Summer Semester 2012
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Wage is income of a labour. It is also
know as salary.
There is two concepts of wage: money
wage and real wage. Money wage is
defined by the amount of money
earned by a labour for working an
hour. On the otherhand, real wage is
defined by the real purchasing power
of the amount of money earned by a
labour for working an hour.
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Simply by demand for labour and
supply of labour. So the point is what
constitute demand for and supply of
labour.
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Marginal Productivity of Labour
constitute demand for labour. So the
point is what boost labour
productivity ?
◦ Quality of labour
◦ Quality and quantity of cooperating
factors of production
◦ The level and utilization of technical and
engineering knowledge.
◦ Quality of labour
Refers to the literacy education, training, and
skills of the labour force. A country with an
illiterate work force can hardly hope to
employ modern technologies that require use
of sophisticated computers and machinery.
◦ Quality and quantity of cooperating factors
of production
Wage is high in the USA in part because the nation
is well endowed with fertile and other
resources. Advance Western economy has dense
networks of road, rails and
telecommunication system.
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The level and utilization of technical and
engineering knowledge.
But quality of labour and associated
resources do not tell the whole story.
Poor management and labour strife (means
angry and violent disagreement between
two or group of people) is serious hurdle
for productivity.
Superior technological methods arise
from better basic and applied science,
advanced engineering designs and better
management.
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In mainstream economic theories, the
supply of labor is the total hours
(adjusted for intensity of effort) that
workers wish to work at a given real
wage rate.
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Major determinants of labour supply are the size
of the population and the way the population
spends its time.
Population is determined by natural births and
deaths and by immigration. So limiting the supply
of any grade of labour
is to keep wages high,
on the other hand, wage is low.
Economic theory would suggest that the real
wage is a key determinant of the number of
hours. An increase in the real wage on offer in a
job should lead to someone supplying more hours
of work over a given period of time, although
there is the possibility that further increases in
the going wage rate might have little effect on
an individual’s labour supply.
Labour force participation and hours worked.
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Labor supply curves are derived from the 'labor-leisure'
trade-off. More hours worked earn higher incomes
but necessitate a cut in the amount of leisure that
workers enjoy. Consequently there are two effects on
the amount of desired labor supplied due to a change
in the real wage rate. As, for example, the real wage
rate rises the opportunity cost of leisure increases.
This tends to cause workers to supply more labor (the
"substitution effect"). However, as the real wage rate
rises, workers earn a higher income for a given
number of hours. If leisure is a normal good - the
demand for it increases as income increases - this
increase in income will tend to cause workers to
supply less labor (the "income effect"). If the
"substitution effect" is stronger than the "income
effect" then the labor supply curve will be upward
sloping and vice versa.
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The income effect: Higher real wages increase the
income that someone can earn from a job, but
they also mean that the time that must be spent at
work to earn sufficient to pay for a particular
product declines. Put briefly, higher pay levels
mean that a target real wage can be achieved
with fewer hours of labour supply. So this income
effect might persuade people to work less hours
and enjoy extended leisure time.
The substitution effect: The substitution effect of
a higher wage rate should unambiguously give
people an incentive to work extra hours because
the financial rewards of working are raised,
and the opportunity cost of not working
(measured by the wages given up when people opt
for leisure instead) has increased.
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How labour responds to higher wages.
What will be the effect of higher
wages ?
The supply curve of labour show one
response.
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In the graph, X axis is for quantity of
labour and Y axis is for wage rate. The
worker desire to work extra hour until
the wage reach from W1 point to W2 point,
because each addition hour is now better
paid. After the critical point W2 worker
prefer take one week vacation to relax,
so supply decrease. Because, with a higher
income, worker buy more goods and
services and in addition want more
leisure time.
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The labour market will tend toward
that equilibrium pattern of wage
differentials at which the total
demand for each category of labour
exactly matches its competitive supply.
Only then there will be general
equilibrium with no tendency for
further widening or narrowing of
wage differentials.
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Graph
Unemployed labour
D
S
In the graph
Wage
we observe
A
B
rate
that
equilibrium in
the labour
market is at
E
point E where
supply SS
curve meet
S
D
demand
curve DD
0
Quantity of
The graph further show that anylabour
situation above E
mean, there is surplus labour supply (or unemployed
labour supply) like AB. These unemployed labour
forces are responsible for pushing wage down
further to the equilibrium position at point E.