Question

How is unemployment related to equilibrium and disequilibrium in labor market? What functions does unemployment play in the operation of labor markets?

Answer 1

Unemployment is directly related to the labor market since it determines the total amount of labor force available in the market and the labor wages to be offered for the workforce.

For instance when the unemployment ratio is high, there will be a lot of labor force available in the market for employement and due to higher rate of unemployment the wage rate will also be on a comparatively lower side due. But on the other hand when there is lower rate of unemployment, there wll be very less labor force available for recruitment hence obstructing the supply of workers/ employees. This will add to the hiring costs of the organization as well as the higher wage rates.

Unemployment plays a key role in the labour market by acting as a decision factor for setting :

1. Wages of employees
2. Unemployment compensation for the unemployed personnels
3. The Household consumption rate
4. Expenditure of the economy
5. Rate of savings of the individual and households.