ABSTRACT
This chapter presents the basic economic theory of labor markets and take a detailed look at how labor markets function. It offers some perspectives on current challenges in the labor market and discusses future prospects on how employment might look for workers and societies at large. The markets for labor are different from other markets in many ways. For a start, what is sold in labor markets is not people (that would be slavery) but the willingness of people to undertake paid work. On the demand side of the labor market, a profit-maximizing firm would have an incentive to hire labor only if an additional person-hour of labor will increase its profits, but not otherwise. Economists usually believe that, at relatively low wage rates, the substitution effect will dominate.
