Labor (also spelled labour) is the human effort, physical and mental, that goes into producing goods and services. Economists treat it as one of the factors of production, alongside land, capital and, in many textbooks, entrepreneurship. Workers sell their time and skills to employers, and in return they receive wages, salaries and benefits, which for most households are the main source of income.
Labor is studied in a branch called labor economics, which looks at how people decide whether and how much to work, how employers decide whom to hire, and how pay is set. It overlaps with macroeconomics through unemployment and inflation, and with public policy through taxes, minimum wages, trade unions and social insurance. Labor differs from other inputs because it cannot be separated from the person who supplies it.
Labor in plain terms
Think of a bakery. The ovens, flour and shop space are things the owner can buy or rent. None of them turns into bread on its own. Someone has to mix the dough, watch the ovens and serve customers. That human contribution, the hours and know-how people bring, is labor.
A labor market is simply the place, real or figurative, where people offering work meet people wanting work done. Like any market it has a price, the wage, and that price moves when workers are scarce or plentiful. Unlike flour, though, workers have families, preferences and rights, and they get tired, learn new things and change jobs, which makes this market behave differently from most others.
How labor is measured
Statistical agencies use household surveys, such as the US Current Population Survey run for the Bureau of Labor Statistics and the UK Labour Force Survey run by the Office for National Statistics, to sort the working-age population into three groups using definitions set by the International Labour Organization (ILO):
- Employed. People who did any paid work in the reference week, including part-time work and self-employment.
- Unemployed. People without work who are available and have looked for a job recently.
- Outside the labor force. Students, retirees, carers and others who neither work nor look for work; this group is often described as economic inactivity and includes discouraged workers.
From these come the headline ratios. The labor force participation rate is the share of the working-age population that is either employed or unemployed; the unemployment rate is the unemployed as a share of the labor force. Employers' surveys add counts of job vacancies, hours worked and the quit rate, which together show how tight the market is.
How labor markets work
In the simplest model, labor supply comes from households and labor demand from firms. A firm hires up to the point where the extra output from one more worker, valued at market prices, equals the wage. This "marginal product" idea links pay to productivity. On the supply side, each person compares the wage with their reservation wage, the lowest pay at which they would accept a job, and with the value of time spent on other things.
Real labor markets depart from this picture in several ways:
- Search frictions. Matching workers to jobs takes time, so some frictional unemployment exists even when the economy is strong.
- Employer power. When few employers compete for workers in an area, a monopsony can hold wages below the competitive level.
- Collective bargaining. Trade unions negotiate pay for groups of workers instead of individuals.
- Skills and education. Workers differ in human capital, and technology can raise demand for some skills while lowering it for others, a pattern known as skill-biased technological change.
Labor in economic thought
Classical economists put labor at the centre of their analysis. Adam Smith argued that the division of labor was the main source of rising output, and David Ricardo and later Karl Marx built versions of the labor theory of value, which ties the value of goods to the work needed to make them. From the 1870s, neoclassical economics replaced that theory with marginal analysis, in which wages, like other prices, are set by supply and demand at the margin.
In the twentieth century, John Maynard Keynes argued that unemployment could persist because total spending was too low, not because wages were too high, an idea central to Keynesian economics. Later work on the Phillips curve and the natural rate of unemployment connected labor-market slack with inflation, which is why central banks watch employment data closely.
Current issues
Several long-running shifts shape labor markets in the 2020s. Ageing populations in Europe, East Asia and North America are slowing labor-force growth and raising the dependency ratio, a topic covered under demographics. The gig economy and contracts with no guaranteed hours, such as the zero-hours contract, have widened the range of working arrangements, and some writers group insecure workers into a class they call the precariat. Remote and hybrid working spread after 2020. In many developing countries most work is still in the informal economy, outside labor law and tax systems.
Debates over how much regulation labor markets need, often framed as labor market flexibility versus job security, remain unresolved, and evidence differs across countries and periods.