UK Economy Update: What is a Tight Labour Market?

In this revision video we explore the meaning of a tight labour market and look at some evidence. We also think about some of the economic effects and how businesses are responding to labour shortages.

What is a tight labour market?

• A labour market is “tight” if vacant jobs are plentiful and available workers are scarce.
• This often happens when unemployment has fallen, and economic growth is strong with many employers looking to expand their workforce
• But it can occur when there is a decline in labour force participation / rise in economic inactivity

Some consequences of labour market tightness

1. Can contribute to a supply crunch where production is hampered by labour shortages
2. Increases relative bargaining power of people in work – perhaps a rise in union pay demands
3. Can lead to cost-push inflation as employers pay higher wages to hire and retain key staff
4. Might cause interest rates to be higher too