Labor Market

AG (Aktiengesellschaft)

What is the job market?

The labor market, also known as the labor market, refers to the supply and demand of labor in which employees supply supply and employers supply demand. It is a major component of any economy and is closely linked to the capital, goods and services markets.

DISTRIBUTION Labor market

At the macroeconomic level, supply and demand are influenced by the dynamics of national and international markets, as well as by factors such as immigration, the age of the population and the level of education. Relevant measures include unemployment, productivity, participation rates, total income and gross domestic product (GDP).

At the micro level, sole proprietorships interact with employees, hire them, fire them, and increase or decrease wages and hours. The relationship between supply and demand influences the employee’s hours of work and the compensation she receives in wages, salaries and benefits.

The American job market

The macroeconomic view of the labor market can be difficult to grasp, but a few data points can give investors, economists and policy makers an idea of ​​its health. The first is unemployment. In times of economic crisis, demand for labor lags behind supply, causing unemployment to rise. High unemployment rates exacerbate economic stagnation, contribute to social upheavals and deprive large numbers of people from the opportunity to lead fulfilling lives.

Unemployment in the U.S. was about 4% to 5% before the financial crisis, when many businesses failed, many people lost their homes and the demand for goods and services – and the workforce to produce them – dropped. Unemployment reached 10% in 2009 but fell more or less regularly to 4.9% in January 2020.

Labor productivity is another important indicator of the labor market and broad economic health, measuring output produced per hour of work. Productivity has increased in many economies, including the United States, in recent years due to technological advances and other efficiency improvements.

In the United States, however, growth in hourly output did not translate into similar growth in hourly income. Workers create more goods and services per unit of time, but do not earn more compensation. The growth in the employment cost index averaged less than 0.7% per year from 2001 to 2020, while productivity growth exceeded 2%.

The labor market in macroeconomic theory

According to macroeconomic theory, the fact that wage growth is lower than that of productivity indicates that the supply of labor has exceeded demand. When this happens, there is downward pressure on wages, as workers compete for a limited number of jobs and employers have a choice. Conversely, if demand exceeds supply, there is upward pressure on wages, as workers have more bargaining power and are more likely to be able to move into better paying jobs. , while employers must compete for a scarce workforce.

Image of Julie Bang © Investopedia 2019

Certain factors can influence the supply and demand of labor. For example, an increase in immigration to a country can increase the supply of labor and potentially lower wages, especially if newly arrived workers are willing to accept lower wages. An aging population can deplete the supply of labor and potentially raise wages.

However, these factors do not always have such simple consequences. A country with an aging population will see the demand for many goods and services decrease, while the demand for health care will increase. Not all workers who lose their jobs can simply switch to health care, particularly if the jobs requested are highly skilled and specialized, such as doctors. For this reason, demand may exceed supply in some sectors, even if supply exceeds demand in the labor market as a whole.

The factors that influence supply and demand also do not work in isolation. If there were no immigration, the United States would be a much older and probably less vibrant society. When an influx of unskilled workers could have put downward pressure on wages, this would have probably offset the drop in demand.

Other factors that influence contemporary labor markets, and the American labor market in particular, include: the threat of automation, as computer programs acquire the ability to perform more complex tasks; the effects of globalization, as improved communication and better transport links move work across borders; the price, quality and availability of education; and a whole host of policies such as the minimum wage.

The labor market in microeconomic theory

Microeconomic theory analyzes labor supply and demand at the level of the individual enterprise and the worker. The supply, or hours an employee is willing to work, initially increases as the salary increases. No worker will work voluntarily for nothing (unpaid interns work, in theory, to gain experience and increase their desire with other employers) and more people are willing to work for $ 20 an hour than 5 $ per hour.

Supply gains can accelerate as wages rise, as the opportunity cost of not working overtime increases. But the supply can then decrease to a certain level of salary: the difference between $ 1,000 an hour and $ 1,050 is barely noticeable, and the very well-paid worker who is offered the possibility of working an additional hour spending money on leisure activities may well be the latter.

Labor supply curve

Image of Julie Bang © Investopedia 2019

Demand at the micro level depends on two factors, marginal cost and marginal revenue product. If the marginal cost of hiring an additional employee, or if existing employees work more hours, exceeds the marginal revenue product, it will reduce profits, and the company would theoretically reject this option. If the reverse is true, it makes sense to take more work.

Neoclassical microeconomic theories of labor supply and demand have been criticized on certain fronts. The most controversial is the hypothesis of a “rational” choice – maximizing money while minimizing work – which, for critics, is not only cynical but not always supported by the evidence. Homo sapiens, unlike Homo economicus, may have all kinds of motivations for making specific choices. The existence of certain professions in the arts sector and the non-profit sector undermines the notion of utility maximization. Advocates of the neoclassical theory argue that their predictions may have little impact on a given individual, but are useful for taking a large number of workers as a whole.

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