The labor market, also known as the job market, refers to the supply of and demand for labor, in which employees provide the supply and employers provide the demand. It is a major component of any economy and is intricately linked to markets for capital, goods, and services.
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 gross domestic product (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 number of hours employees work and the compensation they receive in wages, salary, and benefits.
The microeconomic theory analyzes labor supply and demand at the level of the individual firm and worker. Supply—or the hours an employee is willing to work—initially increases as wages increase. No workers will work voluntarily for nothing (unpaid interns are, in
theory, working to gain experience and increase their desirability to other employers), and more people are willing to work for $20 an hour than $7 an hour.
According to the macroeconomic theory, the fact that wage growth lags productivity growth indicates that the supply of labor has outpaced demand. When that happens, there is downward pressure on wages, as workers compete for a scarce number of jobs
and employers have their pick of the labor force. Conversely, if demand outpaces supply, there is upward pressure on wages, as workers have more bargaining power and are more likely to be able to switch to a higher paying job, while employers must compete for scarce labor.
The effects of a minimum wage on the labor market and the wider economy are controversial. Classical economics and many economists suggest that a minimum wage, like other price controls, can reduce the availability of low-wage jobs. On the other hand, some
economists say that a minimum wage can increase consumer spending, thereby raising overall productivity and leading to a net gain in employment.
The unemployment rate is based on the percentage of people who are not employed but actively looking for a job, as a percentage of the total labor force. Those who have no job and are no longer looking are not included in the unemployment rate.
The effects of immigration are difficult to measure precisely, due to the size and complexity of the modern economy. The classical model of economics predicts that high levels of immigration may cause wages to fall due to an increased supply of labor.
However, some studies suggest a more complicated picture. Some studies suggest that immigration can also have a positive effect on aggregate demand, depending on the skillset of the new arrivals. Because new workers are also consumers, the research found that
immigration can increase the demand for labor as well as the supply.