The Operation of Labor Markets

Abstract

Labor markets are characterized by a number of complexities that are absent in simple markets. Because of job search, unemployment arises which may or may not be efficient. Supply and demand behavior are no longer represented by simple curves but instead depend both on the expected wage prevailing in the market for individual workers and on the level of unemployment or likelihood of getting a job. Also, there is not a single market; instead there are many overlapping markets, so that one worker’s prospects depend on the behavior of participants in the related markets. This chapter examines the qualitative conclusions concerning the operation of labor markets that arise from the theoretical and empirical results of this monograph. In particular, the analysis undertaken here suggests that labor markets operate very differently for higher grade workers versus lower grade workers. These differences are described in the next three sections.