Labour Market

Reviewed by #N/A | Updated on Aug 27, 2020

What is the Labour Market?

The labour market, also known as the job market, relates to the supply and labour demand in which the supply is provided by the workers and demand by the employers. It is a significant component of any economy and is closely linked to the finance, commodities, and services markets.

At a macroeconomic level, both domestic and international market dynamics affect supply and demand, as well as variables, such as globalisation, population size, and level of education.

Different companies deal with workers on a microeconomic level, recruiting them, dismissing them, and increasing or cutting pay and hours.

How Does Labour Market Work?

The functioning of a labour market varies under the macroeconomic theory and microeconomic theory.

The wage growth lags productivity growth according to macroeconomic theory. Hence, the demand would surpass the labour supply. When there is downward pressure on wages, the workers compete for a limited number of jobs and employers and find the best of the talent getting picked.

In comparison, if the demand is more than the supply, there is upward pressure on wages, because workers have more bargaining power and are more likely to be able to move to higher-paid jobs. In contrast, employers have to fight for scarce labour.

Some factors can affect supply and demand in the labour market. An increase in immigration into a country, for example, may increase labour supply and potentially depresses wages. In particular, it is likely to happen if a newly arrived worker is willing to accept lower pay. The ageing population will consume labour supply and potentially drive up salaries.

Microeconomic theory analyses the supply of labour and demand at the individual firm and worker level. Supply, or the hours that an employee wants to work, initially decreases as wages increase.

Few workers would willingly work for nothing (theoretically, unpaid interns are working to gain experience and improve their desirability for other employers) and more people are willing to work for Rs.50 an hour than Rs.5 an hour.

Labour Market in India

Firstly, between 1951 and 2012, there was a significant shift in the population from agriculture to manufacturing and services. The recent data shows these changes to be continuing. As a result of these shifts, productivity in agriculture has fallen sharply. It is in contrast to overall productivity, while the services have gone up dramatically.

A second important feature of the Indian labour market is the low rate of participation, defined as the population within the age group of fifteen to sixty-five years (the "working-age" population) who either work or seek employment.

In particular, the low female participation rate (by international standards), which was between 34 and 37 per cent for fifteen years up to 2005, continued to decline and stabilise at a rate of 27 per cent.

A third salient feature of the Indian labour market is the superiority of migrant workers and the unorganised sector's dominance in the labour market, which includes companies employing fewer than ten employees.

A fourth characteristic of the Indian labour market is the presence of rigid labour market laws that limit employers' rights.

The final characteristic of the Indian labour market is the provision of government jobs to rural poor under the scheme of the National Rural Employment Guarantee Act (NREGA).