We explain what the labor market is, and how it works. In addition, we explore its indicators, elements, and more.
What is the labor market?
The labor market is the space in which employers or organizations offering jobs and people looking for a job interact. Job applicants can apply for job offers from employers as long as their qualifications meet job requirements.
The labor market involves various factors, such as a country’s labor laws, the influence of workers' associations and unions, and individual negotiations and agreements between employers and employees.
These different factors intervene in the labor market to establish registered and legal work, minimum wages, and decent working conditions. Nevertheless, there are cases of unregistered or informal work, especially on the part of small-scale unincorporated businesses who may not be able to afford costs.
- The labor market is a physical or virtual space in which employers (who offer jobs) and workers (who seek employement) interact.
- The balance between labor supply and labor demand is conditioned by labor laws and the economic situation of each country.
- The labor market is the basis of economic productivity in modern societies.
- See also: Flexible working
Characteristics of the labor market
The labor market is characterized by three key aspects that give it entity:
- Work. It is the activity employees perform in exchange for a salary or wage, and is the fundamental element for economic activity to thrive and develop.
- Productive factors. They are the natural resources (such as land, water or minerals) and human-created resources (such as machinery and capital) that allow an employer or company to develop a business, in addition to the workforce.
- Consumption capacity. It is the action of spending money on goods and services to satisfy needs, and is subject to people's purchasing power. For a country’s economy to flourish, it needs its population to consume in the domestic market.
How does the labor market work?
The labor market is driven by the number of job opportunities that exist and the human resources or workforce willing to apply; this means it operates based on work demand and supply:
- Work demand. It is the employers and organizations seeking employees to work with them.
- Work supply. It is the people seeking a job.
The balance between supply and demand is conditioned by state labor laws and the intervention of labor unions regarding workers' rights.
However, in countries undergoing serious economic crises, such as inflation, social conflict, or lack of access to education, state and union intervention is not enough. Working conditions often become precarious, companies cannot afford costs and may try to evade certain labor laws in order to survive.
As a result, informal or irregular employment conditions are generated. The informal sector consists of jobs where workers receive wages which are not covered by formal arrangements and are not taxed.
Tax contributions are extra expenses to the employee's salary that both the employer and the self-employed worker are obliged to pay to the state. In return, the employee has access to health coverage, retirement and pension systems, benefits and leaves of absence, among other benefits.
Informal employment represents a situation of vulnerability for the worker, economic saving for those not paying taxes to the state, and precariousness of the labor market as a whole.
- See also: Productivity
Why is the labor market important?
The labor market is the basis for the development of modern societies.
Modern societies are structured on the basis of economic productivity and the evolution of social communities: every citizen represents a basic element to grow, satisfy needs, and live a decent life.
Social conditions are not always fair, and a paradigm shift is still needed to break with traditional political ideals. However, work is a tool that provides individuals with autonomy and allows them to live in globalized societies.
- See also: Work motivation
Labor market indicators
Indicators are measurable characteristics expressed in data. They serve to understand the performance and development of a project, product, or company in the market at a given moment.
- For example: Analyzing different indicators before launching a new product on the market, or evaluating a company’s situation in relation to competitors at a particular time. In addition, labor market indicators can be analyzed to know the percentage of unemployed people or those with precarious jobs.
The main labor market indicators are:
- Economically active population (EAP). It comprises the total working age population, who are employed, self-employed, or unemployed. The EAP age range depends on the legislation of each country, but it usually ranges from 18 to around 70 years of age.
- Economically inactive population (EIP). It comprises the total number of people who do not have a job and are not seeking one, because they are not of working age, as is the case with people under 16 and over 70 years old, or have health-related issues or disabilities, among other reasons.
- Precarious employment. It consists of indecent working conditions not covered by the law, as is the case of labor exploitation, salaries below the established minimum wage, lack of security for the employee, and poor quality of life.
- Underemployment. It consists of a type of labor precariousness or “hidden unemployment” that usually occurs due to a generalized lack of employment. Although it takes place within the legal framework, it does not guarantee a decent lifestyle in the medium and long term. While employees receive a salary above the established minimum level, they do not hold a full-time job, are overqualified for a position, or are qualified for a different job.
- Unemployment. It comprises the total working age population in a country who are economically inactive, that is, who are neither employed nor engaged in any activity that contributes to the country’s economy, though they may be seeking employment.
- Unemployment rate. It is the percentage of the unemployed population as it relates to the working age population, not to the total population of a country. High unemployment rates result in precarious work conditions and underemployment.
- Informal employment. It consists of irregular employment situations in which a person receives payment in exchange for their work, but that amount of money is not a registered salary and is not taxed, nor is it declared by means of a tax receipt in the case of self-employed people. It should not be confused with precarious employment, as it may happen that a job is well remunerated but not declared to the tax authorities.
- Nominal wage. It is the salary or amount of money received by the worker, which may be paid on a monthly or weekly basis.
- Real wage. It corresponds to the wages received by the worker in relation to the purchasing power represented by that amount. For example: in countries experiencing economic crises and devaluation, salaries paid in local currency will lose their nominal value monthly, i.e. the same amount of money will represent fewer goods. Therefore, salaries must be raised periodically in order to compensate for the devaluation of the local currency.