What Does the Labor Market Mean?
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 encompasses individuals who are seeking jobs.
- Demand: Demand consists of businesses that need labor based on organizational changes, economic activity, and industry trends.
Employees provide the supply, and employers provide the demand—understanding how these relationships work is critical in helping employers build a skilled workforce that thrives on economic change, growth, and competition.
The relationship between the supply and demand of labor can depend on variables such as job openings, labor competition, salary data, geography, and workplace conditions—employers will need to tap into their relevant labor market to make decisions.
For example, an employer looking to hire a web developer may want to look into current salary data for that particular role. In addition, they may want to specify their labor market by geography (city/state) to take into account the cost of living.
Doing this can help the employer offer a fair and competitive salary to their prospective employee, which will also result in a higher number of qualified candidates.
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How Does the Labor Market Work?
To understand how the labor market works, let’s examine it from two lenses: macroeconomic and microeconomic levels.
The macroeconomic level examines the relationship between the labor, goods, money, and foreign trade markets.
It investigates how these interactions impact aggregate variables such as:
- Employment levels
- Participation rates
- Aggregate income and gross domestic product (GDP)
The macroeconomic theory explains that when the supply of labor—the amount of employees or hours worked—exceeds demand, there is a scarcity of wages, which creates a highly competitive job market.
The microeconomic level examines supply and demand between individual businesses and their employees. Specifically, it taps into how employers:
- Hire employees. How and when are employers hiring more people? What circumstances necessitate more employees?
- Lay off employees. What main factors (performance, workplace, and finances) require organizations to decrease their workforce?
- Raise or decrease wages and hours. What causes an organization to realign its salary structure?
In this micro level, supply—the number of hours an employee is willing to work—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.
And 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.
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 win 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, job openings, salary data, workplace conditions, and more to assess the health of their relevant labor market.