One way has to do with national boundaries. Thus, a well-qualified physician from India may wind up driving a taxi in the US because his qualifications are not recognized in the American market for physicians.
Another way in which the labor market may be constrained geographically has to do with changes in economic production in a given locality. For example, if a large manufacturing plant closes its doors, the local market for manual labor will be drastically affected.
When this occurs, two main possibilities arise: either manual laborers may sever their roots to their local community and move away in search of better market conditions, or else governments may intervene in the economy in such a way that manufacturers wish to return, thus restoring the local labor market to the status quo ante.
Either way, it is clear that labor markets are constrained in a distinctive way by geography.
The second context in which labor has been studied is the theory of economic value.
Beginning with the founders of political theory in the eighteenth century, notably, Adam Smith, it was thought that the price of a consumer good was determined by the cost of its production, especially the amount of labor that went into making it. This became known as the “labor theory of value.”
The labor theory of value was espoused by nearly all economists through the middle of the nineteenth century and became the centerpiece of the political economy of Karl Marx.
These three economic thinkers, working independently of one another, put in place the foundations of what we now know as the “subjective theory of value.”
The subjective theory of value simply states that the chief determinant of the value of a consumer good is the preference that potential buyers have for it in comparison with other goods.
A little thought is sufficient to show that this is so. No matter how much labor has gone into the production of something, if no one wants to buy it, its market value is effectively nil.
The third context in which economists have studied labor—especially, manual labor, but increasingly, white collar labor, as well—has to do with the way it forms an economic class whose welfare is affected by interactions with various social, political, and legal institutions.
For example, among the social institutions studied by labor economists are labor unions. There are also political and legal aspects to the operation of labor unions.
For example, in some jurisdictions, laws have been passed by local or state governments requiring either “closed” or “open” or shops. This means that union membership is either required or not required of all laborers working in a given unionized factory.
Similarly, legal institutions may be more lenient or more restrictive with respect to the rules governing the picketing of factory premises during strikes.
Beyond unions, there have been many political crusades over the past century and a half or so, resulting in many legal reforms, which have improved working conditions, especially for manual laborers.
Such achievements as the 40-hour work week, paid holidays and vacations, pensions, minimum age requirements, and safe working conditions have all resulted from political pressure exerted by public figures and political parties to improve the welfare of the laboring class.
Another legal institution that continues to be heatedly debated to this day is the minimum wage.
It may appear self-evident that passing laws raising the minimum wage improves the welfare of laborers. And it is true that they benefit those workers fortunate enough to be able to find entry-level work doing manual labor.
However, most economists believe that minimum wage laws reduce the total number of entry-level jobs available. Critics of minimum wage laws claim that more laborers are harmed than are helped by such laws.
Similarly, laws favoring closed union shops and lenient picketing rules may seem like a good thing from the point of view of a laborer lucky enough to have a job in a union factory.
However, overall, such laws act as an artificial restraint on trade, often making such jobs exceedingly hard to obtain.
Labor economists investigate the pros and cons of these and other controversial proposals to advance the welfare of the laboring class.