What is a Labor Market?

Definition: A labor market is a place where supply and demand of work interacts to provide staff to employers, jobs to workers and set wage rates. The labor market refers to the disposal of jobs and requirement of work in a specific industry or region.

What Does Labor Market Mean?

Like any kind of market, a free, competitive labor market is the most efficient way to allocate labor resources and to establish salaries. Workers offer their skills and organizations offer payment in exchange. The amount and kind of work demanded and supplied at a certain moment is the force that drives results.

That means that higher demand causes greater wages, while higher supply causes the opposite effect. If there are enough participants to make the market highly competitive, no individual player can alter the output. Certainly, no labor market is entirely free because governments usually intervene to set minimum wages and working conditions through labor laws.

Unemployment allowances granted by the government would also affect the way workers react to low-wage jobs. On the other hand, individuals might find other motivations to work besides purely money.


Hannah Smith is a young professional recently graduated from college. She was an excellent student that aspired to have a great life in the future thanks to well-remunerated jobs. Hannah told her father that she would demand an annual wage of US$70,000. Her father explained that she is not in total control of her next salary. Her good grades certainly would help but she would enter in an existing labor market of professionals with similar qualifications.

The market establishes the conditions and the price of her work is probably already set. He recommended Hannah to do superior studies to be able to participate in another market with higher wages. Hannah was reluctant and tried to find a job at that moment but she was disappointed when companies offered wages that ranged US$40,000-50,000. A few months later, Hannah accepted the advice and decided to enroll in a graduate program.

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