Labor is one of the four factors of production that drive supply.

The other three are:

1. Land. This is short for the natural resources or raw materials in an economy.
2. Capital. This is an abbreviation of the capital goods, such as machinery, equipment, and chemicals
that are used in production.
3. Entrepreneurship. This is the drive to profit from innovation.

In a market economy, companies use these components of supply to meet consumer demand.

How Labor Is Measured

Labor is measured by the labor force or labor pool. To be considered part of the labor force, you must be
available, willing to work, and have looked for work recently. The size of the labor force depends not only
on the number of adults but also how likely they feel they can get a job. It is the number of people in a
country who are employed plus the unemployed.

Not everyone who is jobless is automatically counted as unemployed. Many are jobless by choice and
aren't looking for work. Examples include stay-at-home moms, retired seniors, and students. Others have
given up looking for work. These are discouraged workers.

The real unemployment rate measures everyone who would like a full-time job. It includes the
discouraged workers. It also includes those who are working part-time only because they can't get a full-
time job. It's called the real unemployment rate because it gives a broader measure unemployment.

The labor force is used to help determine the unemployment rate. The unemployment rate formula is the
number of unemployed divided by the labor force. It tells you how many people in the labor force are
jobless but are actively looking for work.

The labor pool shrinks during and after a recession. Even though many would like a job, they aren't looking
for work. They aren't counted in the labor force.

A recession is "a period of falling economic activity spread across the economy, lasting more than
a few months." When the real (Gross Domestic Product) GDP growth rate turns negative, it could
be a recession.

The labor force participation rate is the labor force divided by the civilian non-institutionalized population.
It tells you how many people are available and looking for work.

The amount of goods and services that the labor force creates is called productivity. If a certain amount
of labor and a fixed amount of capital creates a lot, that's high productivity. The higher the productivity,
the greater the profit. High productivity gives the worker, company, industry, or country a competitive
advantage.

Types of Labor
Labor can be categorized in many different ways. First is the skill level. The most basic is unskilled labor
that does not require training. Although it's usually manual labor such as farm workers, it can also be
service work, such as janitorial.
The next is semi-skilled labor that requires some education or training. An example is manufacturing jobs.

Labor is also categorized by the nature of the relationship with the employer. Most workers are wage
employees. This means they are supervised by a boss. They also receive a set weekly or bi-weekly wage
as well as benefits.

Contract labor is when a contract specifies the work to be produced. It’s up to the worker to define how
it gets done. The amount paid is either commission or a set fee for the work. Benefits are not paid.

A third type is slave labor. This is illegal. That's when the worker is forced to work for little more than
room and board. Child labor is another form of slave labor. Children don't really have the ability to make
a free choice as to whether they will work.

What is the Labor Market?

The labor market is the place where the supply and the demand for jobs meet, with the workers or labor
providing the services that the employers demand. The worker may be anyone who wishes to offer his
services for compensation while the employer may be a single entity or an organization that is in need of
an individual to do a specific job or to complete a task. The worker is then comparable to a seller while
the employer is the buyer.

A common factor that connects the two entities is the salary or wage that is agreed to be received by the
worker from the employer. In short, this is where workers can find work that suits their skills and
qualifications, which are offered by employers, and where both agree on the wages, benefits, and other
forms of compensation for the worker.

In the labor market, it is assumed that workers move to where there is a demand for his skills, whether
this is in his local region or abroad. Moreover, they are also replaceable, which means that a person who
can do the job better can be tapped to take over the other worker’s job. Furthermore, salaries are not
fixed, meaning they can go up or down, depending on the worker’s performance. Wages or compensation
is the highest motivating factor in the labor market.

Components of the Labor Market

In the diagram above, the labor market comprises four components, namely, the labor force population,
applicant population, applicant pool, and the individuals selected.

1. Labor Force Population

The labor force population or labor force participation refers to the number of individuals who
are available to work in a labor market. It considers all workers who are offering their skills and
services for employment regardless of the industry they are in.

2. Applicant Population
The second component is the applicant population which refers to the people who are applying
for a particular job that suits their expertise and skills. Recruiters take a look first at the labor
market and then look next for individuals who meet the skills and qualifications that are set for a
particular job. For example, the people who are looking for IT, graphics design, and similar jobs
belong to the same applicant population which is targeted by recruiters who are looking for this
type of professionals.
 3. Applicant Pool
The third component is the applicant pool, which is the actual number of people who initially
signified their interest to apply for a particular job by sending in their resume. It may already very
well be considered the first part of the selection process where the recruitment department of a
specific organization receives the applications and screens them to determine who advances to
the next round of screening.

4. Individuals Selected
The fourth component is the individuals selected, which simply means the individual or individuals
who’ve made it through the screening process and have been hired for the job. Of course, this is
judged based on a number of factors, and the person is screened against a carefully determined
set of qualifications.

Understanding Labor Market Analysis

Labor market analysis is an integral part of an organization’s recruitment process because it does not only
help find the most qualified workers for the jobs that it offers but also ensures that it provides a
competitive compensation package to its workers. It is important in order for an organization to be able
to keep its competent workers and, thus, continue its productivity.

Generally speaking, labor market analysis involves the following processes:

• Identifying the various labor markets for a given type of position. It involves looking at the
appropriate labor market based on a specific position.
• Checking the market for salaries for a common position. The process involves checking similar
positions in the labor market in order to determine if an organization’s salary rates are about the
same level.
• Determining market trends. The step answers questions as to how other organizations are
compensating their workers, including their pay practices.
• Adjusting salary packages or structure of positions. After checking the salary rates of other
organizations and finding out if there is any need for adjustments, the department then makes
recommendations for such adjustments and restructuring of positions in the company.
• Making consultations with management. The process involves sitting down with management to
determine their workforce needs.

What is Labor Market Information (LMI)?

Labor Market Information (LMI) is basically everything there is to know about a specific labor market.
Information about occupations, their locations, wages, supply and demand, and demographics are all
included in the LMI.

How is the LMI helpful?

The LMI is very helpful for people who are looking at getting a job that is sustainable. A worker who looks
at the LMI enjoys a higher chance of getting recruited because he or she knows what industries or jobs
are exactly looking for.
For example, an individual who finds out that the hospitality industry is looking to hire 1,000 food and
beverage specialists over the next two years decides to take up training and short courses on the subject.
By the time he applies for the job some six months later, his chances of getting recruited are definitely
higher than that of the person with lesser credentials. It further means that he will receive a better
compensation package than the rest precisely for the qualifications and certificates that he holds.

In summary, LMI helps a worker identify the demands of the labor market and helps him be equipped
with the right qualifications.

The Job Market and the Unemployment Rate

The job market is also directly related to the unemployment rate. The unemployment rate is the
percentage of people in the labor force who are not currently employed but actively seeking a job. The
higher the unemployment rate, the greater the supply of labor in the overall job market.

When employers have a larger pool of applicants to choose from, they can be pickier or force down wages.
Conversely, as the unemployment rate drops, employers are forced to compete more heavily for available
workers. The competition for workers has the effect of increasing wages. Wages determined by the job
market provide valuable information for economic analysts and those who set public policy based on the
health of the overall economy.

During difficult economic times, unemployment tends to rise as employers may reduce their staffing
numbers and create fewer new jobs, making it harder for people trying to find work. High rates of
unemployment can prolong economic stagnation—a sustained period of little-to-no growth in an
economy—and contribute to social upheaval, leading to the loss of opportunities for many individuals to
live comfortably.