Labor Market

What is the labor market?

The labor market, also called the job market, is defined as the supply of and demand for workers. Two main factors define the labor market:

• Supply: the number of people seeking employment.
• Demand: the number of open positions, or the number of workers employers are willing or able to hire.

What factors define the labor market?

The relationship between the supply and demand of labor can depend on variables such as:

• Job openings
• Labor competition
• Salary data
• Geography
• Workplace conditions

Employers will need to consider how these factors affect their relevant labor market to make decisions about hiring. For example, an employer looking to hire a web developer may want to investigate current compensation data for that particular role. They may also want to specify their labor market by geography (city/state) to take into account the cost of living and inflation.

Doing this can help the employer offer a fair and competitive compensation package, which can also result in a higher number of qualified candidates.

What happens in the labor market?

So, the supply of labor comes from those seeking employment (potential employees), and the demand for labor comes from those needing to fill roles (employers).

But the better you understand the forces and relationships which drive the labor market, such as macroeconomic and microeconomic conditions, the better prepared you are for the impact of changes in the economy. These words sound a little technical but they’re super easy to break down.

Macroeconomic level

The macroeconomic level considers the relationship between the labor, goods, money, and foreign trade markets. It considers how these interactions impact aggregate variables (a summary of lots of individual data points) such as:

• Employment levels
• Participation rates
• Aggregate income and gross domestic product (GDP)

The macroeconomic theory explains that when the supply of labor—the number of employees or hours worked—exceeds demand, this creates a scarcity of wages, which results in a highly competitive job market.

Microeconomic level

The microeconomic level examines supply and demand between individual businesses and their employees. Specifically, it taps into how employers:

• Hire employees:  How and when employers hire, and what circumstances require businesses to hire.
• Lay off employees:  What main factors (performance, workplace, and finances) require organizations to decrease their workforce and begin to lay off employees.
• Raise or decrease wages and hours:  What causes an organization to realign its salary structure.

At this micro-level, supply increases as demand increases. In other words, the higher the wage goes up, the more time and effort employees may be willing to invest in their jobs. According to research, 80% of workers report low satisfaction with their jobs when average wages aren't on par with inflation—this can lead to lower levels of productivity.

Theoretically, the lower the wage or the less demand there is in the market for a product or service, the fewer employees a business will need or be able to hire.

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 to achieve long-term success.

Specifically, examining how the labor market changes is essential in:

• Understanding how many employees the organization or team needs to stay competitive
• Determining a job’s market value and paying employees with an honest salary or wage
• Enhancing skills and career pathways with the necessary training and promotion opportunities
• Creating a strong workforce that can withstand change and competition
• Aligning employee training and education with industry demands
• Restructuring organizational roles as needed to meet industry demands
• Finding ways to efficiently use one’s budget on employees and how exactly to invest it (education/training, benefits, etc.).

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