Labour and income of labour

Labour is the human effort that is put into the production of goods and services, and includes both physical and mental effort. For example, writing a book involves both physical effort – typing – and mental effort – using the brain for research and creativity.

In modern societies, this concept is usually limited to remunerative activities, with the result that, say, amateur sport and a housewife's labour are excluded. This description is inadequate when applied to developing countries or the economies of earlier societies. In such communities, the bulk of production is intended for the consumption of the producer, so that remunerative activities represent only a fraction of the productive effort of the labour force.

When we talk about labour, we need to separate it into the quality and the quantity of labour.

The quantity of labour refers to the size of a population, the number of people who are of a working age (15–64 years old), and who are willing and able to work.

The quality of labour refers to the skill, knowledge and health of workers. The quality of labour is also often called human capital. Human capital is becoming increasingly important in modern production processes. Even more important than the quantity of labour is the quality of labour. Many economists believe that the difference in living standards between countries is mainly due to differences in human capital. The higher the quality of human capital in a country, the higher the productivity of labour, and the more goods and services are produced to satisfy needs and wants.

The assertion that labour is available only in limited quantities requires some comment since it is common knowledge that many countries are struggling with the problem of overpopulation. Bear in mind, however, that the productivity of a labour force depends not only on the number of labourers available, but also on the strength, health, skills and training of the workers concerned. So it is possible for a country to have an oversupply of unskilled labour but a shortage of skilled labour.

In return for providing firms with labour services, the owners of these labour services receive remuneration in the form of wages and salaries, royalties, commissions, management and consultancy fees, bonuses and fringe benefits (housing, medical aid, pension contributions, etc.).

In a market system, the underlying forces that determine the level of wages and the difference in wages are linked to the forces of demand and supply. The demand for labour is based on the demand for goods and services that are to be produced with labour. The remuneration of labour will depend on two things, namely the demand for the goods and services produced by labour and how valuable the person is to the firm.