Labor Market Theory and Models

This chapter reviews labor supply, demand, and equilibrium topics with the goal of showing how they determine labor market area (LMA) outcomes across geographic space. Labor supply curves are based on utility-maximizing choices between working and leisure, subject to a budget constraint, while labor demand curves are derived from the firm’s production function assuming profitmaximizing behavior. The challenges of defining and empirically delimiting LMAs are examined from historical perspectives and using statistical clustering analysis, with commuting data serving as a key tool. A key distinction is drawn between functional versus homogenous regionalization problems, and a number of suitable statistical approaches are reviewed. Current models used to study differences in earnings across labor markets as well as the effects of boom and bust cycles are also discussed. An empirical technique is presented for decomposing employment change within a community into four key labor market concepts: commuting, unemployment, labor force participation, and migration.