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6.1: Labor

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    287942

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    Let’s start this lesson off with a word association exercise. What word comes to mind when you hear the word, “employment”?

    Thought Bubble: Cloud 40, Textbox

    You would not be alone if the words above popped in your head. Employment means different things to different people. In the most general macroeconomic sense, employment refers to the use of any factor of production (land, labor, physical capital, etc.) in the production process.

    All employment, regardless of the type of factor, is purchased in the input market and employed by firms and other market participants. In this lecture we will examine how employment -- specifically, the employment of labor -- is measured and how these measurements are used to monitor and forecast other economic activity.

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    Figure 1

    Figure 1 illustrates where labor employment fits into the income-circular flow and how data from employment indicators can be used to forecast activity on other parts of the flow (e.g., product markets, household income, etc.).

    Labor-Intensive vs. Capital-Intensive

    Different businesses use different combinations of factor inputs in the production process. For example, labor-intensive industries (e.g., textiles, construction, etc.) use a relatively large portion of labor relative to capital-intensive industries (e.g., software, telecommunications, etc.). It is easy to misinterpret what it means to be labor- or capital-intensive. In most instances, capital-intensive industries actually employ more labor than capital in the production process. This may seem contradictory if we were comparing factor input usage within an industry. However, we are not. We are comparing factor input usage between industries. Figure 2 shows the factor input ratios of two fictitious industries: athletic footwear and software development. Labor represents the largest factor input share in the production process for both industries. But the software industry uses more capital relative to the athletic footwear industry. Therefore, software is considered capital intensive relative to athletic footwear.

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    Figure 2

    Figure 2 graphically shows how important labor is to the economy. Regardless of the type of business, chances are it relies heavily on labor. This intense reliance on labor is one of the reasons that indicators that track an economy’s employment situation are so important and closely monitored.

    This page titled 6.1: Labor is shared under a CC BY-NC-SA 4.0 license and was authored, remixed, and/or curated by Martin Medeiros.