The regulation of the labor market suggests the impact on labor demand and supply. The objects of regulation are the wages, working week and holidays, the procedure of hiring and dismissal, various kinds of social welfare and others. The main indicator of the labor market is wage, which is determined by summation of total cost of goods required for normal human activity. Changes in the level and amount of remuneration are in direct interaction with the changing supply and demand in the labor market. Summation of the whole demand of labor market resources at any price is considered to be named as Labor Demand. This demand is basically defined by two factors: the quantity of labor required and real wage level (see Figure 1). The labor demand curve is also can be determined as locus of these points (Blanchard & Fischer, 1991, 17). Attracting additional unit of labor will cease when these factors will be equal. In the case of increasing the wages, the employer will be forced to reduce the number of workers he has (labor demand is reduced), and, in the case of reducing the wage, he could hire more workers (labor demand increases) (Blanchard & Fischer, 1991, 19).
One of two main factors to shift the labor demand curve to the right, which means the increase of demand for labor force, is when output price rises. In such case, more labor is needed at each wage (Lecture 34, 2009, 1).
Another factor it that over long periods of time a decisive impact on the increase of labor demand has the accumulation of physical capital in the economy, appearance and development of new fields for capital and labor application (Lecture 34, 2009, 1). These processes are accompanied by enhancement of armament work in fixed assets, increasing productivity and involvement in the production of a growing population of working age persons, even taking into account the reduction in the duration of working time - weekly working hours, working days.
As was mentioned above, the market price of the good or service, that company provides the customers with, directly relates to the labor demand. The thing is that with price increase the company’s revenue increases as well, so then employer usually takes steps for enhancing the firm to explore new outlets, new fields of proficiency. For making this expansion successful one, either internal or external, it is necessary to hire more workers, who would be proficient in all the necessary fields.
At the market of labor, government-sanctioned licensing requirements are considered to be a kind of regulation of labor skill and provide the necessary requirements to be able to join this or another industry as an employee. Such licensing provides the industry with only qualified employees, even though they should be paid accordingly. However, if we imagine the situation when such system is lifted, the labor market will be saturated with a huge number of non-qualified workers, who will be ready to work for the less wage rather than well-qualified ones. Trade unions also have a big impact on the wages level in the direction of its increase compared to the equilibrium level, but those unions depends on the licensing system as well. Therefore, not a relevant competition also appears, but the main result is actually decreasing the wages level, which will have an impact on overall population welfare. Such an issue also will then have a huge influence on the level of overall goods production; so basically, those licensing regulations have to be implemented back.
In the labor market there are so-called non-competitive factors which should also include the different institutions. To them actually refers government that actively regulates the labor market, depriving the market wage flexibility. Government intervention into labor market is, nowadays, a usual part of most of the countries’ economy. The main point of such intervention is to control and try to reduce the level of unemployment. Mainly, government is trying to employ as much labor force as possible (Elgrably, 2006, 2). Somebody might say that this is a great intention and attitude to the country’s economic development (Elgrably, 2006, 2). However, if we have a look at the behavior of such politics and then to its results, it would be seen that the government forces to hire a worker, when he or she costs the company more than it will earn out of his or her productivity. For example, if the worker’s services bring the company $9, but worker’s actual cost is $10 or even more, obviously the company will never hire this one (Elgrably, 2006, 2). So then, governmental labor law might make the employer raise the wages according to the market and inflation and/or to retain the workers because large corporations tend to establish a relatively stable over the time standard wage, refusing to revise it too often depending on supply and demand in the labor market. However, they must not make employers to hire somebody, who will bring losses for the company (Elgrably, 2006, 2).
Blanchard, O., & Fischer, S. (1991). NBER macroeconomics annual 1991. Cambridge, Mass.: MIT Press. Retrieved from http://www.nber.org/chapters/c10981.pdf
Elgrably, N. (2006). The Minimum Wage and Labor Market Flexibility. Economic Note. Retrieved from http://www.iedm.org/files/dec06_en.pdf