The labour market is an important portion of the market economy. It is a place where individuals seeking employment interact with employers who want to hire the most suitable person for their production process. In the economy, it determines wage levels, employment rates, and how efficiently labour is allocated by firms and industries. Thus, it is crucial to examine the key drivers of economic growth (3ps) and how changes in them cause changes in growth and government policies.
Demand for labour: productivity
The demand for labour is also known as a derived demand because the number of employees required by a firm is determined by consumer demand. There are many factors that, in turn, influence the demand for labour such as economic growth, conditions of the industry the firm is operating under, consumer demand, cost of capital, and cost of foreign labour. However, the most fundamental factor that influences the demand for labour is labour productivity.
In general sense, the productivity of labour is a measure of how much is produced, on average, for every hour that is worked. Labour productivity is heavily dependent on the quality of the workforce, that is, the overall education level, skills, experience, health and level of motivation. If a firm is able to become more efficient through investment in capital, then obviously the demand for labour will decrease. An increase in labour productivity can either have a positive or a negative impact in the short run, immensely depending on consumer demand. If the demand for an individual firm’s product is increasing at a faster rate than the increase in labour productivity, firms will have to increase labour in order to keep up to the demand, resulting in an increase in demand. If the total demand for goods and services within the economy remains unchanged or decreases whilst an increase in labour productivity, then there will be an excess capacity of labour and firms will not be interested in hiring more employees, and therefore causing a decrease in demand for labour. However, in the long run, increased labour productivity could cause labour to become more attractive in the future, with firms wanting to substitute labour for capital, allowing a rise in labour demand.
Supply for labour: participation rate
The supply of labour is the number of hours people are willing and able to supply at a given wage rate. Many factors such as skills, education, experience, pay levels, working conditions, and mobility influence the supply of labour. However, the participation rate resembles all these factors as it measures the proportion of the population that decides to supply labour. People may not decide to participate in the labour force because they may want to undertake further studies, take care of family, concentrate on leisure activities, are unlikely to find a job, or prefer relying on other forms of income.
An increase in participation rate means an increase in the supply of labour. As an economy tends to grow, the participation rate increases as there are better prospects of finding a job. However, during times of economic decline, the participation rate tends to decrease as people are less hopeful about job prospects. Trends in retirement age and aging of the population also have a huge influence on the participation rate. An increase in people aged over 64 (retirement age) would mean that there are a lower number of people available to work and thus would result in a lower participation rate. If the retirement age tends to increase, it would mean that there are more people available for work, causing an increase in the participation rate. A change in school retention rates could also affect the supply of labour. An increase in this rate would result in a decrease in the participation rate because there are more people seeking to educate themselves and would probably join the workforce later in life. On the other hand, a decrease in the school…