The labour market, made up of employers and job applicants, is a determinant of the economic development of any country. Its current state and prospects are the result of many factors – demographic profile of the population, quality of education, business climate, rule of law, etc.

The labour market gives its reflection both at the micro (household or individual company) and macro levels (unemployment, consumption). It is the macro analysis that is the focus of fundamental analysts. Various macroeconomic indicators carry the necessary data for this purpose.

The labour force represents the working-age population that has or is actively looking for work.

The unemployment rate measures the ratio of the unemployed persons to the labour force.

The low unemployment rate implies a good state of the labour market and, consequently, of the economy. This logic is not always valid. In more authoritarian countries, for example, providing jobs may be government policy. Even in many developed democracies, the state is a key employer (the state administration). Unemployment data for each economy must be interpreted according to its characteristics. The methodology for calculating this indicator may also vary.

The most developed countries can reach unemployment rates of about 3-4% during economic booms. In times of crisis, this percentage can exceed 10%. Unemployment is significantly higher in developing countries.

Several main types of unemployment can be considered:

  1. Current (frictional): Frictional unemployment is the natural result of starting a new job. Whether an employee changes jobs, seeks his or her first job, or returns to the labour market, he or she will remain unemployed until the job begins. Typically, this time interval is short, and by its nature frictional unemployment is perceived as beneficial to the economy. It helps employees and employers find more suitable opportunities. On the other hand, excessive staff turnover can have negative effects as work processes will be disrupted. Frictional unemployment is at its lowest in times of crisis. This is because more employees prefer the security of their current job than the risks of searching for and starting a new job.
  2. Structural: this type of unemployment is caused by the mismatch between the skills demanded and those available on the labour market. Globalization and technical integration lead to constant optimization in production processes, resulting in changes in the requirements for its personnel. The trend of replacing human labour with mechanical one sometimes eliminates jobs in entire industries. The end result is not always negative for society, as the increased efficiency of the production cycle compensates through other channels. Unlike frictional unemployment, structural unemployment involves a much longer process of searching for new jobs. Sometimes periods of economic slowdown or crisis can take workers out of the labour market for a long period of time, making it difficult for them to return to jobs relevant to their qualifications.
  3. Cyclical (Keynesian): this type of unemployment occurs as a consequence of the business cycle existing in the economy. During a recession, businesses will reduce their spending, including laying off employees. Cyclical unemployment leads to a negative spiral effect – the new unemployed persons reduce consumption, which in turn leads to new layoffs. According to Keynes’s theory, fiscal and monetary incentives are needed to end this negative cycle.

Frictional and structural unemployment form the natural rate of unemployment. Natural unemployment is considered unavoidable and when it does not exceed 5% it is not problematic for the economy. It is virtually impossible to achieve 0% unemployment in a free market economy. Viewed from the opposite angle, this would mean full employment of the labour force.

In addition to the types of unemployment already listed, macroeconomic science considers other categories such as classical unemployment (legally imposed high wages prevent businesses from hiring workers), seasonal unemployment (occupations are not practiced year-round), voluntary unemployment (employees prefer benefits to work), and geographical unemployment (difficulties in settling in a new location).

Critics describe the official unemployment figures as misleading, as these statistics do not take into account large population groups, such as the discouraged persons. These are able-bodied people who have stopped looking for work. Another is the group of hourly workers. They are statistically considered to be permanently employed, but some of them would prefer full-time work. At the same time, there are people who work without a contract but are considered unemployed.

It is obvious that the data will not reflect the objective picture of the labour market. This does not mean that the unemployment rate indicator should not be used. On the contrary, it carries extremely important information that must be considered with understanding.

Low unemployment rates do not necessarily mean that the economy is strong. A strong economy is achieved when labour productivity is high. This indicator measures the final output per hour of work and is influenced by the quality of the workforce and technical integration. The implementation of modern technology leads to improved labour productivity but may also lead to job losses in some industries.

The demographic profile of the population is another key determinant of the labour market. When the share of young and educated people is high, there will be greater potential for the economy. Many developed countries suffer from ageing populations. The workforce is shrinking, pensioners are increasing. Such a trend is a threat to the social system.

Sometimes external factors can drastically change the demographic profile of a country – for example, a wave of emigrants or a war.    

Low unemployment is often a harbinger of economic slowdown and recession. It usually occurs when the economy overheats – growth is high and generates significant inflation. Employed people demand higher pay to compensate for rising prices in goods and services. Employers are forced to accept, amid labour shortages in the labour market. To meet rising costs, businesses are forced to raise the prices of their products. To curb this spiral of ever-rising wages-prices, central banks are raising interest rates. This cycle usually ends in a recession.

Unemployment is a lagging indicator mostly due to the willingness of employers not to lay off employees until the severity of the economic slowdown is confirmed. Similarly, when an economic recovery begins, they wait to recruit staff until they are sure the trend is sustainable.

However, the first signs of a change in the labour market can be seen in overtime and temporary employment data. These will be the first to decline as the business climate worsens and the first to increase as signs of recovery become more optimistic.

Another method of identifying changes in the labour market relatively early is by tracking productivity data. It is usually measured as a ratio of output created per man-hour. A decline in this ratio portends a reduction in the number of employees.

Despite its limitations, the labour market is a key indicator in fundamental analysis. When unemployment falls, an economic upturn can be expected. This environment makes high-risk financial instruments attractive. Excessively low unemployment, in turn, usually marks the end of an upward economic cycle.

When a rise in unemployment occurs, lower-risk investments will be subject to increased demand. These are usually periods of economic slowdown and recession. A rise in the number of permanent and temporary employees, as well as an increase in overtime, may signal the beginning of a recovery.  

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