Labour Market

 

 Labour market - definition,

Factors affect supply and demand at a macroeconomic level & At the microeconomic level,

Differences and similarities between the labour market and the goods market

Comparison between labour markets and commodity markets

Factors affecting the labour market demand  & supply

Characteristics of labour market

Labour market definition

Labour market is - a market where the primary commodity is labour and supply is provided by the employees, whilst the employers are on the demand side. It is sort of a reverse of a regular market where firms are suppliers of a product and consumers provide demand for this product.

The labour market comprises of two parts: home labour supply and firm labour demand. Wages are the cost of labour, which provides an income to people while also being a cost to businesses. Wages are determined by the unrestricted interaction of demand and supply in a hypothetical free-market economy. On the other hand, governments and trade unions can affect wage levels in real mixed economies.

DEfinition

The labour market, often known as the job market, is concerned with the supply and demand for labour. Employees provide the supply and employers provide the demand. The labour market is a fundamental part of a country's economy as it’s intertwined with capital, goods, and service markets.

 

Many factors affect supply and demand at a macroeconomic level. Some of these are

·         domestic and foreign market dynamics,

·         immigration,

·         population age,  

·         education levels.

·         unemployment, 

·         productivity,

·         participation rates,

·         total income, and 

·         gross domestic product (GDP.)

At the microeconomic level,

individual enterprises interact with

·         employees hiring,

·         terminating,

·         increasing or decreasing their salaries and work hours. The link between supply and demand has an impact on the number of hours employees work and the earnings, salaries, and benefits they receive.

Differences and similarities between the labour market and the goods market

The labour and goods markets are similar in their general working mechanisms but they have several differences. The labour market is different from the product market when it comes to the function of supply and demand in setting price and quantity.

In a product market, high demand increases the number of goods produced until the demand is met. However, this is not the case in the labour market where labour cannot be manufactured. An increase in wages will not result in an increase in the supply of labour if we don’ take migration into account. The demand-supply mechanism in the labour market is not as straightforward and linear as in the product market.

Table 1 below provides a comparison between labour markets and commodity markets.

 

Table 1 below provides a comparison between labour markets and commodity markets.

Criteria	Labour markets	Goods or commodity markets
Definition	A process by which supplies of a particular type of labour and demands for that type of labour are balanced, as an abstraction.	A physical place where buyers and sellers of a particular commodity gather for doing transactions.
Relationship between buyer and seller	The relationship between a seller and a buyer in is not temporary and thus personal issues can affect it.	The relationship between a seller and buyer ends when the transaction and transfer of goods are complete.
Perfect or imperfect	It’s primarily an imperfect market. There is no perfect mobility. This results in a wide range of compensation rates for the same sort of work and a lack of a normal wage rates toward which the market rate naturally trends.	Commodity markets are both perfect and imperfect market types. Each is characterised by different factors such as type of goods, price, number of buyers and sellers, etc.
Price setting	Wage fixing is a significant element of the labour market. In the absence of unions, the buyer of labour determines its price.	It is normally the seller who sets the price.
Price fluctuation	The price that is determined in the labour market tends to be fixed for a period of time. Employers do not want pay rates to shift in response to changes in demand and supply.	In a goods market, the price-setting depends on various factors and tends to fluctuate with every change in demand or supply conditions.
Complexity	It is significantly more complicated than the commodities market. Whatever a person’s employment or monetary reward, they believe that they are entitled to proper treatment and that their dignity must be respected.	It functions on the different factors of production and the forces of demand and supply. In that sense, it is less complex compared to the forces of the labour market.

 

Characteristics of labour market

What are the characteristics of the labour market?

·         The labour market is stable and it lacks mobility.

·         It also lacks variation in wage rates for identical jobs. Employees of other businesses getting lower pay do not leave their positions to work for high-wage enterprises when the price of labour given by a single employer rises.

·         A labour market might have a distinct geographical location. However, defining the borders of labour markets is difficult. For some employees, the labour market is national (or perhaps worldwide), whereas, for others, mobility is severely limited.

·         The size of a market is determined in part by the worker’s talent and education. 

Engineers and physicians with advanced degrees are likely to find acceptable employment in a variety of locations. Workers in this situation are more inclined to seek a higher-paying position.

Labourers without specialised skills, such as clerks and unskilled workers, find it challenging to get work in a variety of fields. Their labour marketplaces are likely to be limited to their immediate surroundings. 

·         In terms of labour mobility, age is also a significant influence. Young employees, on average, are more mobile than their elder colleagues in the workforce.

·         The most important feature of a rising economy’s labour market is that the great majority of people work as workers, with just a tiny percentage working as employers or as employed managers of employing units. Because the great majority of the population is employed, they are concerned with short-term salary levels, working hours, and working conditions.

·         Supply and demand for labour

Labour demand is the number of people (or hours of work) that an employer is willing and able to hire (in a particular time period) at any given wage rate. The labour demand curve is a typical downward sloping curve indicating that employers will recruit more workers at lower wages and vice versa.

Factors affecting labour market

Factors affecting labour market can be divided into factors affecting labour demand and factors affecting labour supply.

Factors affecting the labour market demand are:

• The wage rate: as the wage rate grows, the demand for labour rises as well. As a result, the labour demand curve begins to trend downward. Every market may use a downward-sloping demand curve to explain the income and substitution effects. When wages grow, businesses try to replace capital with labour, or less expensive labour with more expensive labour. Furthermore, if firms continue to use the same quantity of labour, their labour costs will rise while their income (profits) falls. For each of these factors, demand for labour will decrease as wages rise.

• The demand for the products: labour demand is derived. This means that it is based on the demand for the product that labour creates. More firms will seek the people who create a given item or service if more customers want it.
• Productivity of labour: productivity refers to the amount of labour that every worker produces. Those that are more productive will be in higher demand. Skill levels, education and training, and the use of technology all have an impact on productivity.

• Profitability of firms: if a company is profitable, it can afford to hire additional people. Falling profitability, on the other hand, is likely to diminish labour demand.
• Substitutes: the degree to which labour is required has an impact on demand. The demand curve for labour will change to the left or right if substitutes, such as capital machines, become cheaper or more costly. For example, if the cost of new technology decreases, demand for labour may decrease as well.
• The number of 'buyers' of labour: the number of buyers in a market can have an impact on total demand. Monopsonists are sole buyers in a market, and they are quite frequent in labour markets. London Underground, for example, is the only company in the United Kingdom that employs underground tube drivers. In general, when one employer dominates a labour market, demand for labour is lower than when there are several companies. Furthermore, in such marketplaces, salaries have a tendency to be lower, which is one of the reasons why labour unions emerge and pressure for pay increases.

 

Factors affecting the labour market supply are:

• The real wage rate on offer in the industry itself: increased factor incentives are likely to result from greater pay, which should increase the number of persons willing and able to work.

• Overtime: overtime payments, productivity-related pay schemes, and share option plans are all ways to increase wages.
• Substitute occupations: the salary and earnings disparity that exists between two or more occupations are influenced by the actual wage rate on offer in competing for employment. A rise in the pay offered to skilled plumbers and electricians, for example, may induce some people to change careers.
• Barriers to entry: artificially limiting an industry’s labour supply (for example, by imposing minimum entrance requirements) can restrict labour supply and drive up wage levels. This is the case in professions like legal services and medicine, where severe ‘entry criteria’ apply.
• Improvements in the occupational mobility of labour: if more people are trained in the skills required by the particular occupation, it will improve the overall mobility of labour.
• Non-monetary characteristics of specific jobs: these include things like job security, working conditions, opportunities for advancement, and the chance to live and work abroad. Also employer-provided in-work training, employer-provided or subsidised health and leisure facilities, and other in-work benefits like occupational pension schemes.
• The net migration of labour: labour migration is becoming more important in determining the supply of labour available to many industries. This is the result of a rising flow of people seeking work in the UK post-Brexit, whether to relieve skilled labour shortages in the NHS, education, or to meet seasonal demand for workers in agriculture and the construction industry.