study of the labour force as an element in the process of production. The labour force comprises all those who work for gain, whether as employees, employers, or as self-employed, and it includes the unemployed who are seeking work. Labour economics involves the study of the factors affecting the efficiency of these workers, their deployment between different industries and occupations, and the determination of their pay. In developing models for the study of these factors, this section deals with the labour force of contemporary industrialized economies.

The economist cannot study the capabilities, jobs, and earnings of men and women without taking account of psychology, social structures, cultures, and the activities of government. Indeed, these forces often play a more conspicuous part in the field of labour than do the market forces with which economic theory is mainly concerned. The most important reason for this arises from the peculiar nature of labour as a commodity. The act of hiring of labour, unlike that of hiring a machine, is necessary but not sufficient for the completion of work. Employees have to be motivated to work to an acceptable standard; the employment contract is, in effect, open-ended. This may be no problem when employees are weak and easily replaced, but the more skilled, organized, and indispensible they are, the more the care that must be given to creating an institutional setting that will win their compliance and meet their notions of fairness.

A second major reason for looking beyond straightforward labour market forces is the often highly imperfect nature of the industrialized labour market. The majority of jobs are occupied by the same employees for many years, and only a small minority of employees quits their jobs in order to move to a comparable job that is better paid. Studies in a number of countries have all revealed substantial variation in the level of pay offered for the same job by different firms in the same local labour market. This sluggishness of labour market response is particularly notable for more skilled labour and for labour employed by firms in strong product market positions. The main thrust of competition in many instances comes not through the labour market but through the product market, with an employee's pay being determined less by what the job is than by who the employer is.

In discussing both market and nonmarket forces in labour economics, the following discussion poses them not as alternatives but as complementary explanations. The difference in pay between, for example, a craftsman and the labourer who works alongside him may be fixed by custom, an arbitrator, a job evaluation system, or a bargain with a trade union. In their different ways these are far from being merely passive agents through which market forces are transmitted into human behaviour. They may, for instance, shape the market by defining its categories of labour. Also, they may differ greatly in their speed and extent of response.