Market Factors of Production: A Comprehensive Guide
Market Factors of Production
7.1 Introduction
Income represents the value or price of production factors over a period. The circular flow of income involves relationships and flows between different economic actors. Labor income is called wages, rental income is derived from natural resources, and interest originates from capital. The factor market for production can be divided into three submarkets based on the nature of the factor: the natural resources market, the capital market, and the labor market.
7.2 Market of Natural Resources
This market focuses on the use derived from natural resources, not their price. The value of a resource is based on its capacity to yield benefits. The payment for the use of a resource, known as rental income, is similar to land rent. It represents the income distribution that owners of natural resources receive for their use. This can be illustrated using a vertical line graph.
7.3 Capital Market and Interest
Interest is the value of reduced services or the price of money. The demand for capital is shaped by traders who invest to satisfy consumer demand. It is a decreasing function because as the interest rate increases, the amount of capital demanded decreases. The supply of capital is constituted by savings, and it is an increasing function because a higher interest rate incentivizes agents to save more. The equilibrium interest rate is determined by the interaction of supply and demand. In practice, there are often restrictions on lending and borrowing imposed by banks and private institutions.
7.3.1 Interest as a Reward
Interest is a reward for postponing consumption. Borrowers prefer present consumption to future consumption, while lenders are willing to forgo present consumption for a return in the future.
7.4 Labor Market and Wages
Salary is the payment received for work done. The labor market has the following features:
7.4.1 Demand for Labor
The demand for labor comes from businesses. The quantity of labor demanded depends on factors such as wage levels, the price of goods or services produced, and worker productivity.
7.4.2 Supply of Labor
The supply of labor comes from households. The amount of work offered depends on the level of wages and the characteristics of the population.
7.4.3 Equilibrium Wage
The equilibrium wage is the wage rate at which the quantity of labor demanded equals the quantity of labor supplied. In many countries, there is a minimum wage, which is the lowest wage that can be legally paid to a worker.
7.5 Population and Labor Force
7.5.1 Population Characteristics
The total number of people living in a given geographical area is the population. Not all people participate equally in the production process. The working-age population is the segment of the population that is legally eligible to work. In Spain, the educational legislation mandates schooling until the age of 16.
7.5.2 Workforce
The workforce consists of people who are currently working or actively seeking work. It can be divided into two groups:
- Employed population: People who work for others or are self-employed.
- Unemployed population: People who are actively seeking a job but have not found one. This includes those looking for their first job and those who have lost their previous job.
The inactive population comprises individuals who neither work nor seek employment.
7.5.3 Labor Market Indicators
To measure the labor market situation, several indicators are used:
- Activity rate: The proportion of the working-age population that is either employed or unemployed.
- Unemployment rate: The percentage of the labor force that is unemployed.
- Employment rate: The percentage of the working-age population that is employed.
7.6 Employment Statistics
Several sources provide data on employment:
- Active Population Survey: A survey that interviews 200,000 individuals to gather information on the labor market.
- Labor Market Evolution Survey: Measures unemployment rates and occupation in different sectors.
- Social Security: A public agency that provides healthcare and social benefits to workers and their families. Its membership figures provide insights into employment levels.
- INEM (National Employment Institute): Collects unemployment data based on registered unemployed individuals.
7.7 Types of Unemployment
Unemployment is a significant problem in the labor market. There are four main types of unemployment:
- Cyclical or situational: Unemployment that increases during economic recessions and decreases during periods of expansion.
- Seasonal: Unemployment that occurs in industries with seasonal variations in demand for labor.
- Structural: Unemployment that is long-term and tends to occur in specific regions or industries due to changes in the economy.
- Frictional: Voluntary unemployment that occurs when individuals are between jobs, searching for better opportunities, or taking time for education or personal reasons.