Labor, One of the Four Factors of Production

Why Your Work Is Critical to the Economy

factory workers
••• Photo: Monty Rakusen/Getty ImagesCollection: The Image Bank

Labor is the amount of physical, mental and social effort used to produce goods and services in an economy. It supplies the expertise, manpower, and service needed to turn raw materials into finished products and services.

In return, laborers receive a wage to buy the goods and services they don't produce themselves. Those without desired skills or abilities often don't even get paid a living wage. Many countries have a minimum wage to make sure their workers earn enough to cover the costs of living.

Labor is one of the four factors of production that drive supply. The other three are:

  1. Land. This is short for the natural resources or raw materials in an economy, 
  2. Capital. This is an abbreviation of the capital goods, such as machinery, equipment, and chemicals, that are used in production.
  3. Entrepreneurship. This is the drive to profit from innovation. 

In a market economy, companies use these components of supply to meet consumer demand.

The economy runs most efficiently when all members are working at a job that uses their best skills. It also helps when they are paid according to the value of the work produced. The ongoing drive to find the best match between skills, jobs, and pay keeps the supply of labor very dynamic. That's why there's always some level of natural unemployment. For example, frictional unemployment allows workers the freedom to quit a job in search of a better one.

How Labor Is Measured

Labor is measured by the labor force or labor pool. To be considered part of the labor force, you must be available, willing to work, and have looked for work recently. The size of the labor force depends not only on the number of adults but also how likely they feel they can get a job. It is the number of people in a country who are employed plus the unemployed.

Not everyone who is jobless is automatically counted as unemployed. Many are jobless by choice and aren't looking for work. Examples include stay-at-home moms, retired seniors, and students. Others have given up looking for work. These are discouraged workers

The real unemployment rate measures everyone who would like a full-time job. It includes the discouraged workers. It also includes those who are working part-time only because they can't get a full-time job. It's called the real unemployment rate because it gives a broader measure unemployment.

The labor force is used to help determine the unemployment rate. The unemployment rate formula is the number of unemployed divided by the labor force. It tells you how many people in the labor force are jobless but are actively looking for work.

The labor pool shrinks during and after a recession. Even though many would like a job, they aren't looking for work. They aren't counted in the labor force.

The labor force participation rate is the labor force divided by the civilian non-institutionalized population. It tells you how many people are available and looking for work.

The amount of goods and services that the labor force creates is called productivity. If a certain amount of labor and a fixed amount of capital creates a lot, that's high productivity. The higher the productivity, the greater the profit. High productivity gives the worker, company, industry or country a competitive advantage.

Types of Labor

Labor can be categorized in many different ways. First is the skill level. The most basic is unskilled labor that does not require training. Although it's usually manual labor such as farm workers, it can also be service work, such as janitorial. 

The next is semi-skilled labor that requires some education or training. An example is manufacturing jobs.

Labor is also categorized by the nature of the relationship with the employer. Most workers are wage employees. This means they are supervised by a boss. They also receive a set weekly or bi-weekly wage as well as benefits.

Contract labor is when a contract specifies the work to be produced. It’s up to the worker to define how it gets done. The amount paid is either commission or a set fee for the work. Benefits are not paid.

A third type is slave labor. This is illegal. That's when the worker is forced to work for little more than room and board. Child labor is another form of slave labor. Children don't really have the ability to make a free choice as to whether they will work.

How Labor Affects the U.S. Economy

The United States has a highly skilled and mobile labor force that can respond quickly to changing business needs. But it's facing more competitive labor from other countries that can pay its workers less. They can do this because they have a lower standard of living

The BLS is a division of the U.S. Department of Labor. It manages compliance with labor laws and the U.S. minimum wage. It also provides job training and enforces workplace safety. 

The U.S. Bureau of Labor Statistics measures labor. It provides the monthly employment report. This provides the nation's unemployment rate.