Labor Market

What is Labor Market?

The labor market or the job market is a widely tracked market that functions through the supply and demand dynamics of people seeking employment (workers) and organizations/people rendering employment (employers).

Labor Market

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Components of Labor Market in Macroeconomics

In macroeconomicsMacroeconomicsMacroeconomics aims at studying aspects and phenomena important to the national economy and world economy at large like GDP, inflation, fiscal policies, monetary policies, unemployment more, the labor market is a function of the following components.

#1 – Labor Force

Part of the working-age population that is employed or actively looking for employment. The labor force is a function of population growth, net immigration, new entrants, and the number of retirees from the labor force.

#2 – Participation Rate

It is determined as the size of the labor force as a percentage of the size of the adult civilian non-institutional population.

Participation Rate = Size of Labor Force / Size of Adult Civilian Noninstitutional Population

#3 – Non-Labor Force

It is the difference between the size of the adult civilian noninstitutional population and the size of the labor force.

Non-Labor Force = Adult Civilian Non-Institutional Population – Labor Force

#4 – Unemployment Level

Difference between the labor force and the number of workers currently employed.

Unemployment Level = Labor Force – Number of Workers Currently Employed

#5 – Unemployment Rate

The number of unemployed workers as a percentage of the labor force.

Unemployment Rate = Number of Unemployed Workers / Labor Force Size X 100

#6 – Employment Rate

The number of employed workers as a percentage of the labor force.

Employment Rate = Number of Employed Workers / Labor Force Size X 100

Example of Labor Market

Let’s discuss an example of the labor market.

An economy has a total civilian non-institutional population of 100,000, out of which, 80,000 people are in their working age. Out of the working-age population, 75,000 are actively employed or are looking for employment (forming a part of the labor force) while 5,000 do not form a part of the labor force. Out of the labor force of 75,000 people, 4000 people are unemployed (an unemployment rate coming to be 5.3%). See the below illustration for more details.

Total Adult Civilian Non-Institutional Population (A)100,000
Working Age Population (B)80,000
Working Age Population Rate (B/A)80.0%
Labor Force (C)75,000
Labor Force Participation Rate (C/B)93.8%
Non-Labor Force (B-C)5,000
Number of Unemployed (D)4,000
Unemployment Rate (D/C)5.3%
Number of Unemployed (E)71,000
Unemployment Rate (E/C)94.7%

Types of Unemployment in Macroeconomics

The following are types of unemployment in microeconomics.

Types of Unemployment in Macroeconomics

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#1 – Frictional UnemploymentFrictional UnemploymentFrictional Unemployment is an unemployment type (besides Structured & Cyclical) that occurs when workers have resigned & either are looking for a new job, switching from one job to another, or entering the workforce for the first moreIt is due to the time taken for people to find jobs.

#2 – Structural UnemploymentStructural UnemploymentStructural unemployment occurs when there is a disparity between the knowledge and skills demanded by an employer and those offered by his or her employees. It is typically caused by economic changes such as recessions, deindustrialization, and other factors, and it results in individuals being unable to find work due to differing skill more It happens due to a mismatch between the skills required by firms and offered by workers in the job market. If the skills offered are not in demand and ones that are in demand cannot be supplied, it causes structural unemployment.

#3 – Natural Rate of Unemployment – It is an addition of frictional and structural unemployment and is the rate that prevails when the economy is in equilibrium.

#4 – Cyclical UnemploymentCyclical UnemploymentCyclical unemployment is one of the types of unemployment, which usually happens during the contraction phase of the business cycle where the unemployment rate starts rising as businesses start laying off its employees during the recession period & unemployment rate decreases during the expansionary phase of the business more Any rate of unemployment higher than the natural rate is caused due to cyclical reasons. It generally happens when the economy is not in good shape and the demand for workers is generally low as the demand for final goods and services also gets reduced.

The natural rate of unemployment in the United States is 5%. It touched a high of 10% during the financial crisisFinancial CrisisThe term "financial crisis" refers to a situation in which the market's key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among more of 2009 and came back to a normal 4.9% years later in 2016.

Advantages of Labor Market

Some of the advantages of the labor market are as follows:

Limitations of Labor Market Analysis

Some of the limitations of the job market analysis are as follows:

  • Labor market analysis does not factor in the emotional and psychological factors that go into employment or unemployment status of individuals.
  • The analysis is majorly applicable in capitalist countries, where the job market is fairly developed. It is not applicable in a market dominated by a few employers or where the normal economic activity if distorted due to extraordinary reasons.
  • Labor markets also do not factor in the role of unpaid labor like unpaid interns, who are employed, not paid but contributing to the economic activity.

Important Points

  • Labor markets change based on the level of economic activity (recessions and booms) and structural changes in the economy (technological changes, change of habits, etc.)
  • The high rate of immigration can distort equilibrium in the market result in high unemployment rates.


  • The labor market is an integral part of any economy. It is because of the efforts the workers put that brings about economic activity and growth. Analyzing the labor market is tough. Different theories have different approaches to the labor market. However, the most followed and effective is the macroeconomic theory talked about earlier in the article.
  • Analysts and economists study the variables in macroeconomic theory to access the health of the labor market and determine the essential steps to be taken to bring the economy back to equilibrium if there has been a shift.
  • The labor market is a must study for a student of economics to understand the nuances of the economy and business. It is also interesting to study how the market has changed over a long period of time.

This has been a guide to what is the labor market and its definition. Here we discuss the top 6 components of labor market in macroeconomics theory along with an example. We also discuss the advantages and limitations. You can learn more about finance from the following articles –

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