LABOUR MARKET
ECONOMICS
INTRODUCTION TO LABOUR
MARKET ECONOMICS
The Labour Market
• The market for a factor of production labour (measure of work done by human
beings)
• Explains the functioning and dynamics of
the market for labour e.g. the pattern of
wages, employment and income.
• Refers to the demand for labour – by
employers and the supply of labour
(provided by potential employees)
• Demand for labour is a derived demand not wanted for its own sake but for what
it can contribute to production
The demand for labour is dependent on the
demand for the final product that labour
produces. The greater the demand for office
space the higher the demand for construction
workers.
The Labour Market: Key Role
Players – Individuals Decisions
•
1.
2.
3.
4.
5.
6.
7.
8.
Individuals’ Decisions:
When to enter the labour market
How much education /training
Type/extent of job search
Occupational industry
Labour hours/household work
Accept/quit/relocate
Wage rate
Union/association
The Labour Market: Key Role
Players – Firms Decisions
•
1.
2.
3.
4.
5.
6.
Organizations or firms Decisions:
The number of workers
Wages and benefits
Hours
Layoffs
Subcontracting
Pension/retirement policies
The Labour Market: Key Role
Players – Factors Influencing Firms
Decisions
• Global competition: Free trade, industrial restructuring,
Deregulation, Privatization.
• Legislative environment: Human rights, minimum wage,
overtime, maternity leave, workers compensation,
occupational health and safety, pensions, labour laws,
collective bargaining.
• Changing workforce: Age , gender, ethnic diversity
The Labour Market: Key Role
Players – Governments Decisions
•
•
•
•
•
•
•
Individual rights versus employee competitiveness
Public support
Training and education
Insurance
Compensation
Pensions
Skills development
Characteristics of the Labour
Market
1. Stakeholders – Labour, management, and government (each
with different goals
2. Sociological – Family and community ties, role of women,
and social norms
3. Institutional - unions and multinational corporations
4. Legislative constraints – minimum wage laws, health and
safety regulations, employment insurance, pensions
5. Market imperfection – market uncertainties and risk
6. Complex wage rate implications – ROI on education, training
and mobility, union power, productivity, standard of living
The Labour Market:
• Demand for Labour
• Influenced by:
–
–
–
–
–
Cost of hiring labour
Wages/salaries
National Insurance contributions
Pension contributions
Administration costs associated with tax payments and
adhering to employment laws and regulations
The Labour Market
• Demand closely linked with the value of the product produced by labour
– e.g. 1 person produces 50 mugs per week, each mug sells for R2 each. Total value
of output = R100
– To be profitable the wage rate must not therefore exceed £100 per week
• Marginal Revenue Product – the addition to total revenue from the sale of
one additional unit of output produced by the worker
MRP = MPP x P
• MPP = Marginal Physical Product – the addition to total output produced by
employing one extra or one fewer unit of labour
The Labour Market
The demand for labour will shift
a relatively
high
The
demand for
labour
if: At
At
a
lower
wage
rateper
the
wage
rate of £250
is downward
sloping
•Productivity
of
labour
firm
can
afford
toadded
take on
week,
the
value
from
left
to
right
increases
more
workers.
demand
by the
worker The
must
be
for
labour
is
inversely
greater
to cover
the cost
•New
machinery
is used
which
related
to
the
wage
rate
of
hiring
that
labour.
increases productivity
Demand is likely to be
•If there
lower.is an increase in the
demand for the good/service
itself
Wage Rate (r per week)
R250
•If the price of the good/service
increases
R100
DL1
DL
Q1
Q3
Q2
Q4
Quantity of labour employed
The Labour Market
• Productivity:
• A measure of output per person per time
period
Total Output
Productivity = -------------------Quantity of Factor
The Labour Market
• Productivity
– Not always easy
to measure
– Influences costs – output =
potential revenue
counterbalanced
by wage costs
– Indicates efficiency
– Competitive advantage
Measuring productivity in service
industries, especially the public sector
can be difficult. How would you
measure the productivity of a teacher?
The Labour Market
• Supply of Labour determined by:
– Size and structure of the population – age, gender, etc.
– Skill levels required
– Education and training
• Number in higher education
• School leaving age
• Qualification types
– Fashion
– Time period
– Opportunity cost of work – income and substitution effects
The Labour Market
SL
Wage Rate (R per hour)
In theSshort
run, theL1supply
of internet
developers is
very inelastic
75
50
30
DL
Q1
Q3
Shortage
Q2
In
the
long run,
as
The
shortage
causes
The
As
businesses
demand
the
wage
rate
tofor
be
more
people
train
Assume
this
is
developers
recognise
the
atfor
a
forced
up
to to
£75
per
and
qualify
the
market
hour
as rate
firms
compete
wage
potential
benefits
of
£30
become
internet
Internet
for
the
skillsisof
those
per
of
having
hour
a
now
Web
Q2
developers,
the
developers
–short
the
available.
In
the
but
site,
there
demand
are rate
still
for
supply
will
wage
runinitial
there
is increase
not the is
only
their
Q1
skills
available
and
also
become
£30
hour
time
forper
new
workers
for
increases
employment.
from
more
elastic.
The DA
to come
onto the
shortage
to D1
develops.
market
because
of the
wage
rate
will
fall
training
needed.
back
to time
a lower
level.
DL1
Number Employed
The Labour Market
• The relative demand and supply of labour can
help to explain differences in wage rates for
different occupations
– e.g. Supply of those able to train as nurses higher
than those with the talent to be successful
professional footballers, hence the higher wage
rate
of footballers!
Nurses help care for people and save
lives, footballers entertain. One earns
R90,000 per week, the other R350.
The Labour Market
• Other factors influencing wage
differentials:
–
–
–
–
–
–
–
–
–
–
–
Status attached to the job
Discrimination
Race
GenderMonopsony – a dominant
buyer in the market
Sector – public or private
Trade Union power or influence
Length of career
Risk or danger involved
Social or unsocial hours
Shift patterns
Productivity
Some jobs might attract a premium
because of the danger or risk
associated with carrying it out!
POLICY ISSUES
Labour supply:
Work incentive effects of income maintenance and tax
transfer programs like employment insurance.
Labour demand:
Effects of globalisation and outsourcing, trade policies,
collective bargaining, legislation, human rights