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4 LABOR MARKET

1 Definition of labor market. Mechanism of function.

2 Employment and unemployment.
3 Wages. Nominal, real and minimum wages.

Key words: labor market, demand for labor, supply of labor, employed,
unemployed, out of the labor force, labor force, unemployment rate, frictional
unemployment, structural unemployment, cyclical unemployment, natural rate of
unemployment, nominal wages, real wages, minimum wages.

Labor market is the place where workers and employees interact with each
other. In the labor market, employers compete to hire the best, and the workers
compete for the best satisfying job.
Markets for labor have demand and supply curves, just like markets for goods.
The law of demand applies in labor markets this way: a higher salary or wage – that
is, a higher price in the labor market – leads to a decrease in the quantity of labor
demanded by employers, while a lower salary or wage leads to an increase in the
quantity of labor demanded. The law of supply functions in labor markets, too: a
higher price for labor leads to a higher quantity of labor supplied; a lower price leads
to a lower quantity supplied.
Demand for labor is influenced by:
- cost of hiring labor;
- wages/salaries;
- national insurance contributions;
- pension contributions;
- administration costs associated with tax payments and adhering to
employment laws and regulations.
Supply of labor is determined by:
- size and structure of the population – age, gender, etc.;
- skill levels required;
- education and training: number in higher education, school leaving age,
qualification types;
- time period;
- opportunity cost of work – income and substitution effects.

In reality, not everyone in the labor market has a job all the time: in all free-
market economies, at any moment, some people are unemployed. Unemployment is
the macroeconomic problem that affects people most directly and severely.
Every day some workers lose or quit their jobs, and some unemployed workers
are hired. This perpetual ebb and flow determines the fraction of the labor force that
is unemployed. Because every worker is either employed or unemployed, the labor
force is the sum of the employed and the unemployed:
The adult population is not just divided into employed and unemployed. A
third group exists: people who do not have a job, and for some reason – retirement,

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