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The labor force demand can be divided into expansion demand, which is caused due to economic growth and which manifests itself in creation of new employment positions, and substitution demand, which is caused due to aging of the labor force and vacating the existing employment positions. In both cases, vacancies are created and filling thereof is dependent on the labor force supply. The labor force supply is described by two aspects – the quantitative and qualitative. The quantitative aspect of labor force is determined by the demographical situation in the country and the migration flows, as well as level of economic activity. However the qualitative aspect of the labor force is established by the level of labor force qualification.

Nonconformance of supply and demand in labor force market may arise due to unbalance development of any of its components. Quantitative disproportion in labor force market can originate if, for instance, the economy is developing at decelerated pace, creating a relatively smaller labor force demand, however the demographical situation develops explosively, as a result of which the inhabitants are not employed to the fullest. Such situation could be observed in underdeveloped countries, for instance, in the poor countries in Africa.

If explosive growth demographical situation occurs simultaneously with rapid economic growth pace, a more balanced labor force market development is guaranteed. A good example for this situation currently is China.

In the developed countries of Europe, a process could be observed of decreasing demographical situation and the pace of economic growth is also not very high, and there the labor force is ensured by importing it (through immigration) and by developing technologies. In Latvia, a rather peculiar process could be observed – similar to the developed European countries, the demographical situation is deteriorating and similarly to the developed countries –

the economic growth pace is high. In short-term, such growth is ensured by a more active participation of the inhabitants or employment and higher load of the devices, however in long-term, in order to maintain high development pace, goal-oriented measures should be performed for building productivity. Simplified occasions are displayed in Table 17.

Table 17. Comparison of demographic and economic situation

Economic development Demographics

Good Poor

Good China + + Africa + -

Poor Latvia - + Europe - -

It could be stated that provided the given conditions both in the developed European countries and in China, a balanced labor force market development could be observed, which cannot be said about the cases of poor countries in Africa and of Latvia.

In both cases, these are lost opportunities – the development of the country would be more rapid if it would employ all available labor force resources or if the resources of labor force would be available in significant amount. Therefore it is very important to ensure balanced development of labor force market.

Previously considered were the conformance aspects of quantitative labor force demand and supply, however not less important is to ensure balance of labor force market in the qualitative aspect, when the qualification of the labor force supply conforms to the qualification required by the employers.

Considering the above mentioned, the most significant causes of nonconformance between supply and demand, which are elaborated into the dynamic optimization model, are connected with the following factors:

• Demographic situation of the country

In case of Latvia, considering the pessimistic demographical forecasts, the economy must achieve the optimistic development goals.

• Economic development scenarios

The goals of economic development must be balanced with the availability of labor force in the country.

• Technological progress

Provided the slow technological development, the economic sectors require a bigger volume of labor force, in order to ensure the economic growth. And vice versa – growth is ensured if the economic production volume increases faster than the increase of the employed, i.e., labor productivity is increasing.

• Factor of labor force migration

It is used as an additional factor, with assistance of which additional labor force quantitative provision scenarios can be created.

Reciprocity of the first four factors ensures balance or disproportion of the quantitative labor force supply and demand. In order to ensure balanced labor market development in a quantitative sense, it must be ensured that the demographic trends, economic growth trends, and productivity growth trends would promote sensible conformance of labor force market supply and demand. An option has been elaborated in the dynamic optimization model, which allows varying with the numerical features of these factors, in order to set forth hypotheses about optimum development scenario.

• Structure of the education system

It must ensure formation of labor force supply corresponding to the economic requirements. This is the key factor, with assistance of which the model users may modify the qualitative conformance of the labor force supply to the demand, thus creating the optimum distribution of labor force in profession groups, thus in situation, when in the labor force market the quantitative feature is indicative of balance also at a more detailed level (economic sectors or profession groups), a state of balance or nearing the state of balance could be observed. In a situation, when the supply on a general level of the labor force market does not satisfy the demand, with corrections to the education system policy it could be achieved that primarily such sectors are ensured with proper labor force, which are considered as strategically significant. Thus, the labor force division between various profession groups is being optimized.

• Re-qualification of the labor force

This is another significant way of organizing optimum distribution of labor force market. There is no automatic mechanism elaborated into the dynamic optimization model, which would ensure migration between various profession groups, however it is designed that the user, by analyzing the data tables, can make conclusions about the possible re-qualification scenarios depending on the profession groups, which have formed surplus and which have deficiency of labor force supply.

• Slow reaction time of the labor market

Slow reaction time of the involved participants (employers, employees, and state institutions) affects the labor market significantly, firstly, it is related to the fact that time is necessary to create a vacancy, when a necessity (demand) is recognized for workers of the specific profession, secondly, in order to find a suitable candidate and fill the vacancy, and thirdly, if there is no labor force supply for the specific profession in the labor market or if the existing supply does not conform to the demand and the vacancy is not filled for a long time, time is necessary for the employers to recognized this situation and react accordingly, by increasing the salary to attract the necessary labor force, fourthly, the inhabitants require time to recognize the economic demand for labor force of specific profession, fifthly, time is required for obtaining corresponding education. Thus the labor force supply is attempting to adjust itself to the labor force demand, which in turn is fluctuating again. As a result, the total delay time may reach even up to 10 years, during which the initial labor force demand has changed. Therefore, the shorter is the delay time, the more flexible is the labor force supply, and the faster a state of balance can occur in the labor force market.

In the dynamic optimization model, there is an option to examine the results of measures taken to preclude disbalance in the labor force market, by reviewing various scenarios influenced by delay time.

The ways of solving nonconformance of labor force supply and demand can be multiple and they derive from the identified causes of nonconformance.

In order to preclude nonconformance of labor force supply and demand on a macroeconomic level, several alternatives are possible:

a. In cases when the increase of production volume is not possible by quantitative increase of labor force volume, given ever decreasing labor force volume significant changes are necessary in the level of productivity, by implementing more modern technologies and by increasing the load of the labor force and equipment;

b. Importing labor force of the required quality into Latvia from other countries, thus increasing the labor force volume both – quantitatively and qualitatively;

c. Promotion of Latvian residents to more active participation in the economic life (students, young mothers, senior citizens employed in part time jobs), thus increasing the percentage of the economically active residents.

In order to preclude the key cause of nonconformance of labor force supply and demand on a macroeconomic level – nonconformance of the labor force qualifications to the market demands – one of the main solutions is adaptation of the education system to the new situation, ensuring that the newcomers to the labor market could find a suitable job for themselves. Firstly, by balancing the structure of education system (number of student positions in the professional programs) in such way that it would support long-term economic demand.

Secondly, the already commenced work must be carried on in development of lifelong learning, which includes improvement of professional skills of the employed, as well as training of the unemployed, and re-qualification from one profession group to another. There is no lifelong learning structure elaborated into the DOM model, however the results of the model provide with exhaustive information, therefore the users could conclude by analyzing the data on nonconformance of supply/demand, as to which profession groups are available for re-qualification to the deficient professions.

Thirdly, in order to achieve a faster balancing of labor force supply and demand, it is necessary to decrease the total delay time of labor market reaction to the changes in economic structure, by performing complex measures:

• In order to facilitate the employers in search for employees, detailed information about those seeking for a job, their level of qualification could be provided (also promotion of use of services by human resource management companies),

• Informing the society (employers and potential employees) about the trends existent in the market, in order for the labor market participants to be able to react faster to the occurring changes.

The offered models allow examination of influence by various managerial decisions on the labor market development, which in turn provides with an option to select the optimum strategy.

5.6. Conformance of the Labor Force Supply to the Demand