External Labour Markets

Labor Market refers to that geographical area which an organization recruits employees and where individuals seek employment. They labor market is often different for various groups of employees, for example, clerical and technical employees are recruited locally whereas managerial personnel are recruited at national and international level.

Many factors motivate candidates to seek employment with a particular organization including:

  • Location of the organization.
  • Type of business of the organization.
  • Reputation.
  • Employer branding.
  • Opportunities for advancement.
  • Compensation and benefits.
  • Job security.
  • Autonomy and independence.
  • Working condition.



Organizations must pay their employees keeping in view the market, industry, region or country norms. Labor market supply and demand situations creates a push and pull effect in its constituents as depicted in fig. if there is increased demand for employees or particular skills than what is available, then compensation rises. The compensation rise reaches the peak and crashes because organizations are unable to sustain high compensation burden as it starts affecting their bottom-line. Thereafter, organization offers employees a pay cut and compensation remains stable for period. However, with falling compensation levels and pay cuts, the labor market comes under recession and number of job seekers increases. With increased availability of employees in the external labor market, the overall compensation level falls down and comes to an all time low, resulting in widespread retrenchment and terminations of employees thereby furthering putting pressures in the labor market. After some time as environmental conditions improve, the compensation rises with increasing demand for employees.

Labor market conditions are often unstructured and unpredictable and should therefore be constantly monitored by compensation specialists to determine present and emerging trends such as the changing composition of the labor force as well changing values and expectations, so that policies and programs can be adapted and designed in order to recognize and take advantage of these trends. For those organizations employing fewer employees, it is often not viable to employee a dedicated compensation specialist and an executive in the organization has to do all the research required for compensation reviews in addition to his day’s job.

War for talent and retention has increased many folds in the recent past which has affected external labor market especially for top talents. This is perhaps the single biggest drive of compensation policy, as without the right caliber people, it is difficult to achieve the desired business performance. Not having the right people in place will be the biggest stumbling block for organizations in achieving their goals and objectives. This poses a business risk and drives compensation policy. It is anticipated that this will become an increasing important driver of compensation policy decision-making in the future.

HR-Professionals 12 Compensation 12


Explore Tutu'rself