Lecture 10- Labour economics

Labour is [blank_start]derived[blank_end] demand (occurs when demand for [blank_start]resources[blank_end] is [blank_start]derived[blank_end] from demand for [blank_start]goods & services[blank_end]). Demand for labour is [blank_start]derived[blank_end] from demand for final [blank_start]product[blank_end]

An employee’s remuneration is [blank_start]total rewards[blank_end] they get. Large part of this in many circumstances is their [blank_start]pay[blank_end] but it may also include [blank_start]non-monetary rewards[blank_end]

Efficiency wage theory suggests that it may be [blank_start]efficient[blank_end] for managers to pay [blank_start]more[blank_end] than market wage because of consequent [blank_start]productivity gains[blank_end] & [blank_start]cost savings[blank_end]

Real wages are [blank_start]nominal wages[blank_end] adjusted for [blank_start]inflation[blank_end]. They show [blank_start]purchasing power[blank_end] of earnings

Marginal value product- Value of extra [blank_start]output[blank_end] of extra [blank_start]employee[blank_end]

Reservation wage- [blank_start]Minimum[blank_end] amount that an [blank_start]employee[blank_end] would require to [blank_start]accept[blank_end] job

Geographical immobility occurs when employees [blank_start]cannot easily[blank_end] move between [blank_start]regions[blank_end] to accept job

Migration refers to flow of people [blank_start]in[blank_end] & [blank_start]out[blank_end] of country. Immigration means people are [blank_start]coming[blank_end] into country. Emigration means they are [blank_start]leaving[blank_end] country. Net migration means that more people are [blank_start]entering[blank_end] country than are [blank_start]leaving[blank_end]

Demand for [blank_start]labour[blank_end] will be linked to demand for [blank_start]output[blank_end]. Demand for [blank_start]labour[blank_end] is derived from demand for [blank_start]product[blank_end] you are producing: labour is ‘[blank_start]derived demand[blank_end]’. Higher the demand for your [blank_start]products[blank_end] & the more [blank_start]customers[blank_end] are willing to pay for product, the higher the demand for [blank_start]employees[blank_end] in general is likely to be, & this is likely to pull up [blank_start]wages[blank_end] & [blank_start]salaries[blank_end]

Another factor that influences your demand for labour is how [blank_start]productive[blank_end] employees are. If employees are [blank_start]productive[blank_end] then they produce [blank_start]more[blank_end], & this [blank_start]extra[blank_end] output can be sold. This means that you are likely to be willing & able to pay them [blank_start]high earnings[blank_end]

In rational world you will employ [blank_start]additional[blank_end] people up to point where value of extra [blank_start]output[blank_end] produced by one [blank_start]additional[blank_end] person (known as value of [blank_start]marginal product[blank_end]) is equal to extra [blank_start]costs[blank_end] of employing that person. This is marginal condition of employment for [blank_start]profit-maximising[blank_end] employer

Productivity is key element in likely earnings of [blank_start]employees[blank_end] & [blank_start]success[blank_end] of business. As manager, you will want to examine every stage of operational process to look for ways of helping [blank_start]employees[blank_end] to become more [blank_start]productive[blank_end]. [blank_start]Higher productivity[blank_end] is potentially win–win situation (business can earn more, & so can employees)

Managers will want to improve [blank_start]productivity[blank_end] because this can help to [blank_start]reduce[blank_end] unit costs. Increasing [blank_start]productivity[blank_end] may be achieved in several ways which include changes to [blank_start]reward systems[blank_end], changes to [blank_start]work processes[blank_end], [blank_start]training[blank_end] of staff & [blank_start]investment[blank_end]

[blank_start]Earnings[blank_end] of employees in market will depend on [blank_start]supply[blank_end] conditions as well as [blank_start]demand[blank_end]

Supply of labour- Number of people who are [blank_start]willing[blank_end] & [blank_start]able[blank_end] to work in particular [blank_start]profession[blank_end] at given [blank_start]wage[blank_end]). It will depend on range of factors such as amount of [blank_start]training[blank_end] required, [blank_start]skills[blank_end] involved, relevant numbers in [blank_start]working population[blank_end], ease of [blank_start]movement[blank_end] & [blank_start]nature[blank_end] of job

Reservation wage depend on many factors, such as [blank_start]nature[blank_end] of job, [blank_start]working[blank_end] conditions, [blank_start]hours[blank_end] of work & an individual’s [blank_start]personal & family[blank_end] circumstances

Labour market is made up of [blank_start]millions[blank_end] of markets. [blank_start]Demand[blank_end] & [blank_start]supply[blank_end] of labour in given region is [blank_start]different[blank_end] from those in another region; [blank_start]demand[blank_end] & [blank_start]supply[blank_end] for one type of job is [blank_start]different[blank_end] from those for another type. In any particular market [blank_start]wage[blank_end] level may be determined by market forces of [blank_start]supply[blank_end] & [blank_start]demand[blank_end]

If demand for labour [blank_start]increases[blank_end], this leads to [blank_start]higher[blank_end] wage; [blank_start]extra[blank_end] demand pulls [blank_start]up[blank_end] wage level. If demand for labour [blank_start]decreases[blank_end], this leads to [blank_start]lower[blank_end] wage; [blank_start]lack of[blank_end] demand pulls [blank_start]down[blank_end] wage level

If supply of labour to market [blank_start]increases[blank_end], this [blank_start]does not limit[blank_end] number of people available & wages are pushed [blank_start]down[blank_end]. If supply of labour to market [blank_start]decreases[blank_end], this [blank_start]limits[blank_end] number of people available & wages are pushed [blank_start]up[blank_end]

An [blank_start]increase[blank_end] in demand for labour may be caused by [blank_start]more[blank_end] demand for final product. This leads to [blank_start]higher[blank_end] equilibrium wage & higher [blank_start]quantity[blank_end] of labour. A [blank_start]decrease[blank_end] in demand for labour may be caused by [blank_start]less[blank_end] demand for final product. This leads to [blank_start]lower[blank_end] equilibrium wage & [blank_start]lower[blank_end] quantity of labour

An [blank_start]increase[blank_end] in supply of labour may be caused by [blank_start]net migration[blank_end]. This leads to [blank_start]lower[blank_end] equilibrium wage & [blank_start]higher[blank_end] quantity of labour. A [blank_start]decrease[blank_end] in supply of labour may be caused by [blank_start]net emigration[blank_end]. This leads to [blank_start]higher[blank_end] equilibrium wage & [blank_start]lower[blank_end] quantity of labour

In some markets there may be one main ‘[blank_start]buyer[blank_end]’ of particular type of [blank_start]employee[blank_end]. If there is one [blank_start]buyer[blank_end] of labour, this is known as ‘[blank_start]monopsony[blank_end]’. [blank_start]Monopsony[blank_end] is likely to drive [blank_start]down[blank_end] wages & employ [blank_start]fewer[blank_end] people than well functioning market would

Market conditions may lead to [blank_start]wage[blank_end] that brings about [blank_start]equilibrium[blank_end] in particular labour market, but which society feels is too [blank_start]low[blank_end]. This desire to see employees earn ‘[blank_start]reasonable[blank_end] amount’ led to government introducing [blank_start]National Minimum Wage[blank_end] in 1999. There is now [blank_start]National Living Wage[blank_end] for those aged 25 & over

Argument against minimum wages is minimum wage is [blank_start]lowest[blank_end] amount an employee can be legally [blank_start]paid[blank_end]. If this is set [blank_start]above[blank_end] market wage it could lead to [blank_start]excess[blank_end] supply. At [blank_start]higher[blank_end] wage, quantity demanded [blank_start]falls[blank_end] & quantity supplied [blank_start]increases[blank_end] (compared to equilibrium wage & output). Impact of minimum wage would be that number of people employed [blank_start]falls[blank_end] compared to [blank_start]equilibrium[blank_end] but wage rate they receive is [blank_start]higher[blank_end]

Argument for minimum wages is [blank_start]macroeconomic[blank_end] benefits as there would be increasing [blank_start]aggregate demand[blank_end] as workers have more [blank_start]income[blank_end] (workers on lower [blank_start]income[blank_end] have [blank_start]higher[blank_end] propensity to consume). Also, there would be an increase in [blank_start]incentive[blank_end] to work (people may come off [blank_start]benefits[blank_end]). In addition, productivity may [blank_start]increase[blank_end] & [blank_start]positive[blank_end] welfare effect for lower paid

Trade unions exist to represent [blank_start]employees[blank_end] & protect their [blank_start]interests[blank_end]. By being part of union, [blank_start]employees[blank_end] have more [blank_start]power[blank_end] in negotiations because they are acting as [blank_start]group[blank_end], rather than [blank_start]individually[blank_end]. This means they might be able to [blank_start]push up[blank_end] wages

Trade unions may also [blank_start]bargain[blank_end] to force managers to [blank_start]retain[blank_end] same number of employees that would occur in [blank_start]free[blank_end] market but insist on [blank_start]higher[blank_end] wage than market suggests. Trade unions may also counteract [blank_start]monopsony power[blank_end] of big employers. Also, it protects [blank_start]employment[blank_end]

Remuneration of employees is important to attract the right [blank_start]number[blank_end] & [blank_start]quality[blank_end] of staff. Employee’s [blank_start]costs[blank_end] are also significant [blank_start]cost[blank_end] of business & must be monitored & assessed to ensure [blank_start]investment[blank_end] is worthwhile. [blank_start]Pay[blank_end] that individuals receive will usually be affected by [blank_start]demand[blank_end] & [blank_start]supply[blank_end] conditions in relevant labour market. Low pay may be associated with [blank_start]low[blank_end] levels of demand &/or [blank_start]high[blank_end] levels of supply. High pay is likely to be associated with [blank_start]limited[blank_end] supply &/or [blank_start]high[blank_end] levels of demand