Presented By Group 2

Among the factors of production, land, labor, capital, and entrepreneurship, labor
is the most important, and in fact, has the largest share in almost all economies
with the gross national earnings. Basically, the labor market operates by supplying
a skill or talent that someone else would need or demand. Let us look at it this
way: roles in a labor market are determined by the one who supplies the labor, or
the seller of labor, and the one who buys it, the buyer of labor. There should be a
voluntary exchange of work, an agreement that a certain price, that is the wage, the
buyer agrees to the work and employs the seller of that work. The market for
professional athletes is a little more complicated than other labor markets, but the
idea is the same. It follows the law of supply and demand.

This chapter talks about the demand for and supply of labor, individual earnings
and wages, international immigration, labor market discrimination, and human
development index. In addition, an article about one of the largest labor accidents
in the world as of today will be discussed as a case study.
Demand is the link between the price of a product and the
quantity demanded for it. We sometimes present it in a table or
schedule to further appreciate the changes in quantity
demanded as the price increases or decreases. The basic rule is
that all other things remain constant, as the price increases, the
quantity demanded decreases or vice versa. There is a negative
relationship between the price and the quantity. A demand
curve is a graphical representation of the price and quantity
demanded, and since the relationship is negative, the curve is
also negatively sloped. Labor is the input to a factor of
production. In most cases, we hire labor to produce goods to
sell. Labor markets, like any other markets, exist with the
invisible hand at work, the forces of supply and demand.
Consider an example of
the Navotas Fish
Market. The table
below shows the
number of workers
hired and the weekly
output by the number
of oval crates given the
price and the wage.
Table 7.1 shows the relationship between workers,
given the price and the wage of employment. It would
yield an optimum marginal income and a level where
loss is incurred for the number of workers employed,
given a competitive market and the wage is fixed at
P6,000.

The value of the marginal product of labor gives us

the idea about decision-makers on how much more
income is expected for additional labor employed.
In this case, P20,000 is the maximum value of the MPL, hence an
optimized number of workers of 7.

The production function in Navotas Fish Market gives us the

relationship of the inputs in terms of labor and the amount of
product obtained. The more labor put into the production
function shows that it increases at a fast rate at the beginning
and moves slowly, flatter, toward the rightmost part of the graph.
We call this the diminishing marginal productivity. Firms employ
workers as long as the revenue generated by the output of a
marginal worker exceeds the cost of that worker, i.e., until the
worker’s marginal revenue product is equal to the market wage
rate. The marginal product of labor will decline and the wage of
all workers will fall.
Supply is the link between the price of a product and the
quantity supplied for it. Just like demand, we sometimes
present it in a table or schedule to further appreciate the
changes in quantity supplied as the price increases or
decreases. The basic rule is that all other things remain
constant, ceteris paribus, as the price increases, the quantity
supplied also increases or vice versa. There is a positive
relationship between the price and the quantity. A supply
curve is a graphical representation of the price and quantity
supplied, and since the relationship is positive, the curve is
also positively sloped or going up from left to right of the
graph.
It is significant to note the reservation wage theory that
says individuals would be choosing not to work when
they value leisure more than the wage rate that they
would be receiving from working. Hence, reservation
wage is the minimum rate that a worker is willing to
accept for a specific job, at a given period of time,
considering there is no change in an individual’s overall
wealth, marital status, length of unemployment, health,
and security and disability issues.
The graph in Figure 7.3 shows the relationship between the labor
market and the effect on the individual employer. The demand
for labor is downward sloping, and the supply is upward sloping.
The point where they meet is the equilibrium wage and quantity.
The demand represents the revenue attributable to additional
workers as they are hired.

The wage rate basically is the profit-maximizing level of individual

employer, also known as the marginal resource cost (MRC). In a
competitive labor market, the firm can pay to hire additional
workers.
There are situations wherein there is a change in demand even
if the price does not change. In effect, it shifts the demand
curve to the right. Remember the notion, all other things
remain constant or fixed. What if the “other things” change?

These are the factors that result in a “change in demand:” As

the price of a substitute service increases, demand also
increases. For example, we always go to a famous hairstylist
salon situated in a shopping mall. If the price of the same
service outside the mall increases, the demand for the salon
service in the mall increases as well.
There are situations wherein there is a change in demand even if the price
does not change. In effect, it shifts the demand curve to the right.
Remember the notion, all other things remain constant or fixed. What if the
“other things” change?

These are the factors that result in a “change in demand:” As the price of a
substitute service increases, demand also increases. For example, we always
go to a famous hairstylist salon situated in a shopping mall. If the price of
the same service outside the mall increases, the demand for the salon
service in the mall increases as well. Another factor is the price of the
complementary service. Let us say that the price of the shampoo-ing in the
salon increases and the demand for the salon service decreases, hence
there is an inverse relationship between the price of the complementary
service to the demand.
When the population of a city increases, it may be due to migration from
other regions or countries. This leads to a higher demand for services, such
as salon services. As the market grows, there is an expected increase in the
demand for salon services, and businesses will anticipate higher prices.
Additionally, shifts in consumer preferences can impact demand, depending
on whether the change is favorable or not.

Factors affecting demand include:

• Prices of substitute and complementary goods
• Expected future prices
• Consumer income and wealth
• Population growth
• Market size
• Changes in consumer preferences
A shift in the supply curve can occur without a price change when other factors
influence supply. If more agencies enter the market, competing for the same
workforce, this can lead to a higher supply of workers at a stable wage level. For
example, an increase in wages in the Middle East may raise the number of workers
being sourced and deployed from other regions.

Government policies, such as tax cuts or incentives for agencies, may also increase
labor supply. On the other hand, higher taxes may reduce supply. Government
partnerships that enhance worker benefits and safety can further influence labor
market conditions.
Factors affecting supply changes include:
• Cost of acquiring skills
• Number of agencies and businesses
• Wage expectations
• Technological advancements
• Government policies, including subsidies and taxes
As an employee invests his or her time, labor services, ideas, skills, knowledge,
and abilities, the employer must fairly compensate these with a reasonable
wage, that is at par or even higher with the same employee contributing the
same resources in the market. Wage must cover the opportunity cost, the value
that is lost like the worker’s free time and the income that may be derived from
another job, or from doing something else.

If the demand for a certain good or service is booming, more of it is produced

and offered in the market, and ultimately increases wages. We call this derived
demand. The demand for a factor of production derived from the demand for its
product, e.g., there is a demand for labor in the construction industry because of
the demand for housing. If professionals are in low supply, and yet the demand
for their skill is high; therefore, the wage is also high. Whereas social work is
considered a very important job for poverty alleviation and protection of human
dignity, the wage is low, that is because the supply for social work is high.
There are some businesses that provide high wages to
their employees, compared to the market equilibrium, to
motivate them to work and not leave the company (among
other reasons). We call this efficiency wages. Labor unions
can affect wages as they advocate the benefits and
interests of the employees and improve their working
conditions. Through a collective bargaining agreement
(CBA), this is more common in the government sector and
is slowly declining in existence.
A minimum wage is the price floor that ensures employees
receive this amount or more, and employers are prevented from
paying below this amount. Classical economists argue against
any form of government manipulation in a competitive market
like the minimum wage. They believe that this is of no value to
alleviate poverty and does not solve the problem of
unemployment. In fact, this worsens the unemployment
problem in the economy. Paying the minimum wage stops some
employers from hiring unskilled workers. Instead, they look for
skilled or semi-skilled workers, leaving this type of labor to be
untapped, hence unemployment increases. Skilled workers are
those who have special skills or who have had long training.
In the graph (Figure 7.6), we can see that an imposition of a minimum wage (price
floor) would change the behavior of the labor market. An increase in the minimum
wage will lead to an increase in labor supply and a decrease in quantity demanded,
which creates a wage price difference that will decrease surplus. But this case does
not apply to all businesses. Now that we are more open to labor markets, the
maximum level that the workers can earn is the marginal revenue cost set. Leaving
the existing wage rate incorrect, this would result in a decrease in the quantity of
labor the employers would hire.

The question now is, how much should be the minimum wage? An increase in the
minimum wage means more income for people who have the capacity to buy goods
and services. It increases the demand for products and stimulates employment and
the economy. A high minimum wage would mean more and more businesses now pay
higher wages, but this also depends on factors like the demand for labor, the
industry, and even geographical location. In the end, economists do agree that skill
and education are factors that determine the market value of labor. Those with
specialized skills in high demand and low supply are promised higher wages.
It is important to note that not all regions have a minimum
wage, and for those who do, the minimum wage differs across
regions. In the Philippines, for example, the minimum wage in
the National Capital Region (NCR) is different from that of
other regions.

The minimum wage will not solve the problem of poverty and
inequality; it will just be a trade-off that may have positive or
negative effects on the economy. However, it is still significant
that people be educated and develop skills that contribute to
the country's development.
When people move between countries and become part of the labor market of
that country, it is called immigration. The main economic benefits of immigration
are the following: (1) increases the national output, the GDP; (2) enhances
specialization especially with highly skilled immigrants; and (3) provides net
economic benefit to the country. Immigration resulted in advancements in
technology and improved transportation in terms of speed, cost, and access.
Some would speculate that it is also due to some security issues and the desire to
look for greener pastures.

There are two main arguments in the economic impact of immigration, that it
increases demand because of the population increase, but low-skilled workers
tend to add to the poor and worsen inequality in the market. Highly skilled
immigrants contribute to a large employment surplus, as they innovate and
become entrepreneurs, adding to the factors of production in the country.
Wage discrimination has been mentioned in the news,
especially the kind when a certain race or nationality is
undermined and is given less respect, dignity, and
attention. Discrimination happens, favoring some group
of individuals according to gender, age, ethnicity,
nationality, and disability. Although there are moral and
ethical issues involved in labor discrimination, we focus
on wage discrimination, its nature, and its impact on the
economy.
In evaluating wage discrimination in
the labor market, we must clearly
identify, first, who among the
workers are favored and who are
discriminated against. Perhaps, this
may be apparent with the wages
that the workers are receiving,
having the same position and
nature of the job. We assess the
employer who offers lower labor
supply and lower productivity. The
economy with this irrational
decision-making begins
misallocating resources and tends
to effect economic inefficiency.
Wage discrimination happens considerably when there is
monopsony—there is only one buyer of the labor offered. It can clearly
be distinguished who is favored and who is discriminated against, and
an ostensible variable is the price elasticity of labor supply in different
groups. This may negatively impact the economy as it tends to affect
inefficiency and may cause market failure.

For example, the marginal revenue product (MRP) of the favored group
tends to be overestimated, while the discriminated group is
undervalued. This distorts the market as the latter inclines to withdraw
from the market. The effect is decreasing the supply of labor, reducing
human capital and labor, and then diminishing productivity.
As the world becomes more sophisticated, having the GDP per capita alone may not be
enough to measure the economic development of a country. It is instinctive for humans
to know how and what others in the world are doing, not only in terms of money in their
hands but also for their welfare. Human Development Index (HDI) indicates the average
well-being of people in a country in a given period of time. It is a composite index
combining life expectancy at birth, mean years of schooling, expected years of schooling,
gross national income per capita, and non-income using a geometric mean.

There are three main components in determining the HDI: life expectancy, knowledge,
and standard of living. The average life of the people in a country according to various
demographic factors, such as age, gender, and so on is a part of life expectancy. The
average years of schooling of adults and children is a part of knowledge. And the
standard of living basically is the GDP per capita plus all income by citizens derived
abroad, foreign investments, and foreign aid received. However, not all countries have the
same purchasing power to buy a specific good and service; hence, we use the purchasing
power parity agreement to express the differences in dollars for more accurate results.