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What Is a Labor Market Analysis?

Businesses often use a SWOT analysis to examine their competitiveness.
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  • Written By: Ray Hawk
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  • Last Modified Date: 15 October 2014
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Labor market analysis is the economic study of the dynamic relationship between workers and employers in the regional, national, or global labor market. It involves a variety of factors from employment rates to wages, per capita income, and education levels. While governments use the practice of labor market analysis to gauge the effects of economic policies, it is often also used by business and academia from a human resources perspective, to see how well the conditions of benchmark jobs match those of competing businesses or employers.

One of the primary functions of labor market analysis in the for-profit sector is to determine the competitiveness of wages. Market research is conducted by human resources departments to determine median salaries and pay scales for positions, as well as additional benefit packages that come with positions such as merit pay and health-care coverage. This data is used to guide management in setting wage policies that will help the firm to compete for the best available staff in the labor market.

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On a larger national or global scale, labor market analysis is a tool in economic industry analysis that has a direct effect on the gross domestic product (GDP) of nations and international trade. The field is considered so important that the Nobel Prize in Economics in 2010 was awarded to three researchers — Peter A. Diamond, Dale T. Mortenson, and Christopher A. Pissarides — for their study of the difficulty in the job market of matching available workers to appropriate positions in a timely manner. Delays in matching job seekers to jobs, even in good economic time periods, is known to have a direct impact on the housing market and government social programs.

The researchers spent decades analyzing the root causes behind unemployment in their work in labor market analysis. In government policy in the US, they found a lack of fiscal stimulus of the labor market, as well as generous unemployment benefits can both, in their own ways, increase unemployment levels over time. By contrast in European nations, more restrictive government policies on businesses in terms of hiring and firing workers was seen to lead to conditions of more stable employment for those with jobs, and much longer unemployment for those without jobs as compared to the US workforce.

Businesses often use formulas of Strengths, Weaknesses, Opportunities, and Threats, or SWOT analysis, to examine their competitiveness, and they work pay scale details into this to find ways to compete against rivals. Like economic researchers' use of empirical data in labor market analysis using wages and employment rates, the results are often simplistic and based on an ideal, fictitious, centralized market where job seekers and employers all meet and effortlessly pair up. In many parts of the world, however, such as the developing nations of Pakistan and Tanzania, even if accurate data exists on causes for unemployment or underemployment, the public institutions don't exist or aren't capable of remedying the situation on a broad scale.

In middle-income nations such as Brazil and South Africa, modernizing and improving the labor market is a nation's primary means of rising out of poverty. A little known fact of market segmentation when discussing global labor market analysis is that, in poorer nations, the unemployment rate typically tends to be much lower than that in wealthier countries. The obvious reason for this is that many jobs involving menial labor at very low wages and with poor working conditions exist in the developing world. This makes labor market analysis just a small part of a broader national goal for developing and middle-income nations. Those nations on a path of growth understand the requirement for underlying support in education of the young, ongoing training opportunities for the employed, and loans and financial incentives for small businesses if the country is to chart a better life for most of its citizens.

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