Job Market

A marketplace where people exchange their labor in return for payment.

The job market, in its simplest form, is a marketplace where people exchange their labor in return for payment. Laborers are the supplier in this market (supplying their labor), and firms are the consumers in the market (demanding people's labor). 

Job market

The job market behaves similarly to how any other supply & demand market acts.

Some other factors interact in the market, like economic activity levels, industry trends, the need for certain skill sets or education levels, etc. An example is a medical industry. The medical industry demands highly educated and skilled workers. 

Although the job market is referred to as a "market", there is no physical place where this exchange of labor for pay is happening. It's just a concept demonstrating competition and interplay between different labor forces. 

This market may also be referred to as the labor market, as labor is the service being demanded. 

Throughout an economic cycle, the job market will grow and shrink depending on the demand for labor. The number of available workers willing to offer their labor will also change the job market size. 

Other factors that affect the size of the labor market are:

  • The needs of specific industries
  • The need for a particular level of education or skill set
  • Required job functions

Since the economy needs people to work, the labor market status is extremely important and directly related to the demand for goods and services.

At a macroeconomic level, international and domestic market dynamics influence supply and demand, as well as factors such as level of education, the population's age, and immigration. 

Relevant measures for the labor market are unemployment, productivity, participation rates, total income, and gross domestic product (GDP). 

Individual companies interact with laborers. They hire people, fire them, and raise or cut wages and hours. The relationship between supply and demand affects the employee's hours and their compensation in wages, salary, and benefits.


The relation between the unemployment rate and the job market

The labor market is directly related to the unemployment rate. The unemployment rate is a figure to measure the percentage of the labor force that doesn't have a job but is actively searching for one. 

When the unemployment rate is high, the labor supply in the job market will also be high. 

Now hiring

If there is a large pool of unemployed people, employers will be able to be pickier with who they hire. They will also have bargaining power when negotiating wages, so they can drive down wages and get the labor relatively cheap. 

It's a whole different story when the unemployment rate drops. The supply of labor will be more limited, and firms won't be able to be as picky. 

They will have to compete against other firms for workers, putting the bargaining power in favor of the labor force. This effect will increase wages, even for lower-skilled occupations. 

During difficult economic times, like recessions or depressions, employers will be forced to lay off their workers to save money. This will effectively increase unemployment and create an extremely competitive labor market for workers. 

High unemployment rates can prolong economic stagnation and force people to live uncomfortably and be conscious of their financial decisions. Economic stagnation is a sustained period of minimal growth in an economy and is terrible for both sides of the labor market. 

The U.S. Bureau of Labor Statistics takes a monthly statistical survey called the Current Population Survey to measure the state of the job market.

The survey uses a representative sample of around 60,000 households to try and find the unemployment rate in specific regions of the country, earnings of those surveyed, hours the respondents worked, and plenty of other demographic factors. 


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Supply and demand in the job market

The job market experiences a similar supply-demand mechanism as regular goods and services markets. The only real difference is that labor is a commodity. 

So just like in a market of goods and services, when the quantity of workers demanded by firms is equal to the available labor force, the job market will be in equilibrium. 

Supply and demand in job market

When firms desperately try to hire workers (a shortage of available workers), wages will increase. On the other hand, when firms don't demand workers and large numbers of people are unemployed (a surplus of available workers), wages will decrease.

In most economies, wages can't move freely due to price controls. Many countries implement a minimum wage, which is a price floor. Just as the name implies, a minimum wage is a minimum price employer can legally pay their workers. 

Just like with a normal price floor, when the market equilibrium price is above the minimum wage, the minimum wage does not affect the job market. When the market equilibrium price is below the minimum wage, then problems arise. The minimum wage would cause a surplus here.

Firms wouldn't be able to justify paying a lot of workers over the equilibrium wage, which will result in firms hiring fewer workers. 

Even though minimum wage is supposed to protect workers and increase the wage of workers, it can cause fewer people to experience these benefits because of unemployment. 

There are benefits to minimum wage, as it provides a better income for unskilled workers. Due to this increase in wages, the government can reduce its spending on social programs to support these individuals and reduce economic inequality simultaneously



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Researched and authored by Alexander | LinkedIn

Reviewed and edited by Tanay Gehi | LinkedIn

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