If labor is being used efficiently, there is no excess unemployment or over employment.

This phrase from Khan Academy struck me as quite strange. Why on Earth would over employment mean that labor is NOT used efficiently? Labor is a resource. And if we can use more of a resource without increasing its size, then it would seem that we are using it more efficiently, we are using bigger share of it.

For an example, land is recourse. If we will drain swamps we will be able to use more of land for commerical purposes, meaning that we will use land more efficiently. I believe that similiar reasoning can be applied to labor.

P.S. What I understood from comments: Overemployment is inefficient because it happens due to sticky wages/prices in short run equalibrium. Sticky prices/wages create inefficiency in the market, thus it should be nothing suprising that overemployment caused by sticky wages/prices leads to inefficient use of labor.

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    $\begingroup$ "Over employment" is not a commonly used term. What is their definition of this term? $\endgroup$ – user18 Jan 19 '20 at 1:14
  • $\begingroup$ @KennyLJ I guess it means situation when unemployment is lower than the natural rate of unemployment $\endgroup$ – user161005 Jan 19 '20 at 4:35

Because using efficiently does not mean that all labor is used (this holds also for any other factor of production). This is so because on the margin at some point additional inputs might not produce enough value to justify the cost.

Consider simple supply and demand on perfectly competitive labor market with no market failures and all standard background assumptions.

Supply is: $S_L=10+w$ where $w$ is wage. Also let’s suppose there are enough people so that maximum 100 labor hours ($S_L \leq 100$) could be supplied after that there simply is no more labor hours due to lack of people.

Demand for labor hours is: $D_L=100-w$.

Now given the supply and demand it’s trivial to calculate that equilibrium wage is $w=45$ and equilibrium employment will be: $S_L=D_L=55$.

This equilibrium is completely efficient yet only 55 hours of labor is demanded. Employing 60 or 70 or 100 hours of labor would just reduce total welfare as measured by total surplus, and hence it would be inefficient.

Intuition is that because given the firms demand which is derived based on their own optimal production decisions given the prices they face for their product the equilibrium wage is too high to justify employing everyone. Employing more than 55h of labor would start destroying value as those workers would have to be applied to activities where simply the value of output is not sufficient to cover the cost of that labor. Of course, there could be situations where all labors would be employed if equilibrium demand is equal to maximum number of labor hours there is or exceeds it.

  • $\begingroup$ You made a good argument against hiring more people than the equalibrium quantity. I agree. BUT, when demand for labor is so high that there is overemployment, this situation isn't the case. Firms rationally and voluntary hire more people => equalibrium quantity at this time period leads to overemployment. It's unclear why under such circumstances labor would be used inefficiently. $\endgroup$ – user161005 Jan 18 '20 at 17:14
  • $\begingroup$ In real life markets are not always in long run equilibrium. In macroeconomics adjustments can take time, wages are sticky etc. this can result in temporary over or underemployment - in both cases labor is not used efficiently. However assuming perfect markets and that we are in equilibrium then there can’t be any in-efficient use of labor if we use it at equilibrium quantity. Also btw you have tendency to ask one question in your opening post and then turn it in different question in comments. Your question was in short why using more labor is not always efficient, my answer addresses that $\endgroup$ – 1muflon1 Jan 18 '20 at 17:30
  • $\begingroup$ 1."In real life markets are not always in long run equilibrium". Do you imply that overemployment is never equalibrium quantity, that it's always result of not sufficient adjustments on labor markets? 2." Also btw you have tendency to ask one question in your opening post and then turn it in different question in comments." Probably because there is a gap between what my real problem is and how I formulate my question. Like I expected to be told why there is inefficiency, instead of being told that my conception of efficiency is flawed because it doesn't take into account cost-efficiency $\endgroup$ – user161005 Jan 18 '20 at 18:07
  • $\begingroup$ 1. No I said in LR equilibrium. In SR equilibrium in macro there can be inefficient under or over-employment. Also if markets are not perfect. 2. Well it might not been the question you wanted to ask but it’s the question you asked. One can only respond to question that’s asked not the question that was meant to ask. From your comment I sort of get that your underlying question is something along why we call this short run equilibrium where more labor is used than long run inefficient but that’s actually totally unrelated to question why using factor more is not always better... $\endgroup$ – 1muflon1 Jan 18 '20 at 18:15
  • $\begingroup$ " why we call this short run equilibrium where more labor is used than long run inefficient " If I understood you correctly, given perfect markets short-term equalibrium quantity would be efficient. But this situation is oxymoronic, in short run there would be inefficiency due to sticky prices/wages, thus either over/under employment, which would inefficient due to non-perfect market. Is it correct? $\endgroup$ – user161005 Jan 18 '20 at 18:33

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