Labor Market


The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. It is a major component of any economy, and is intricately tied in with markets for capital, goods and services.

Labour economics seeks to understand the functioning and dynamics of the markets for wage labour.

Labour markets or job markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers) and the demanders of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and income.

In economics, labour is a measure of the work done by human beings. It is conventionally contrasted with such other factors of production as land and capital. There are theories which have developed a concept called human capital (referring to the skills that workers possess, not necessarily their actual work).

BREAKING DOWN ‘Labor Market’

At the macroeconomic level, supply and demand are influenced by domestic and international market dynamics, as well as factors such as immigration, the age of the population, and education levels. Relevant measures include unemployment, productivity, participation rates, total income and GDP.

At the microeconomic level, individual firms interact with employees, hiring them, firing them, and raising or cutting wages and hours. The relationship between supply and demand influences the hours the employee works and compensation she receives in wages, salary and benefits.

Types of labor market


Type of unemployment

  • Frictional unemployment – This reflects the fact that it takes time for people to find and settle into new jobs. Technological advancement often reduces frictional unemployment; for example, internet search engines have reduced the cost and time associated with locating employment.
  • Structural unemployment – This reflects a mismatch between the skills and other attributes of the labour force and those demanded by employers. Rapid industry changes of a technical and/or economic nature will usually increase levels of structural unemployment; for example, widespread implementation of new machinery or software will require future employees to be trained in this area before seeking employment. The process of globalization has contributed to structural changes in labour markets.
  • Natural rate of unemployment – This is the summation of frictional and structural unemployment, that excludes cyclical contributions of unemployment (e.g. recessions). It is the lowest rate of unemployment that a stable economy can expect to achieve, given that some frictional and structural unemployment is inevitable. Economists do not agree on the level of the natural rate, with estimates ranging from 1% to 5%, or on its meaning – some associate it with “non-accelerating inflation“. The estimated rate varies from country to country and from time to time.
  • Demand deficient unemployment (also known as cyclical unemployment) – In Keynesian economics, any level of unemployment beyond the natural rate is probably due to insufficient goods demand in the overall economy. During a recession, aggregate expenditure is deficient causing the underutilisation of inputs (including labour). Aggregate expenditure (AE) can be increased, according to Keynes, by increasing consumption spending (C), increasing investment spending (I), increasing government spending (G), or increasing the net of exports minus imports (X−M), since AE = C + I + G + (X−M).gdp_equ