Understanding How the Labour Market Works

When we talk about the labour market, it can sound abstract or overly technical. In reality, the labour market shapes everyday experiences: how easy it is to find work, how difficult it is to hire, what skills are valued, and how businesses and communities grow.

For both job seekers and employers, understanding how the labour market works can reduce uncertainty and support better decisions during times of change.

What Is the Labour Market?

In economics, a market is any place where goods or services are exchanged. Just as there are markets for housing, food, or financial investments, there is also a market for labour.

The labour market is where individuals offer their time, skills, knowledge, and abilities, and where employers seek workers to meet their operational needs. Economists often refer to these skills and abilities as human capital.

Like all markets, the labour market is shaped by supply and demand. These forces determine how many jobs are available, how many people are looking for work, and how easily the two connect.

Labour Supply, Demand, and How the Market Shifts

Labour supply refers to people who are working or actively looking for work. Labour demand refers to the number of workers employers have hired or are trying to hire.

Labour demand includes both positions that are filled and those that remain vacant. Filled positions represent met demand, while job vacancies represent unmet demand. Looking at both provides a clearer picture of how much labour employers actually need.

Labour supply is influenced by many factors, including:

  • population size and age
  • retirement patterns
  • migration and immigration
  • access to education and training
  • economic conditions and social trends

Supply and demand are not fixed. They shift in response to economic cycles, technological advances, government and policy decisions, funding changes, and demographic trends.

These shifts can happen gradually or very quickly. For example:

  • a damaging earthquake can increase demand for construction workers
  • opening a new department store can raise demand for retail staff
  • a school closure can reduce demand for teachers
  • a growing population of seniors can increase demand for care workers

Labour Markets Are Local and Regional

Every region, municipality, province, and territory has its own labour market. These local labour markets are shaped by regional industries, population characteristics, geography, and commuting patterns.

Labour markets often overlap. People who live within commuting distance of a larger city may participate in that labour market, while others may be willing to relocate for stable or higher-quality work.

Because Canada is large and diverse, national labour market data does not always reflect local realities. Highly aggregated data can mask important regional differences, which is why local and regional labour market information is essential for informed decision-making.

Labour Market Imbalances and Tightness

When labour supply and labour demand are not aligned, a labour market imbalance occurs. These imbalances may affect specific industries, occupations, or regions rather than an entire labour market.

Labour market tightness describes the relationship between available workers and job openings:

  • a tight labour market has few available workers and many job vacancies
  • a loose labour market has many job seekers and fewer vacancies

These imbalances influence how easy it is to find work, which skills are in demand, and how challenging it is for employers to recruit.

Labour Shortages

A labour shortage occurs when the demand for workers is higher than the available supply. This is often described as employers having difficulty attracting or hiring qualified workers.

Shortages are commonly linked to:

  • an aging workforce
  • geographic barriers
  • wages that do not reflect job demands
  • mismatches between job requirements and the available talent pool

For job seekers, labour shortages can create more opportunities and may lead to higher wages or improved working conditions. For employers, shortages can mean longer hiring timelines and increased pressure on existing staff.

Labour Surpluses

A labour surplus occurs when more people are looking for work than there are job opportunities. This situation is often associated with higher unemployment, increased competition for jobs, and underemployment.

While employers may have greater flexibility during a surplus, prolonged surpluses can lead to underused skills and workers drifting away from their trained fields.

Skills Mismatches

A skills mismatch occurs when workers’ skills do not align with employer needs, even when the number of job seekers and job openings appears balanced.

Under-skilled workers may need additional training to access available roles. Over-skilled workers may experience underemployment, working in positions that do not reflect their education or experience.

Skills mismatches often overlap with shortages and surpluses, which can make them difficult to identify clearly in labour market data.

Measuring Labour Market Conditions

Labour market conditions vary widely by occupation, industry, and region. The unemployment rate and job vacancy rate are commonly used indicators, but neither tells the full story on its own.

Because it takes time to fill positions, the labour market is never in perfect balance. In 2023, it took an average of 44 days to fill a role in Canada. A small degree of imbalance is normal and can even be healthy, signaling job movement, business growth, and new opportunities.

Labour Market and the Economy

The labour market influences wages, consumer spending, and overall economic stability.

Understanding how the labour market works helps explain why finding work can feel easier in some situations and more difficult in others, and why hiring can be straightforward at times and challenging at others.

For job seekers and employers, this knowledge is a starting point. Interpreting what these trends mean locally, and how they apply to your situation, is where labour market information becomes especially valuable.

WorkBC Centres can help translate labour market trends into practical insight for both individuals and businesses, using local and regional information to support informed decisions about careers, training, and hiring.

In next month’s article, we will look at how to find and use labour market information tools to make practical decisions with confidence.

Sources:

  1. LMIC-CIMT. (2018). LMI Insights report no. 3: What’s in a name? Labour shortages, skills shortages, and skills mismatches. Labour Market Information Council. Retrieved from https://lmic-cimt.ca/publications-all/lmi-insights-report-no-3-whats-in-a-name-labour-shortages-skills-shortages-and-skills-mismatches/
  2. Statistics Canada. (2022). Determinants of skill gaps in the workplace and recruitment difficulties in Canada (Catalogue No. 18-001-X). Statistics Canada. Retrieved from https://www150.statcan.gc.ca/n1/pub/18-001-x/18-001-x2022002-eng.htm
  3. Labour Market Information Council. (n.d.). What is a labour market? Retrieved from https://lmic-cimt.ca/what-is-a-labour-market/
  4. Canadian Broadcasting Corporation. (2024, April 22). Shortage of skilled tradespeople is hitting all Canadians in the pocketbook, economists say. CBC Radio. Retrieved from https://www.cbc.ca/radio/costofliving/skilled-trades-shortage-cost-of-living-1.7169441