Labor: Definition, Types and How It Affects the Economy

One of the 4 Factors of Production

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

Definition: Labor is the amount of physical, mental and social effort used to produce goods and services in an economy. It is one of the four factors of production that drive supply. The other three are natural resources or the raw materials, capital or the amount of money in the society, and entrepreneurship or the drive to profit from innovation. In a market economy, these components of supply are provided to meet demand from consumers.

Labor 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. To make sure they make enough to cover the costs of living, many countries have a minimum wage.

The economy runs most efficiently when all members are working at a job that uses their best skills and 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.

The labor force or labor pool is the number of people in a country who are employed plus the unemployed.

But 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, the retired or students. Others have given up looking for work. These are discouraged workers. To be considered part of the labor force, you must be available, willing to work and have looked for work recently.

 Find out how this is calculated in the Unemployment Rate Formula and in the Labor Force Participation Rate.

The size of the labor force therefore depends not only on the number of adults but also how likely they feel they can get a job. For this reason, the labor pool shrinks during and after a recession. That's true even though the number of people who would like a full-time job if they could get it, may stay the same. This is measured by the real unemployment rate.

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 a form of slave labor. 

How It 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. That's because they have a lower standard of living.

For more, see Why American Jobs Are Being Outsourced.

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

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. Here's How to Use Labor Market Information When Exploring Careers.