What is meant by labour market?

The labor market, also called the job market, refers to the supply and demand for employment.

What factors define the labor market?

These two main factors define the labor market:

• Supply:  Supply consists of individuals who are looking for a job.
• Demand:  Demand includes businesses that need labor based on organizational changes, economic activities, and industry trends.

Employees provide the supply, and employers provide the demand – understanding how these relationships work is critical to helping employers build a skilled workforce that thrives on economic change, growth, and competition.

The relationship between labour supply and demand can depend on variables such as job opportunities, labour competition, salary data, geography and workplace conditions – employers must leverage their relevant labour market to make informed decisions.

For example, an employer looking to hire a web developer may want to look at existing salary data for that particular role. Additionally, they may want to specify their labor market by geography (city/state) while taking into account the cost of living.

Doing so can help employers offer their prospective employees a fair and competitive salary, resulting in an increased number of qualified candidates.

How does the labor market work?

To understand how the labor market works, let's look at it from two perspectives: the macroeconomic level and the microeconomic level.

Macroeconomic level

The macroeconomic level examines the relationship between labor, goods, money, and foreign trade markets.

It examines how these interactions affect aggregate variables, such as:

• Employment level
• Participation Rates
• Total Income and Gross Domestic Product (GDP)

Macroeconomic theory explains that when the supply of labor – the number of employees or hours worked – exceeds demand, wages are squeezed, creating a highly competitive job market.

Microeconomics level

The microeconomic level examines the supply and demand between individual businesses and their employees. Specifically, it looks at how employers:

• Hire employees.  When and how do employers hire more people? Under what circumstances is more staff needed?
• Lay off employees.  What are the main factors (performance, workplace and finances) that force organizations to reduce their workforce?
• Raise or decrease wages and hours.  What does an organization have to do to realign its pay structure?

At this micro level, supply – the number of hours an employee is willing to work – increases as demand increases. In other words, the higher the pay, the more time and effort employees may be willing to put into their jobs.

And the lower the wages or the lesser the market demand for a product or service, the fewer employees a business will need.

Why is the labor market important?

Understanding how the labor market works can help employers assess how many employees to hire and how to leverage their skills for long-term success.

In particular, it is necessary to examine how the labor market changes:

• Understanding how many employees the organization or team needs to remain competitive
• Determine the market value of a job and pay employees an honest  salary  or  wage
• Enhancing skills and career paths with necessary training and promotion opportunities
• Building a strong workforce that can cope with change and competition
• Tailoring employee training and education to industry demands
• Restructuring of organizational roles as needed to meet industry demand
• Finding ways to efficiently use your budget on employees and what to invest it in (education/training, benefits, etc.)

Employers  can refer to the Bureau of Labor Statistics (BLS) to assess unemployment rates, labor turnover, job opportunities, salary data, workplace conditions, and the health of their relevant labor market.