Labor and the American Economy

Labor and the American Economy

According to the neoclassical theory of supply and demand, wages are determined much like prices. When there is a high demand for labor, wages go up, as individuals have their pick of the best places of employment, the places that presumably give the highest wages. Fairness hardly enters into the question, as it is not 'fair' that oranges may be more in demand than apples one week, and a worker with more in-demand skills is likely to receive higher pay just as necessities (yo-yos vs. milk). Unequal wages can be reasoned as fair, as education may be seen as a 'cost of production,' namely the time the individual bowed out of the labor force to enhance his or her skills -- and as more labor-intensive products (such as refrigerators vs. apples) cost more

The human capital theory explains why some people go to college and others don't in the sense that some people prefer a more immediate return on their educational investment, even if it has long-term pay offs, and some may find their skills better deployed in equally necessary but non-remunerative ways in the home.

The theory of time expenditure is equivalent to wages multiplied by the time spent per unit of the good produced in the household. This implies that an increase in the wage of one member of the household gives rise not only to changed incentives for work on the market, but also to a shift from more to less time-intensive product on and consumption of goods produced by the household. But as noted by the Nobel-prize winning 20th century University of Chicago economist Gary Becker, as real wages increase, along with the possibilities of substituting capital for labor in housework, labor is released in the household, so that it becomes more and more uneconomical to let one member of the household specialize wholly in household production (for instance, child care). As a result, some of the family's previous social and economic functions are shifted to other institutions such as firms, schools and other public agencies. This creates more jobs, but also means that more luxury jobs may become necessities, such as maids. (Gary Becker, Nobel Prize, 2004)