Labour Economics encompasses the relationship between workers (the supply of labour) and the employers (the demand of labour). The relationship between these control the wage, employment levels, and the structure of the marekt. The government is also an important agent in the market. To determine employment and wage, which is quantity and price, we use the neoclassical supply and demand model.
Although labour economics shares many similarities with other types of markets and areas of economics, labour economics is unique in four main ways. First, is the diversity of its agents, as different groups within a population have different goals. Second, is the sociological component, demonstrated by institutional and legislative complications, such as labour laws implemented by the government. The third difference of labour economics is that it has to use finite information, as worker productivity is difficult to accurately measure. The last difference of labour economics is that price has multiple functions since wage serves different purposes, such as motivation for work effort and risk and a return for education.
The study of labour economics entails the study of the supply curve (S), which reveals the behaviour of the workers; the demand curve (D), which shows the behaviour of firms; and the equilibrium, which is when the quantity of labour demanded by the firms is equal to the quantity of labour that is supplied by the workers. The behaviours of each are often not straight forward. For example, from a microeconomic perspective, workers' behvariours may not necessarily act aggregately as an upward sloping supply curve. Though this is often assumed, it is contingent on a dominant substitution effect (over the income effect).
Labour Economics is interested in the effect that policy issues, such as welfare, worker compensation, etc., have on the labour market. Furthermore, it is also concerned with unemployment, participation rates, and underemployment. To study how policy issues are implemented by the government to control the labour market, regression analysis is used to determine how these changes impact individual outcomes, such as a firm’s individual outcome.