The labor market is one where the supply and demand for labor converge. The job offer is made up of the set of workers who are willing to work and the demand for work by the set of companies or employers that hire the workers.
The labor market is of great importance to society. Its malfunction can negatively affect a country's economic growth and employment. In addition, unemployment has significant economic and social costs:
- Economic, since unemployment supposes a loss of potential production.
- Social, due to the harmful effects of unemployment on income distribution and, hence, on social cohesion.
In this way, growth, the optimization of resources and social cohesion depend, to a large extent, on the correct functioning of the labor market.
The salary is the price of the labor factor. The lower the real wages, the more work companies will demand. The higher the wages, the more people will want to work.
The demand for employment is directly linked to economic activity, so that only sustained growth in production can guarantee employment growth in sufficient quantity to absorb the population willing to work.
In other words, the demand for labor is derived from the demand for goods and services. This is because when a company sells it wants to produce more, and for this it will want to hire workers. Therefore, if there is no production, there will be no more workers who can offer their jobs.
Unemployment is an economic imbalance caused by the difference between the quantity of labor supplied and the quantity of labor demanded, in the conditions and levels of wages existing at a given moment in the labor market. In the strict sense, unemployment is understood to be the group of people of working age who, being willing to work, do not have a job.Labor economics
Functioning of the labor market
The labor market also has other peculiarities. Despite the fact that like any other market it is governed by the law of supply and demand, the government intervenes (through legal norms), social institutions and collective organizations such as unions.
In the labor market, wages and working conditions are set through a negotiation process, thus determining the level and quality of life of employees.
In competitive markets, price works as an adjustment mechanism, until equilibrium is reached. The labor market does not function as a perfectly competitive market, since it has imperfections, rigidities and interventions from the outside. Imperfections because both companies and workers have market power to influence wages. Rigidity because employment implies a stable personal relationship and both the worker and the company are interested in other conditions in addition to salary.
Finally, there is intervention of labor legislation in the labor market where the characteristics of labor contracts, severance payments, the setting of a minimum wage, among others, are set.
Characteristics of the labor market
Among the characteristics of the labor market are:
- It is subject to a regulation where a minimum price is imposed, which is the legal minimum wage. This implies that it is not a market of perfect competition because there will always be people willing to receive a salary below that minimum, but they will not be able to be absorbed by the market.
- It is a rigid market, since employment contracts normally have a period of duration. Thus, an employee cannot be so easily fired (unless he is paid compensation).
- There are external variables that affect the labor market, such as technological changes. These make that more and more manual or mechanical tasks can be developed by computers or artificial intelligences. Thus, over time, skills such as creativity and the ability to think "outside the box" will be more valued.
- It may happen that educational entities do not always train the professionals demanded by the labor market, so that people must acquire knowledge while in jobs. This can be facilitated by the employers themselves through training.
- There is the so-called frictional unemployment, which is when the person leaves their job voluntarily. Thus, it takes time to find another job opportunity, to study, etc. This is one of the reasons that full employment does not exist.
See list of countries ordered by their unemployment rate.