Labor market has two important parts that heavily influence the conclusions and predictions derived from it. The first concerns the nature of human behavior. Many have labelled or called the model of economic man. One key assumption concerns human motivation. The model of economic man holds that individuals seek to maximize their level of well-being, always striving for the best outcome, given the constraints they face. A second key assumption is that human beings have the cognitive ability to exercise rational choice. This implies that the human brain is powerful enough to calculate the value of alternative outcomes so that the optimal outcome can be chosen. Finally a third assumption is that human beings are individualists in their behavior and preferences and are largely independent of what others outside of the family think or do.
The second important part concerns the nature and operations of markets. While economists recognize that the labor markets have certain unique features they do not perceive these differences to be so great as to preclude analyzing the labor market with the same theoretical model used to study other product and factor markets. Furthermore it is usually assumed that the labor market is highly competitive having large number of buyers and sellers and allowing relatively easy entry into and exit from the market. The importance of these assumptions is that they ensure that demand and supply determine a stable equilibrium where impersonal market forces are the major determinant of wages and the distribution of labor. As a result market outcomes lead to an efficient allocation of resources.
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