The labour market tension meter

06/03/2012 11:45

What is the labour market tension meter?

The labour market tension meter is a graphical representation of tension on the labour market. The tension is the result of the balance between the demand for extra labour and the available supply of labour. Labour market tension increases if, for example, demand for extra workers is high and unemployment is low. If demand decreases, tension will also decrease, even if unemployment remains low. Labour market tension correlates strongly with wage developments. When tension is high, wages will rise substantially; when tension decreases, wage developments will be smaller.

In the labour market tension meter, tension is measured through a set of indicators for the demand for extra labour and the available labour supply. The tension meter is updated every quarter, around 45 days after the end of the quarter.

The four labour market situations

tension meter labour market

The horizontal axis represents the labour supply, the vertical axis the demand for extra workers. The resulting four quadrants correspond with the four possible situations on the labour market.

Tight labour market (top right) - demand for labour is higher than average, while the available supply is low (low unemployment).

Decreasing tension (bottom right) - demand for labour has dropped to below average while the supply (unemployment) is still low.

Slack labour market (bottom left) - demand for extra work is still below average, while labour supply is high (high unemployment).

Increasing tension (top left) - demand for extra labour has risen to above average, but the labour market is not yet tight, because unemployment is still relatively high.

The indicators

The available supply of extra labour is represented by the unemployment rate (unemployed labour force/labour force).
The demand for labour is calculated as the total number of job vacancies divided by the average number of jobs. 

Interpreting the tension meter

The interactive graph shows labour demand and labour supply as standardised deviations from the mean in one complete business cycle. In other words: 0 is in fact the average development, a positive value is an above average realisation, and a negative value is a below average realisation.

The purpose of the labour market tension meter is not to quantify tension on the labour market. The characterisation of the labour market is based on the position in the diagram, which is determined by the values of the realisation of demand and supply (y and x axes). It does not calculate a value for labour market tension, therefore. The characterisation by four phases is a robust one, however. The meter does not necessarily rotate in a clockwise direction. The most recent situation on the labour market determines in which quadrant the meter is located, and that is not automatically in the order: tight - decreasing tension - slack - increasing tension.

Changes from November 2013

As from November 2013, the Tension meter has been simplified. Additional labour demand is now based on one indicator: the vacancy rate (number of job vacancies divided by the average number of jobs). In the original version of the Tension meter the labour demand was based on several component indicators, including workforce expectations in the manufacturing industry, business services, and temp agency branch.
In the new version of the Tension meter, labour demand and labour supply are calculated as standardised deviations from the mean in one complete business cycle. In the original version, they were compared with the mean of all previously observed values; as a result, when new values were added, this sometimes led to adjustments in previous results.