What is labour market

Indeed, the defining employment challenge of the future will be not the surplus, but the shortage, of appropriate labour.

In the US, 25 million extra workers will be needed by to sustain economic growth. Labour shortages and surpluses of this magnitude will obviously have drastic consequences for growth; when considered alongside the public welfare costs of an ageing population, they begin to look like a sure-fire recipe for economic disaster. Clearly, labour markets will need to adapt significantly if economies are to remain competitive. Pension reform is inevitable, and labour migration and real productivity rates will almost certainly need to be increased in order to reduce labour demand.

But there is a further key piece of the puzzle requiring urgent and concerted attention: the need for a more inclusive labour market. An inclusive labour market is a labour market that allows and encourages all people of working age to participate in paid work and provides a framework for their development.

At present, groups such as women, young people, older workers and low-skilled workers remain underemployed in many sectors and economies. The goal, therefore, is to effectively mobilise the talents and resources of these underutilised groups so that they can participate in and benefit from the driving of economic growth. The target is to increase the employment rate of people aged from the current Increased participation in itself, however, is not enough to ensure inclusive and sustainable growth.

After all, an abundance of workers is of little consequence if they lack the high-level, sector-specific skills increasingly required by employers.

During times of economic stress, the demand for labor lags behind supply, driving unemployment up. High rates of unemployment exacerbate economic stagnation, contribute to social upheaval, and deprive large numbers of people of the opportunity to lead fulfilling lives. In the U. However, almost 7 million people filed unemployment claims in a single week in April ; that number dropped to 1. Department of Labor. Labor productivity is another important gauge of the labor market and broader economic health, measuring the output produced per hour of labor.

Productivity has risen in many economies, the U. Workers have been creating more goods and services per unit of time, but they have not been earning much more in compensation. The Economic Policy Institute analysis of U. Bureau of Labor Statistics data showed that while net productivity rose The fact that productivity growth has far outstripped wage growth means that the supply of labor has outpaced the demand for it.

According to the macroeconomic theory, the fact that wage growth lags productivity growth indicates that the supply of labor has outpaced demand.

When that happens, there is downward pressure on wages, as workers compete for a scarce number of jobs and employers have their pick of the labor force. Conversely, if demand outpaces supply, there is upward pressure on wages, as workers have more bargaining power and are more likely to be able to switch to a higher paying job, while employers must compete for scarce labor.

Some factors can influence labor supply and demand. For example, an increase in immigration to a country can grow the labor supply and potentially depress wages, particularly if newly arrived workers are willing to accept lower pay. An aging population can deplete the supply of labor and potentially drive up wages.

A country with an aging population will see demand for many goods and services decline , while demand for healthcare increases. Not every worker who loses their job can simply move into healthcare work, particularly if the jobs in demand are highly skilled and specialized, such as doctors and nurses. For this reason, demand can exceed supply in certain sectors, even if supply exceeds demand in the labor market as a whole. Other factors influencing contemporary labor markets, and the U.

The microeconomic theory analyzes labor supply and demand at the level of the individual firm and worker. Supply—or the hours an employee is willing to work—initially increases as wages increase.

Gains in supply may accelerate as wages increase, as the opportunity cost of not working additional hours grows. Demand at the microeconomic level depends on two factors: marginal cost of production and marginal revenue product. If the marginal cost of hiring an additional employee, or having existing employees work more hours, exceeds the marginal revenue product, it will cut into earnings, and the firm would theoretically reject that option.

If the opposite is true, it makes rational sense to take on more labor. Neoclassical microeconomic theories of labor supply and demand have received criticism on some fronts. Homo sapiens, unlike Homo economicus , may have all sorts of motivations for making specific choices. The existence of some professions in the arts and nonprofit sector undermines the notion of maximizing utility. Defenders of neoclassical theory counter that their predictions may have little bearing on a given individual but are useful when taking large numbers of workers in aggregate.

Bureau of Labor Statistics. Economic Policy Institute. Business Essentials. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. This develops during periods when demand for goods and services is less than the economy can deliver that is, growth is below trend and some productive resources, such as labour or capital machinery, are not fully used. Periods when growth is below trend but still positive are commonly known as economic slowdowns.

If growth is below trend but negative that is, GDP falls for at least two successive calendar quarters, this is known as a recession. A complete period during which an economy moves from a position of full capacity, experiences an economic slowdown or recession and a recovery and then returns to full capacity is called an economic cycle.

The Monetary Policy Committee MPC of the Bank of England takes the estimated size of this output gap into account when deciding the appropriate level of interest rates, along with several other factors.

The human resources that contribute to GDP are bought and sold in the labour market. The greater the amount or quality of human resources supplied to the market the higher the potential level of GDP.

But this potential will only be realised if there's sufficient demand for these resources, which is itself derived from the demand for goods and services. The market demand for labour is measured by the number of people in work employment , how much they work hours plus the number of unfilled job vacancies.

Supply is measured by employment plus the number of people who are looking for work unemployment. The balance of demand and supply in the labour market is reflected in the level or rate of change of wages and salaries earnings.

If demand is high relative to supply, earnings will rise. This will increase the cost of employing people assuming no change in their productivity which in turn will cause demand for human resources to drop, easing the upward pressure on wages.

If, by contrast, supply is high relative to demand, we would expect employment costs to fall and hence increase the demand for labour. Unemployment will be low and there will be many unfilled job vacancies. There will always be some unemployment because jobs cannot be advertised and filled instantaneously, and it takes time for people to move from one job to another. A higher rate of unemployment than this suggests that some human resources are going unused. Unemployment tends to rise and fall over the course of the economic cycle and is referred to as a lagging indicator of the economy because it takes a while normally about six to nine months for a slowdown in demand for goods and services to translate into a fall in demand for labour.

The unemployment that emerges in this way is called cyclical unemployment , the resulting slack being closely associated with the output gap see above.

In principle the existence of cyclical unemployment should cause the rate of growth of earnings to moderate and thereby create renewed demand for any unused human resources. Because of this the MPC closely monitors labour market indicators such as unemployment, vacancies and the rate of pay increases when making decisions on interest rates. However, even when unemployment is high, the necessary adjustment of earnings may not always occur and unemployment may persist.

This structural unemployment is more problematic than cyclical unemployment because it cannot be corrected simply by a cut in interest rates or extra government expenditure. The remedy is to improve the employability of job seekers, match them effectively to the vacancies available and minimise any barriers that stop this process from happening — often called improving labour market flexibility.

An economy operating at full capacity with no cyclical or structural unemployment is said to be at full employment. This situation was close to the norm in the UK and most other developed countries in the s and s and some of the s. Full employment defined in this way implicitly assumes that everybody who can work or wants to work is participating in the labour market.

However, while this might have been a reasonable assumption a generation ago, today there is a much higher number 7. In addition, the UK labour market has had a large number of people who are underemployed, meaning they would prefer to work more hours than they do at present - including more than a million part-time workers who say they would like more hours. It also seemed that employers were not under a great deal of pressure from workers to raise wages, which may be partly explained by the relatively strong labour supply being driven by welfare claimants, older workers and EU nationals.

Office for National Statistics — employment and labour market statistics. The Economist — British economy. PwC — UK economic update. London: Resolution Foundation. CIPD Voice.