Labor Market: What is It?

As the sluggishness of the labor market continues along with a nine percent unemployment rate, many organizations are starting to ask if 2011 will be the year to delve more into the labor market.  As the question is posed to me more and more as of late, I thought it might be helpful to dedicate a few posts to the nature of the market, what we can expect in 2011, and how best to analyze the market.

So, what is the labor market?  How does it work? In working with a major metropolitan newspaper editorial board a few years ago, I came to realize that different people have very different views of what the labor market is and how it actually functions.  The most common perceptions fit into these general categories:

  • Bazaar on Market Day
  • Efficient Exchange
  • Chaotic

Bazaar on Market Day

One of the most prevailing views resembles a market bazaar on a busy day.  There are many vendors all selling their wares (candidates) and a few shoppers (organizations) that go through the market looking for the best deal based on skills and price.  The vendors try to attract the shoppers and draw them in as they make their way through the market maze.   Some shoppers buy early as soon as they see something interesting while others take the time to look at everything first.  Similarly, some vendors drop their prices quickly to keep buyers interested while others want to make sure they maximize their return.  Some shoppers are too picky and end up not finding anything just as some vendors for too much and end up without making a sell.  This type of explanation typically rewards those with experience (shoppers or vendors) and creates opportunities on a regular basis if someone is perceptive enough to regularly “walk through” the market.

Efficient Exchange

An exchange typically provides an environment where buyers and sellers can conduct transactions that potentially benefit both.  Stock or commodity exchanges have been used as a model for the labor market by some to illustrate how the overall cost of labor as well as specialized skills or groups of capabilities goes up and down over time.  Most of us have invested in stocks at one time or another and seen how the market can change quickly and how without a good sense of a specific stock and factors influencing its value, a poor investment can be made.  Being successful on an exchange requires exceptional timing.   Similarly, an organization can fall in the same trap of not timing its labor purchases well.

Chaotic

The last common explanation of the labor market acknowledges its complexity and simply concludes that it is too chaotic to really understand.  The basis of this chaos is the unlikely ability of anyone to have even close to perfect information.  I have heard proponents of this explanation describe their idea as there are so many people looking for work using so many different ways and organizations operating without enough information that there is not an orderly process to the market’s operation.   In addition, those subscribing to this view many times argue that the labor market is full of misinformation from both parties that prevent either from making a rational decision.  Employees “pad” their resumes and employers describe their workplaces as “utopias.”  As a result, employees seek higher level jobs than they can succeed at and employers describe mundane and unrewarding jobs as great opportunities to lure employees.

The labor market is a little bit of all of these perceptions.  The labor market is a place where workers and employers come to meet their respective needs.  Workers are seeking wages for their time and expertise while employers need workers to produce and provide their goods and services in the most efficient and effective manner possible.  Workers desire to sell their time and capabilities for the highest possible value in order to maximize their effort. Conversely, employers want to purchase assistance with the highest level of capability for the lowest possible cost.  Labor markets are typically not monolithic and operate on multiple geographical levels (local, regional, national, and international) as well as in different combination of skills and abilities areas.  A single job family can have multiple sub-markets at multiple levels.  As a result, wage rates are determined by the actual as well as perceived supply and demand for labor in each major job area as well as the impact of the availability of information on both the employer and the candidate.    Organizational success in the market depends on availability of information on current wages rates, available resources, market position, perceptions of their work environment and compensation practices, level of competition, and size of employer.  Similarly, the success of job candidates depend on current wages rates, availability of comparable skills and capabilities, and knowledge of the market place.

Important to keep in the mind the following characteristics of the labor market:

  • It is dynamic and changes over time
  • Level and change is not uniform across all skills or capabilities or geographical locations
  • Information plays a key role in employer and candidate success
  • Perceptions of work environment and compensation practices are almost as critical as market position in setting an organization’s market position
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