Labour Economic
Introduction
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Issues Discussed in Labour Economics
Labour, like other economic resources are scarce and wants are
virtually unlimited, society is obligated to manage its resources as
efficiently as possible so as to achieve the maximum fulfillment of its
wants.
We need to use the laboiur resources utilize efficiently
Generally labour economics studies how labour markets work.
However, the study of labor economics requires a solid foundation in
microeconomics
Defn: Labour Market Economics involves analyzing the
determinants of the various dimensions of labour supply and demand
and their interaction in alternative market structures to determine
wages, employment and unemployment
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What make labour economics important area of study?
Justification
1. Many of the most compelling socioeconomic issues of the day
center upon the labour sector of our economy.
2. A second justification for labour economics is quantitative. In
the various economies of the world the bulk of the national
income is received, not as income (profit, rent, interest), but as
wages i.e. The lion share of the NI flows to workers in the
form of wages and salaries. .
3. Tthe market in which labour services are “bought” and “sold”
embody special characteristics and peculiarities which call for
separate study.
4. More technically stated, the concepts of supply and demand
must be substantially revised and reoriented when applied to
3 labour markets.
Labour market economics also studies various wage structures
including occupational, industrial and regional wage differentials,
union/non-union wage differentials, and male/female wage
differentials (the issue of sex discrimination in the labour market)
In general labour economics yields information and develops
analytical tools which may be useful in making personal and
managerial decisions relevant to labour markets.
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Labour Market and The Economy
The labor market is like other markets in that a
commodity (labor services) is bought and sold. It differs
from most product markets in several important ways.
Among these differences are:
labor services are rented, not sold,
labor productivity is affected by pay and working conditions,
and
The suppliers of labor care about the way in which the labor
is used.
The labour market – like other markets – can be described in terms
of supply and demand components. That is labor market is it is a
market where the labor services are exchanged.
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In the labour market, labour services are exchanged and it is the
interaction of the workers and firms that determines, in part, the price of
labour, the number of workers employed, and the working conditions
attached to employment such as the work schedule and specific duties.
A unit of labor may be an hour, year, or some other measure. The
price of labor service is the wage rate. The quantity can be
measured in various units (hours, weeks, full-time workers).
There are many different kinds of labor (labor of college educated
workers, labor of high school educated workers, labor of
experienced workers, labor of inexperienced workers, labor of
medical doctors, labor of waiters, etc.). For each kind of labor
there is a market.
A market may have geographic dimensions .
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How the Labour Market Works
A In the labour market, labour services are exchanged and those negotiations occurring
between buyers and sellers partly determine the placement of workers in jobs with specified
wages, benefits, and conditions of employment.
The demand for labour - employers and is derived from their need to employ workers to
produce goods and services. Firms choose their staffing levels according to a number of
factors, including: the cost of labour; the productivity of the workforce; the current and
anticipated level of production; and the price
In the most basic terms, the supply of labour refers to the number of people currently working
or actively seeking employment.
The size of the labour supply is determined by the number of individuals of working age (the
working-age population) as well as the proportion of the working-age population that wishes
to work. Other aspects of labour supply include the hours that staff work, the effort put forth
by employees, and the skills possessed by the workforce. Thus, labour supply is determined
by numerous factors including: the age distribution of the population; retirement behaviour;
migration patterns; education and training decisions; fertility rates; the state of the economy;
and individuals’ decisions concerning the allocation of time between work activities and
leisure.
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Labor Market Participants
Workers: Workers supply labor. Workers are the employees of frms. Workers make
decisions about whether to work and how much to work. Workers receive wages for their
work, which they use to purchase consumer goods.
Firms: Firms demand labor. Firms are the employers of workers. Firms combine labor with
other inputs, such as capital (machines, factories, etc.), to produce output goods. Firms can
be one person (the worker is self-employed) or very large with thousands of employees.
Government: Various levels of government (local, state, federal) government establishes
the environment by providing training, unemployment insurance, workers compensation,
pensions and laws to protect workers and firms. The government also enforce laws which
regulate wages (e.g. minimum wage laws),
Unions: Unions are groups of workers who collectively bargain labor contracts with
employers. Usually unions are formed among workers in the same industry or occupation.
.
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Labor and its peculiarities as factor
In labour markets, labor is supplied by households and demanded by firms.
These are the opposite of the roles that are played by households and firms
in product markets.
labour market is often described in terms of demand and supply
components, there are many unique features of the labour market that
constrain or limit the applicability of this theoretical framework
In commodity market supply/demand lead to a drop/rise in its price till
the market cleared
In the labour market, excess supply does not typically result in price
reduction (i.e., drop in the wage rate). Similarly, excess demand does
not necessarily lead to a rise in price.
the labour market transactions are different from product market in that the
transaction product markets are pure exchange relationship..
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Labour market legislation is an obvious impediment to the
unfettered operation of supply and demand forces. Below is a
partial list, and description, of labour market legislation
governing the labour market.
Human Rights, Minimum wage: prevents wages from falling
below a specified minimum wage rate.
The Employment Standards The Act also determines the
maximum length of the work week and the conditions under
which an employee is entitled to an overtime pay premium.
Occupational health/safety: protects workers against health and
safety hazards on the job by outlining the rights and duties of all
parties in the workplace
Overtime, Maternity leave, Worker’s compensation,
Pensions/mandatory retirement
11 Labour laws/collective bargaining
Institutions also introduce rules and regulations that
impact the workings of the labour market.
For example, hiring practices within the firm may determine who
can compete for particular jobs. As a result, an important
distinction may exist between the internal labour market (i.e.,
workers within the firm) and the external labour market (i.e.,
workers outside of the firm). Workers inside internal labour
markets are, to a certain extent, buffered from the supply and
demand pressures of the external labour market.
ii. Non-pecuniary nature of labour
Worker and employer have certain preferences regarding to
whom to work or whom to employee. Thus, equilibrium of the
labour market is affected by non pecuniary (non economic)
factors besides, its price which are further categorized as
physical and social factors.
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The physical factors include working environment, risk of injury,
and others.
The social factors include prestige of job, race, religion, culture,
attitudes, etc.
As the result, the exchange taking place in labour market is
affected by both on its prices, and above mentioned factors. This
arises due to two unique features of laborers.
It is not possible to separate labour from laborers. That is on the
supply side we will find that the labour services are obviously
inseparable from the worker.
The behavior of person owning labour affects the exchange.
The worker is interested in a job’s health and safety features,
the arduousness of the work, stability of employment,
opportunities for training and advancement, and so forth.
These non-monetary characteristics may be as important as the
amount one earns. Indeed, even one’s social status is related
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to the kind of work one performs.
Unlike labour, the demand for a product is based upon the
satisfaction or utility it yields, labour is demanded because of its
contribution.
Its productivity-in creating goods and services. Indeed, the
demands for particular kinds of labor are derived from the
demands for the products they produce. The demand for labour is
therefore an indirect or “derived” demand.
iii. Long-Term Nature of the Employment Contract
One of significant feature of the labour market is the relatively long-term nature
of the employment relationship. Unlike commodity market, frequent switch is
not common in labour market because of the cost associated with it.
One important implication of the long-term relationship between workers and
firms is that wages and employment levels are less-responsive to supply and
demand forces. For example, firms may choose to retain workers during an
economic downturn in order to avoid the costs or re-hiring or training when the
economy picks up. Similarly, firms may choose not to reduce their workers’
wages during a period of relatively high unemployment due to concerns that
14 wage reductions may have long-term negative impacts on the morale,
productivity, and turnover of their staff.
IV. Unique Workers and Unique Jobs
Another distinguishing feature of the labour market is the
diversity in the characteristics of the service being traded. Workers
differ along numerous dimensions, including skills, abilities, work
experience, educational background, work attitudes and
motivations.
The uniqueness of workers and jobs has two main implications.
First, labour market exchanges are dependent on numerous
factors in addition to price. For example, workers may rationally
“trade-off” a high wage for job security or for a pleasant working
environment.
Second, it is important for both labour demanders and suppliers
to acquire an adequate amount of information about the other party
before transacting in the labour market.
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V. Multiplicity of Markets
Labour market is the area over which the demand and supply
along with the non pecuniary (non economic) factors determine the
ongoing wage rate.
“the” labour market is comprised of numerous individual sub-
markets. We have different market segmentations depending on
location, education, experience skill, etc. The two most important
ways in which the labour market can be subdivided are according
to geographic location and occupation.
These non monitory characteristics may well be as important as
the direct pay. Thus, the labour supply decision of worker is more
complex than the supply decisions that applies to the product
market.
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For some occupation the market is described as the national
labour market.
The search for highly skilled technical and professional
occupations is often carried out on a national basis.
The research director of a major pharmaceutical firm
and the chief executive officer of a major charitable
association are likely examples of positions in the
national labour market.
For other occupations, such as professional athlete or university
professor, the labour market may even be international in
scope.
On the other hand, if the area of search is within the local
community, the market is described as the local labour market.
Real estate agents and taxi drivers are examples of occupations
17 where job search and recruitment typically occur within a local
a. National and Local Labor Markets: A National Labor
Market is one in which most job search by employers and
firms takes place on a national level. Most job search takes
place at a local level in a local labor market. The markets
for college professors, top management positions in large
corporations, and similar occupations are national labor
markets. A national labor markets exists only when there are
few employers and employees in most geographical regions.
Local labor markets exist when there are many employers
and employees in most geographical regions.
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b. Internal and External labor markets : An internal labor market is said to
exist within a firm if the firm fills higher level positions in the firm primarily by
promotion from within the firm. Firms often rely on internal labor markets
because:
this reduces hiring and training costs,
it improves employee morale and motivation, and
it reduces the effect of uncertainty (since the firm has already observed worker
productivity).
c. Primary and Secondary Labor Markets: jobs is that between the primary and
secondary labor market.
Jobs in the primary labor market are characterized by high wages and stable employment
relationships. Examples of jobs in the primary labor market include: accountant, lawyer, teacher,
carpenter, and plumber..
Workers employed in the secondary labor market receive low wages and experience unstable
employment relationships. Workers in fast-food restaurants, gas station attendants, dishwashers,
janitors, etc. are employed in the secondary labor market
While primary labor market jobs have obvious advantages than secondary labour market. The secondary labor market offers
job opportunities that would not be available in the primary labor market to high school and college students, adults engaged
in extensive child-care activities, and retired individuals. High school and college students are not likely to find primary labor
market jobs during summer vacations or for part-time work during the academic year. Those adults who are "stuck" in
secondary labor market occupations because of limited job skills and education, however, are not as pleased with finding their
19 only employment prospects in this sector.
primary labor market is characterized by high wages and stable employment relationships. While secondary labor market with low wages and unstable
employment relationships
While primary labor market jobs have obvious advantages than
secondary labour market. The secondary labor market offers job
opportunities that would not be available in the primary labor
market to high school and college students, adults engaged in
extensive child-care activities, and retired individuals. High
school and college students are not likely to find primary labor
market jobs during summer vacations or for part-time work
during the academic year. Those adults who are "stuck" in
secondary labor market occupations because of limited job skills
and education, however, are not as pleased with finding their
only employment prospects in this sector.
primary labor market is characterized by high wages and stable
employment relationships. While secondary labor market with low wages and
unstable employment relationships
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1. Labor Economics and its Evolution
Labour economics has been recognized as an important field of study. Market,
institutional and sociological factors shaped the theories of labour economics.
Different economists attached different value to these three factors Depending
on these; we have two major school of labour economics.
[Link] neoclassical school of thought
[Link] institutional school of thought
The Neoclassical School of Thought
The principal founder of this school is Alferd Marshal. This school of thought
believes that on the force of demand and supply.
they considered labour market as self correcting market in which there is
automatic solution. It assumes that the labour market is in equilibrium (the
labour market clears where supply equals demand). Thus, the real wage rate
adjust to the point where demand for labor equals its supply. As the result labour
market is always in equilibrium and there will be no involuntary unemployment.
They argued that during low demand for labour, unemployment will be high. x
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The theory failed to explain economic depression of 1930s . As the result, many economists
started to questions the existing neoclassical theories.
Institutional School of Thought
The schools have emerged as opposition against to neoclassical and they rejected the
neoclassical rational actor model. They believe in irrationality of indidividuals in some cases.
Thus, rather than maximizing their needs, individual might stop at the point where they get
satisfied .
Their theory institutional school was based on the following assumptions
Preferences of individual are highly independent. That is preference of one individual is
highly affect the preference of others.
Preferences of individual are affected by economic. Social, institutional and other factors.
This has strong implication in labour market operation.
More specifically, policy of labour union, corporations, social forces has close association in
labour market. These forces reduce the competitive forces in the labour market. Thus, market
are imperfect and resources are shared equally.
In general the institutional approach plays down economic forces and emphasizes the roles
of institutions, custom and sociopolitical factors; rather than abstract theoretical reasoning,
this approach emphasizes descriptive realism
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Preferences of individual are affected by economic. Social,
institutional and other factors. This has strong implication in
labour market operation.
policy of labour union, corporations, social forces has close
association in labour market. These forces reduce the
competitive forces in the labour market. Thus, market are
imperfect and resources are shared equally.
In general the institutional approach plays down economic
forces and emphasizes the roles of institutions, custom and
sociopolitical factors; rather than abstract theoretical reasoning,
this approach emphasizes descriptive realism
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