The science of economics is concerned with the allocation of resources in the economy and the determination of prices and level of production. For a capitalist economy the primary theoretical construct used to understand these issues is the market model of supply and demand. In labor economics one particular market the labor market is studied.
Labor is a service that households supply to business firms in order to earn an income and that the business firms demand in order to produce their product. It is this interaction of the demand and supply of labor that determines wage rates, the level of employment and the distribution of income in the economy. Market forces of supply and demand are not the only determinants of these market outcomes however institutional and sociological forces also play roles. Institutional forces affect labor market outcomes through the influence of organizations such as large corporations and government. Sociological forces exert their influence through such factors as culture, class, discrimination and custom. There is no one model in labor economics that weaves these market, institutional and sociological forces into a universally accepted theory of how the labor market works. Rather there are different views that give varying degrees of emphasis to the relative importance of these forces in the labor market and the degree to which the market forces of supply and demand efficiently work to set wage rates and allocate labor.
To discriminate between these views therefore requires a process of guesses that can be tested which can validate the guess that can be used to predict the outcome of the labor market.
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