How the Labour Market Works
Wages, jobs, and skills are shaped by supply and demand — and much more.
By Iris Penhaligon | Oct 21, 2026 | 6 min
The labour market is where workers supply their time and skills and employers demand them.
It is more complex than simple supply and demand.
I Supply and demand
Wages tend to rise when workers with certain skills are scarce and fall when they are plentiful.
II Frictions
- — Searching for jobs takes time
- — Workers may not move for jobs
- — Skills mismatches
- — Information gaps
III Institutions
Minimum wages, unions, and employment laws affect outcomes. See our monopsony guide.
IV Tight vs slack markets
A tight market has many vacancies and few unemployed workers, often pushing wages up.
V Measuring the labour market
Economists look at several indicators: the unemployment rate, the employment rate, job vacancies, wage growth, and labour force participation — the share of working-age people who are working or looking for work. Changes in participation can affect unemployment figures; for example, if discouraged workers stop looking, unemployment may fall even if jobs are not being created. See our unemployment rate guide.
This is general educational information about economics, not financial, investment, or tax advice. Consult a qualified, licensed professional before making financial decisions.
Further reading
- 1. Commodity Markets Explained
- 2. Natural Monopolies: Why Some Markets Have Only One Supplier
- 3. Monopoly, Oligopoly, and Competition: How Market Structure Affects Prices