Labor Demand

This article focuses on labor demand. This article provides an analysis of the major U.S. labor demand policies. The relationship between labor markets, labor demand, labor supply, and wages is described. The U.S. Bureau of Labor Statistics' program to measure labor demand, through the Job Openings and Labor Turnover Survey, is discussed. The issues associated with forecasting labor demand across industries are addressed.

Keywords Budget Constraint; Economic Growth; Gross Domestic Product; Income Effect; Job Openings & Labor Turnover Survey; Labor Demand; Labor Economics; Labor Force; Labor Market; Labor Supply; Marginal Physical Product of Labor; Occupation; Opportunity Cost; Productivity; Reservation Wage; U.S. Bureau of Labor Statistics

Economics > Labor Demand

Overview

Labor economists, also referred to as demographic economists, study the relationship between labor supply and demand, wage distribution across industries, and changing demographic trends in an effort to explain and predict economic activity and business cycles. Labor economists argue that the aggregate labor, or productive work, of the population drives the economy and economic growth. Economic growth, the quantitative change or expansion in a country's economy, is measured as the percentage increase in a nation's gross domestic product (GDP) during one year. Gross domestic product refers to the market value of goods and services produced by labor and property in the United States. The United States government, recognizing the importance of a strong labor market, develops and implements labor demand policies to promote the creation of new jobs and work industries. Labor demand refers to both the total labor costs for a particular skill level and total output the firm is capable of producing to meet customer needs for profit maximization as well as the aggregate need for labor in a given region or sector. Increased labor demand will theoretically draw more workers into the workforce and increase productivity and economic growth.

Importance of Labor Demand

The public and private sectors, and economic stakeholders in general, rely on labor market information, economic analysis, and short and long-term forecasting for effective economic planning. For example, information about forecasted labor demand in different sectors and industries allows individuals to strategically plan their education and training to capitalize on labor demand. In addition, information about forecasted labor demand in different sectors and industries allows organizations to make strategic hiring decisions and investigate technology to lessen the burden of forecasted employee shortages. Businesses, industries, and occupations generally have differing levels of labor demand.

Labor Demand in Microeconomics

The concept of labor demand is a fundamental building block in microeconomics. Microeconomics, in contrast to the large-scale inquiry of macroeconomics, studies the behavior of small economic units including households, organizations, and individual consumers. The concepts of labor demand and labor supply are based on the economic theory of supply and demand that refers to the relationships between a product's place in the market and the market's valuing of the product. The theory of supply and demand is a fundamental economic theory applied to multiple businesses, industries, and issues. Labor economics, which refers to the area of economics concerned with labor markets, adopted the theory of supply and demand to help explain how labor markets function. Labor economists often represent demand and labor supply in a graphical way as supply-demand curves. These curves, which are common conceptual tools in economics, are two lines on a graph representing people's willingness to buy or sell a product depending on its price. The labor supply curve is likely to be different for different individuals and the labor demand curve will be different for various businesses, industries, and sectors.

Factors Affecting Labor Demand & Supply in the U.S.

The following factors and variables affect labor demand and labor supply in the United States: Budget constraint, rate of substitution, income effect, substitution effect, and opportunity cost. Budget constraint refers to the consumption options available to someone with a limited income to allocate among various goods. The rate of substitution refers to the least-favorable rate at which a business is willing to exchange units of one good or service for units of another. Income effect refers to the influence that a change in income will have on consumption decisions. The substitution effect is a price change that changes the budget constraint but leaves the consumer on the same indifference curve. Opportunity cost refers to the cost of passing up the next best choice when making a decision. Labor economists consider labor demand to be a derived demand. The demand for labor is dependent on or derived from the demand for particular goods in a particular market. A business' overall labor demand is determined by its marginal physical product of labor (MPL). The marginal physical product of labor refers to the additional output that results from an increase of one unit of labor. Ultimately, the demand for labor is an important economic indicator for the health of the labor market and the economy in general.

The following section provides an overview of U.S. labor demand policy. This section serves as the foundation for later discussion of how and why the U.S. government measures labor demand with the Job Openings and Labor Turnover Survey. The issues associated with forecasting labor demand across industries are addressed.

U.S. Labor Demand Policies

The federal government, recognizing the importance of a strong labor market, develops and implements labor demand policy to promote the creation of new jobs and work industries. The United States government creates policies and programs to increase labor demand. Labor demand policies are developed to increase the number of poor and disadvantaged persons hired into gainful employment. Significant labor demand policies of the twentieth century included the public works programs of the 1930s, public service jobs of the 1970s that were funded by the Comprehensive Employment and Training Act (CETA), and tax credits for employers hiring poor and disadvantaged individuals (Bartik, 2001).

Labor Demand Policies & Public Problems

Economists and government stakeholders in general debate the development and use of labor demand policy as a solution for the public problem of poverty and unemployment. Labor economists in favor of the use of labor demand policies to eradicate poverty argue that an increase in the number and scope of labor demand policies is necessary for several reasons. First, America's poor need significantly more jobs made available to them. The U.S. labor market would need at least 9 million additional full-time jobs to provide each poor, non-elderly U.S. household with one full-time worker. Second, labor supply policies alone may be insufficient to solve job shortages. Labor supply policies, such as welfare reform, are generally a costly way to increase employment opportunities for the poor. For example, welfare reform, which has brought millions of workers into the labor force, has required the development and implementation of extensive job and workforce training programs. Third, aggregate labor demand policies are necessary but insufficient to eradicate poverty and its related conditions. For example, in 1999, the U.S. unemployment rate was 4.2 percent and the poverty rate was 11.8 percent. As a result of the difference between poverty and unemployment rates, lowering unemployment to zero would not fully eliminate poverty. Fourth, targeted labor demand programs, such as programs that hire targeted low-employment groups for public service jobs or subsidized jobs with private employers, can be effective in addressing poverty and its related conditions.

Recommended Labor Policies

Labor economists generally recommend three types of labor demand policies: Tax credits, wage, subsidies and wage redistribution. First, a tax credit program can be implemented to provide subsidies to all employers who expand their labor force. Second, a wage subsidy program can be implemented which awards wage subsidies to selected employers that hire selected individuals from disadvantaged groups (Bartik, 2001). Third, a wage redistribution program can be implemented to redistribute and equalize wages. The main types of wages manipulated in labor demand policies include reservation wage, market clearing wage, real wage, minimum wage, and nominal wage. A reservation wage refers to the lowest possible real wage that makes workers indifferent between consumption and leisure. Market clearing wage are the wages necessary to clear the labor market of all surpluses and shortages. Real wages refer to wage amounts, useful for economic analysis and comparisons, which have been adjusted for inflation. Minimum wage refers to the lowest hourly wage, determined by the Fair Labor Standards Act (FLSA), that may be legally paid to full-time and part-time workers in the private sector and in federal, State, and local governments. Nominal wages are wages, written down in contracts between the employee and the organizations, which are unadjusted for inflation.

Criticisms of Government Labor Demand Policies

There are numerous criticisms of government labor demand policies. Critics of labor demand policies argue that the federal government negatively impacts the private sector's ability to create new jobs. Critics argue that the federal government, through legislative mandates and employer or business regulation, weakens the demand for labor and the supply of labor. The increasingly large presence of government in the employment process can, in some instances, slow down the growth of employment rates in the United States, raise the cost of the hiring process, and discourage the creation of new jobs (Weidenbaum, 1994).

Applications

Measuring U.S. Labor Demand through the Job Openings & Labor Turnover Survey

The U.S. Bureau of Labor Statistics (BLS) of the U.S. Department of Labor collects statistics on job openings and job turnover in the United States. The U.S. Bureau of Labor Statistics is the primary federal government body in the field of labor economics and statistics. The U.S. Bureau of Labor Statistics gathers data relevant to the social and economic conditions of U.S. workers and their families. The public and private sectors use data gathered by the U.S. Bureau of Labor Statistics to assess the health of the economy and adjust wages. The Bureau of Labor Statistics, in 1999, developed the Job Openings and Labor Turnover Survey to “assess the excess demand for labor in the U.S. labor market.” The Job Openings and Labor Turnover Survey (JOLTS) measures labor demand and provides a thorough analysis of the U.S. labor market. The Job Openings and Labor Turnover Survey, along with the monthly unemployment rate, serves as a measure of labor market activity, general economic conditions, and labor supply and demand (Clark & Hyson, 2000).

Categories of JOLTS Statistical Data

The Job Openings and Labor Turnover Survey provides demand-side economic indicators of labor shortages at the local and national levels. The JOLTS statistical data categories include the following: Total employment, job openings, hires, and separations. The Bureau of Labor Statistics describes the JOLTS statistical data categories in the following ways:

• Employment: The JOLTS employment data categories, which refer to all persons on the payroll who worked during or received pay for the pay period that includes the 12th of the month, include the following people: Full-time and part-time employees; permanent, short-term, and seasonal employees; salaried and hourly workers; and employees on paid vacation or other paid leave. The JOLTS employment data categories do not include proprietors and partners of unincorporated businesses; unpaid family workers; employees on strike for the entire pay period; employees on leave without pay for the entire pay period; and employees of temporary help agencies, employee leasing companies, outside contractors, or consultants (JOLTS, 2007).
• Job Openings: The JOLTS job opening data category refers to all positions that are open, or not filled, on the last business day of the month. A job is considered open if it meets all three of the following conditions: First, a specific position exists and there is work available for that position. Second, the position can be full-time or part-time, and it can be permanent, short-term, or seasonal. Third, the job could start within 30 days whether or not the establishment finds a suitable candidate during that time. The JOLTS job opening data category does not include positions open only to internal transfers, promotions or demotions, or recall from layoffs; openings for positions with start dates more than 30 days in the future; positions for which employees have been hired but the employees have not yet reported for work; and positions to be filled by employees of temporary help agencies, employee leasing companies, outside contractors, or consultants (JOLTS, 2007).
• Hires: The JOLTS hires data category refers to all additions to the payroll during the month. The category includes the following people: Newly hired and rehired employees; permanent, short-term, and seasonal employees; full-time and part-time employees; on-call or intermittent employees who returned to work after having been formally separated; workers who were hired and separated during the month; transfers from other locations; and employees who were recalled to a job at the sampled establishment following a formal layoff lasting more than 7 days. The JOLTS hires data category does not include transfers or promotions within the sampled establishment; employees returning from strikes; and employees of temporary help agencies, employee leasing companies, outside contractors, or consultants working at the sampled establishment (JOLTS, 2007).
• Separations: The JOLTS separations data category refers to all employees separated from the payroll during the calendar month. The JOLTS separations data category includes quits, layoffs, and discharges. Quits refers to employees who left voluntarily. Layoffs and discharges, which refer to involuntary separations initiated by the employer, include layoffs with no intent to rehire; discharges because positions were eliminated; discharges resulting from mergers, downsizing, or plant closings; firings or other discharges for cause; terminations of seasonal employees; layoffs lasting or expected to last more than 7 days. Other forms of employment separations include retirements, transfers to other locations, deaths, or separations due to employee disability. The JOLTS separations data category does not include job transfers within the sampled establishment; employees on strike; employees of temporary help agencies; employee leasing companies; outside contractors or consultants working at the sampled establishment (JOLTS, 2007).

Geographic Regions Studied in the JOLTS Survey

The JOLTS survey includes labor statistics on job openings, hires, total separations, quits, layoffs and discharges, and other separations, for four geographic regions: Northeast, South, Midwest, and West.

• Northeast: Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont.
• South: Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia.
• Midwest: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin.
• West: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming (JOLTS, 2007).

Relevancy of JOLTS Survey Data

The data for JOLTS are gathered, through collaboration between the Bureau of Labor Statistics and the Atlanta JOLTS Data Collection Center, from a sample of 16,000 U.S. businesses. According to the Bureau of Labor Statistics, the JOLTS survey is relevant for all nonagricultural industries in the public and private sectors currently in operation in the United States. The Job Openings and Labor Turnover Survey publishes industry estimates based on the North American Industry Classification System (NAICS). The North American Industry Classification System, established in 1997, is a common classification system, shared by the United States, Canada, and Mexico, which facilitates direct comparison of economic data across borders in North America. The JOLTS program publishes unadjusted estimates for the following NAICS sectors: Natural resources and mining; construction; durable goods manufacturing; nondurable goods manufacturing; wholesale trade; retail trade; transportation, warehousing, and utilities; information; financial and insurance; real estate rental and leasing; professional, scientific, and technical services; management of companies and enterprises; waste management and remediation services; educational services; health care and social assistance; arts, entertainment, and recreation; accommodation and food services; federal government; and state and local government.

Purposes of JOLTS Survey Data

The Job Openings and Labor Turnover Survey data, which is released on a monthly basis in the media and online, is used for the following purposes: “National economic policy; business cycle analysis; industry retention rates; economic research and planning; industry studies, and education and job training” (JOLTS, 2007). The data provided by the Job Openings and Labor Turnover Survey, in particularly the availability of unfilled jobs or the job openings rate, provides a measure of the tightness of job markets. The Job Openings and Labor Turnover Survey is the first economic indicator that provides information about of the unmet demand for labor. The public and private sectors use Job Openings and Labor Turnover Survey data to assess where and when labor shortages occur in the United States.

Issues

Forecasting Labor Demand

The public and private sectors, and economic stakeholders in general, rely on labor market information, economic analysis, and short and long-term forecasting to provide the information necessary for successful economic planning. For example, information about forecasted labor demand in different sectors and industries allows individuals to strategically plan their education and training to capitalize on demand. In addition, information about forecasted labor demand in different sectors and industries allows organizations to make strategic hiring decisions and investigate technology to lessen the burden of potential employee shortages. Economists and businesses make both short-term and long-term job and labor forecasts. Businesses, industries, and occupations generally have differing levels of labor demand. In short term forecasts, job growth is tied to price changes or supply and demand shocks such as rises or drops in oil prices. In long-term forecasts, economists work to show the overall trends in job growth and structural changes in the economy.

Changes in the U.S. Labor Market

In the United States, the labor market changed significantly at the end of the twentieth century. Labor market changes included “increased overall wage inequality and shifted wage and employment opportunities in favor of the more-educated and more-skilled” workers (Katz, 1996). The overall balance of labor demand shifted from less-educated manufacturing jobs toward more-educated workers, with half of all jobs created between 2010 and 2012 being in such fields as nursing, computer technology, and high-skill manufacturing, which require post-secondary education and training (Kochan, Finegold & Osterman, 2012). The demand for this type of labor outmatched the supply and wages rose significantly. Increasing wage inequality was and continues to be tied to the increasing demand for labor that is educated and technologically savvy. The demand for skilled labor has been reinforced by the business sector. Reinforcements include “new pay-setting norms, increased competition in many product markets, increased immigration of less-educated workers, and the weakening of institutions” such as labor unions that have historically offered job protection to non-educated workers (Katz, 1996). Labor economists debate whether substantial shifts in labor demand between sectors, such as that seen between manufacturing and information technology industries at the end of the twentieth century, are a result of the business cycle or permanent sector or industry specific events. Labor economists, and the U.S. Bureau Labor of Statistics, collect statistics on labor demand to track patterns and provide analytical labor demand forecasts (Haltiwanger & Schuh, 1999).

Conclusion

In the final analysis, labor demand is an important economic indicator for the health of the labor market and the economy in general. The federal government, recognizing the importance of a strong labor market, develops and implements labor demand policy to promote the creation of new jobs and work industries. The United States government creates policies and programs to increase labor demand across business sectors and industries. Increased labor demand will theoretically draw more workers into the workforce and increase productivity and economic growth. Labor economists debate the best strategies for bringing poor and uneducated persons into a labor market that has increasing demand for educated and technologically savvy workers. In the twenty-first century, public and private sector stakeholders must address labor issues, such as labor demand and wage determination, the economics of wage policies, and occupational wage differentials, to create effective and balanced labor markets.

Terms & Concepts

Budget Constraint: The consumption options available to someone with a limited income to allocate among various goods.

Economic Growth: The quantitative change or expansion in a country's economy.

Gross Domestic Product (GDP): The market value of all goods and services produced by labor and property in any given country.

Income Effect: The influence that a change in income will have on consumption decisions.

Job Openings and Labor Turnover Survey: A U.S. Bureau of Labor Statistics survey that measures labor demand and provides analysis of the U.S. labor market showing how changes in labor supply and demand affect the economy as a whole.

Labor Demand: The aggregate need for labor in a given region.

Labor Economists: Economists who study the relationship of labor markets to the economy at large.

Labor Force: All persons classified as employed or unemployed in the civilian, non-institutional population 16 years old and over.

Labor Supply: The number of workers available in the local or national work force.

Marginal Physical Product of Labor: The additional output that results from an increase of one unit of labor.

Opportunity Cost: The cost of passing up the next best choice when making a Decision (Bartik, 2001).

Productivity: A measure of economic efficiency regarding the effectiveness of economic outputs from economic inputs.

Reservation Wage: The lowest possible real wage that makes workers indifferent between consumption and leisure.

Bibliography

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Kochan, T., Finegold, D., & Osterman, P. (2012). Who can fix the "middle-skills" gap?. Harvard Business Review, 90, 81-90. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=83467020&site=ehost-live

Katz, L. (1996, May/Jun). Shifts in labor demand and supply. New England Economic Review, 179-181. Retrieved August 13, 2007, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=9607092584&site=ehost-live

Palley, T. (2002). The child labor problem and the need for international labor standards. Journal of Economic Issues, 36, 601-615. Retrieved August 13, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=7364159&site=ehost-live

The Job Openings and Labor Turnover Survey (JOLTS). (2007). U.S. Department of Labor, Bureau of Labor Statistics. Retrieved August 13, 2007, from http://www.bls.gov/jlt/home.htm#overview

Rothstein, J. (2012). The labor market four years into the crisis: assessing structural explanations. Industrial & Labor Relations Review, 65, 467-500. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=80300306&site=ehost-live

Weidenbaum, M. (1994). How government reduces unemployment. Society, 31, 72-77. Retrieved August 13, 2007, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=9409233192&site=ehost-live

Suggested Reading

Graham, D., & Spence, N. (2000). Manufacturing employment change, output demand, and labor productivity in the regions of Britain. International Regional Science Review, 23, 172-200. Retrieved August 13, 2007, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=4607210&site=ehost-live

Henderson, W. (1976). Measuring the supply and demand for dentists in a population. American Journal of Public Health, 66, 70-72. Retrieved August 13, 2007, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=5662628&site=ehost-live

Puhani, P. (2003). Relative demand shocks and relative wage rigidities during the rise and fall of Swiss unemployment. Kyklos, 56, 541-562. Retrieved August 13, 2007, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=11414987&site=ehost-live