The concept of “labor market”: meaning, analysis, and its main features.
Labor is the most important factor of production and the main source of income for the economically active part of the population. Various types of income related to labor activity account for up to 75% of national income in developed countries.
Table of Contents
What Is the Labor Market: Definition
The market always consists of buyers and sellers who form the supply and demand for a particular product or service. In this regard, the labor market is no exception: employers provide the demand for labor, and workers provide the supply.
The labor market is a dynamic system in which owners of the means of production (employers) and hired workers (employees) interact.
The market always includes a wide range of labor relations and persons involved. However, the definition of the exchange of labor for money (the amount of labor sold and bought, its price, etc.) and the process of exchange itself is at the center of the labor market, which makes it the most important of all markets in the modern economy, both for the individual and for society in general.
Through the labor market, the majority of the working population receives income and, having got a job, spends most of their active time there. Education and vocational training, which an individual can acquire throughout his life, are aimed at achieving better results in the labor market.
The Concept of “Labor Market” at the Macroeconomic and Microeconomic Levels
At the macroeconomic level, supply and demand in the labor market will depend on the dynamics of the domestic and international markets, as well as on such important factors as the level of inflation, immigration, the age of the working population, and the level of education. These factors include paying attention to unemployment rates, labor productivity, national income, and gross domestic product (GDP).
In turn, if we consider the concept of the labor market at the microeconomic level, relations between the firm and employees come to the fore here: wage setting (increase or decrease), the number of working hours and working days, benefits, compensation, etc.
As a result of the competitive struggle between buyers and sellers of labor, the demand for labor and its supply is formed.
Importance of Labor Market Efficiency for the Economy
The productivity of the exchange performed in the labor market is one of the main components of the efficiency of the economy as a whole.
Any errors and failures in the activity of the labor market are worth the costs, measured by lost non-production products, which could be produced if labor were involved.
Such miscalculations reduce the number of goods and services needed to maintain the achieved standard of living. Therefore, the efficiency of the labor market is of vital interest both for the individual and for society.
Contracts and Remuneration for Work
The terms of transactions for the exchange of labor for money are usually determined by relevant contracts, which may take the form of written or oral agreements on the price of labor and its quantity.
The level of contracts ranges from general agreements between employers and trade unions to individual agreements between an employer and a single employee.
Remuneration for work takes various forms, the main of which is wages expressed in real terms. As a rule, employees also have additional benefits in the form of:
- medical care,
- use of company vehicles,
- meals at work,
- or sports facilities and equipment.
The state also participates in social and labor relations in the labor market: it sets the minimum wage, social benefits, working hours, etc.
Boundaries and Classification of Labor Market
The boundaries and classifications of the labor market can be established according to various criteria, among which professional and geographical are the most obvious.
For example, elite administrators and high professionals have a single national and even international labor market. The largest number of highly qualified specialists are recruited by employers from all over the country.
For the vast majority of manual and mental workers (teachers, medical workers, engineering and technical workers, etc.), the labor market is usually limited to the region boundaries: municipality, district, or state. However, the growing interrelationship and interdependence strengthen the unity between labor markets at all levels, which in many cases, allows us to abstract from professional and territorial specifics in the analysis of labor problems.
Nowadays, in industrialized countries, the so-called internal labor market has developed, mainly these are large enterprises. Entrepreneurs strive to fill high-skilled vacancies at the expense of the personnel already working in this firm and not to hire workers from outside. Entrepreneurs view already employed staff as a source of labor supply, and workers, in turn, regard such an internal market from the point of view of their promotion.
Characteristics and Features of the Labor Market
The labor market has several features and characteristics that deserve special attention:
- In the labor market, only labor services are bought, and the individual himself can neither be bought nor sold. The buyer of labor services comes into contact with a free person, whose rights he is obliged to respect.
- The main labor market indicators at the macroeconomic level are the unemployment rate and labor productivity. In turn, at the microeconomic level, these will be indicators: wages and the number of hours worked.
- Compensation for work is represented not only by wages but also by additional benefits such as medical care, company transport, meals at work, paid vacation, etc. The inclusion of additional benefits in monetary compensation complicates the problem of determining the market price of labor.
- Employment contracts are multilateral agreements. In addition to the monetary aspect of the transaction, they include:
- content and working conditions;
- job promotion prospects;
- the microclimate in the team and the norms of subordination in the management;
- chances of job retention, and others.
The complexity of employment contracts makes it difficult to find a job and gives rise to imperfect information about vacancies for job seekers, as well as job offers – for entrepreneurs.
5. The commodity market, as a rule, is mainly a market for standardized products, especially when it comes to raw materials or semi-finished products. The labor market is in sharp contrast to the product market.
6. All workers differ from each other in many qualities, in particular, abilities and preferences, and jobs differ in the required skills and working conditions.
7. What a consumer or entrepreneur buys today has nothing to do with what they bought yesterday or will buy tomorrow. But when buying labor, the duration of the contacts between the seller and the buyer is of great importance. Its duration brings benefits to both the employer and the employee. The experience of the worker depends on the duration of work, which increases labor productivity and, consequently, increases monetary compensation to the worker. By training workers, the employer invests significant funds in them. Therefore, the termination of the contract will cause damage to both parties.
8. In contrast to the material and real factors of production, the unemployment of labor resources has significant human and economic costs. Since most individuals are both buyers of finished products and sellers of labor services, unemployment reduces their standard of living, sometimes quite significantly. Labor services that are not used today are lost forever by the economy.
9. Compared to the usual market, the labor market has some institutional structures representing the interests of the state, business, and trade unions. Each of them contributes to the development of the “rules of the game” in the labor market. The importance of a particular structure in the regulation of labor relations varies from country to country. In most developed countries, its impact on the labor market is mostly balanced.
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