Labor market theories

Labor market theories attempt to explain how the labor market works from an economic point of view. One distinguishes macroeconomic and microeconomic labor market theories.

The former are dedicated to explaining macroeconomic labor market phenomena, with a focus on employment and unemployment. The microeconomic approaches deal with the incentives to take up work as well as the incentives to demand labor under the given economic and institutional conditions.

Two variables are of decisive importance in current labor market theories: real wages and the aggregate demand for goods. However, they come into play in different ways depending on the theory. In neoclassical models, for example, real wages are the decisive variable for employment and unemployment, while demand does not play a role. In New Keynesian approaches, both quantities have an influence, while in Keynesian theories only demand is significant.

Many recent labor market theories also emphasize the importance of labor market institutions and regulations, such as unemployment benefits and dismissal regulations. Social norms that work is a social obligation are also taken into account in more recent considerations.

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