2.10 – Why It Matters: Labour Markets

Why understand labour markets?

The photo on the left shows people protesting in response to Wisconsin governor Scott Walker’s collective bargaining laws. The photo on the right shows people graduating.
Figure 2.10a. What determines incomes? In the U.S., income is based on one’s value to an employer, which depends in part on education. Image by Steven A. Greenlaw & David Shapiro (OpenStax), licesned under CC BY 4.0. Modification of work by AFL-CIO America’s Unions/Flickr Creative Commons and COD Newsroom/Flickr Creative Commons.

Working your way through college used to be fairly common in the United States. According to a 2015 study by the Georgetown Center on Education and the Workforce, 40% of college students work 30 hours or more per week.

At the same time, the cost of college seems to rise every year. The data show that the cost of tuition, fees, room and board has more than doubled since 1984. Thus, even full time employment may not be enough to cover college expenses anymore. Working full time at minimum wage–40 hours per week, 52 weeks per year—earns $15,080 before taxes, which is less than the $19,548 the College Board estimates it cost in 2016 for a year of college at a public university. The result of these costs is that student loan debt topped $1.3 trillion this year.

Despite these disheartening figures, the value of a bachelor’s degree has never been higher. How do we explain this? This module will tell us. We will learn about:

  • The theory of labour markets
  • How wages are determined in an imperfectly competitive labour market
  • How unions affect wages and employment
  • How labour market outcomes are determined under bilateral monopoly
  • Theories of employment discrimination
  • How Immigration affects labour market outcomes

In a market economy like the United States, income comes from ownership of the means of production: resources or assets. More precisely, one’s income is a function of two things: the quantity of each resource one owns, and the value society places on those resources.

Recall from the module on production and costs that each factor of production has an associated factor payment. For the majority of us, the most important resource we own is our labour. Thus, most of our income is wages, salaries, commissions, tips and other types of labour income. Your labour income depends on how many hours you have to work and the wage rate an employer will pay you for those hours. At the same time, some people own real estate, which they can either use themselves or rent out to other users. Some people have financial assets like bank accounts, stocks and bonds, for which they earn interest, dividends or some other form of income. Each of these factor payments, like wages for labour and interest for financial capital, is determined in their respective factor markets.


Except where otherwise noted, this chapter is adapted from “Why It Matters: Labor Markets” In Microeconomics by Steven Greenlaw and Lumen Learning licesnsed under CC BY 4.0. / A derivative of “Introduction to Labor Markets and Income” In Principles of Economics 2e (OpenStax) by Steven A. Greenlaw & David Shapiro, licensed under CC BY 4.0.

Access for free at Principles of Microeconomics 2e

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Labour Economics for Leaders Copyright © 2023 by Norm Smith, Georgian College is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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