The fluctuations that occur in the labor market in the international trading relations are attributed to several factors but the elementary determinants are the demand and supply. When labor demand and supply are equal, the market is said to be in an equilibrium position. However, this is not often the case since sometimes the demand is less than supply and vice versa and these scenarios results to disequilibrium in the market. In consideration of the first case of adjusted labor supply either due to government intervention on market operations through minimum wage mechanisms, companies, institutions and organizations in the market won't be willing to employ more labor due to their budget constraints and cost reduction measures.
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However, the supply of labor will be massive and exceeds the demanded capacity that firms are willing and able to accommodate. This causes unemployment which consequently causes a rise of inflationary forces in the economy deterioration the disequilibrium condition caused by excess supply of labor that does not match with demand. This increasing supply that consequently chokes labor demand in the market indicating that labor utilization in production is expensive (Davidson and Steven 2004).
The labor market also witnesses' disequilibrium when demand elasticity of labor is inelastic as opposed to elastic supply of labor in the same market. The rise in unemployment either due to other factors or government regulations of wage settings throws equilibrium position to an unstable condition. In the same way, when labor demand is very high either due to increased investment or low wages or any other incentive, companies more labor and the economy cannot supply enough to meet their demand, therefore the market experiences disequilibrium condition caused by shortage of labor with excess demand. Labor becomes too cheap and no one is willing to work at the prevailing rates which make demand elastic and supply inelastic. This case also thrills the market to a disequilibrium condition with excess demand not meet by the prevailing willingness of workers to supply labor. The two scenarios of either excess supply or demand results to difficult market segmentation making movement of labor and firms impossible in the market.
This in turn causes prolonged disequilibrium and market inefficient in allocation of resources especially labor an capital (Gregory 2008).
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