The Labour Market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. It is a major component of any economy, and is intricately tied in with markets for capital, goods and services. A labour market is the place where workers and employees interact with each other. In the labour market, employers compete to hire the best, and the workers compete for the best satisfying job.
At the macroeconomic level, supply and demand are influenced by domestic and international market dynamics, as well as factors such as immigration, the age of the population, and education levels. Relevant measures include unemployment, productivity, participation rates, total income and GDP.
At the microeconomic level, individual firms interact with employees, hiring them, firing them, and raising or cutting wages and hours. The relationship between supply and demand influences the hours the employee works and compensation she receives in wages, salary and benefits.
A labour market in an economy functions with demand and supply of labour. In this market, labour demand is the firm's demand for labour and supply is the worker's supply of labour. The supply and demand of labour in the market is influenced by changes in the bargaining power.
Income and Productivity
Income for most people is determined by the market value of the productive resources they sell. What workers earn depends, primarily, on the market value of what they produce and how productive they are.
• People can earn income by exchanging their human resources (physical or mental work) for wages or salaries.
• Employers are willing to pay wages and salaries to workers because they expect to sell the goods and services those workers produce at prices high enough to cover the wages and salaries and all other costs of production.
• A wage or salary is the price of labor; it usually is determined by the supply of and demand for labor.
• More productive workers are likely to be of greater value to employers and earn higher wages than less productive workers.
• In a Labour Market, in the absence of other changes, if wage or salary payments increase, workers will increase the quantity of labor they supply and firms will decrease the quantity of labor they demand.
• Changes in the prices of productive resources affect the incomes of the owners of those productive resources and the combination of those resources used by firms.
• Changes in demand for specific goods and services often affect the incomes of the workers who make those goods and services.
Unemployment imposes costs on individuals and nations. Unexpected inflation imposes costs on many people and benefits some others because it arbitrarily redistributes purchasing power. Inflation can reduce the rate of growth of national living standards because individuals and organizations use resources to protect themselves against the uncertainty of future prices.
• Unemployment exists when people who are actively looking for work do not have jobs.
• The labor force consists of people aged 16 and over who are employed or actively seeking work.
• The unemployment rate is the percentage of the labor force that is willing and able to work, does not currently have a job, and is actively looking for work.
• Full employment means that the only unemployed people in the economy are those who are changing jobs.
The macroeconomics of labour markets.
The labour force is defined as the number of people of working age, who are either employed or actively looking for work. The participation rate is the number of people in the labour force divided by the size of the adult civilian noninstitutional population (or by the population of working age that is not institutionalized). The non-labour force includes those who are not looking for work, those who are institutionalised such as in prisons or psychiatric wards, stay-at home spouses, children, and those serving in the military.
Personnel economics: hiring and incentives
At the micro level, one sub-discipline eliciting increased attention in recent decades is analysis of internal labour markets, that is, within firms (or other organisations), studied in personnel economics from the perspective of personnel management. By contrast, external labour markets "imply that workers move somewhat fluidly between firms and wages are determined by some aggregate process where firms do not have significant discretion over wage setting." The focus is on "how firms establish, maintain, and end employment relationships and on how firms provide incentives to employees," including models and empirical work on incentive systems and as constrained by economic efficiency and risk/incentive tradeoffs relating to personnel compensation.