ECON 429: Labour Economics I LECTURER: DR PRISCILLA TWUMASI BAFFOUR INTRODUCTION: DEFINITION, OBJECTIVES AND FUNDAMENTAL CONCEPTS Priscilla T. Baffour Slide 1
Definition and Objectives of Labour Economics Labour Economics is the study of how labour markets work. Labour economics examines the organisation, functioning and outcomes of labour markets: the decisions of prospective and present labour market participants; and the public policies relating to the employment and payment of labour resources (McConnell and Brue). Its a mechanism that brings consumers of labour services and producers together to interact for the benefit of both. Focuses on the determination of wages and employment in the labour market that results in the distribution of income among individuals and households. Priscilla T. Baffour Slide 2
Definition and Objectives of Labour Economics As in any market, economics of the labour market deals with the behaviour of employers (demanders) and workers (suppliers) in response to general incentives of profit, prices, wages and other non-monetary factors that affect the employment relationship and their influence on economic well-being of individuals and society. In effect, economics of the labour market is the application of scientific methodology to the interaction between the demand and supply of labour and labour market institutions and their influence on labour market outcomes. Priscilla T. Baffour Slide 3
Objectives of Labour Economics Labour is unique from other factors of production, as a result, answers will be sought from the following questions; What factors influence workers occupational choice and for that matter employer; How employers choose among prospective employees Wage and employment determination Priscilla T. Baffour Slide 4
Objectives of Labour Economics Why wages and salaries differ among jobs and industries. Events, trends and other developments in the labour market (union strikes, women participation in the labour market etc). Priscilla T. Baffour Slide 5
Structure Labour outcomes to be dealt with this semester includes: Changing level and composition of labour supply Changing level and composition of labour demand The structure of earnings Labour management relations and collective bargaining Changes in composition and levels of unemployment Priscilla T. Baffour Slide 6
The Framework The structure used to facilitate understanding of the labour market is; Demand side Supply side Institutions Labour Market Outcome Priscilla T. Baffour Slide 7
Framework Cont. Labour market outcomes are the observed events, behaviour or developments in the labour market that we try to understand. Important to note you can understand the outcome only when you know the processes that led to the them, thus the mechanics of how the labour market works. As indicated in the framework, actors in the labour market are; Households Firms Government Priscilla T. Baffour Slide 8
Actors in the labour market Households make decisions such as: when to enter the labour market how much education or training which occupation or industry number of hours to work whether to quit or retire Firms decide on: number of workers to hire hours of work when to layoff or close plant pension or retirement policy Priscilla T. Baffour Slide 9
Actors in the labour market Government establishes the environment by: providing training unemployment insurance workers compensation pensions laws to protect workers and firms Priscilla T. Baffour Slide 10
Framework Cont. Labour outcomes to be dealt with this semester includes: Changing level and composition of labour supply Changing level and composition of labour demand The structure of earnings Labour management relations and collective bargaining Changes in composition and levels of unemployment Priscilla T. Baffour Slide 11
Uniqueness of the Labour Market Labour is embodied in the seller: Although wages are important, other noneconomic factors affect labour. Human beings have preferences with regards to the conditions under which they work. Most employment relationships are long term: Workers become experienced and efficient on the job overtime. Cost associated with hiring new workers. Labour can acquire knowledge and better skills to be more productive in the long-run compared to other factors of production which deteriorate over time. Labour develops skills over time, so its better to have a long term employment relationship. However, if skills acquired are not utilised, labour in the long-run deteriorates. Priscilla T. Baffour Slide 12
Uniqueness of the Labour Market Cont. Heterogeneity (diversity) of workers and jobs: Individuals differ by education, ability, age, experience, sex physical appearance, personality etc. Jobs differ in terms of remuneration, degree of difficulty, risk accessibility etc. Heterogeneity could be explicit or implicit. Jobs are chosen not solely because of remuneration, factors such as safety, prestige etc. Employers also choose workers based on personality appearance etc. Labour is Perishable: labour cannot be stored, depreciation of the source of labour (human beings) Priscilla T. Baffour Slide 13
Uniqueness of the Labour Market Cont. Multiple Sub-Labour Markets: eg. Skilled vrs unskilled, market for teachers, nurses etc. makes the exchange in the labour market different from that of commodity market. People have preferences in the usage of time: (work for income, raise kids, rest, holiday etc) Priscilla T. Baffour Slide 14
Fundamental Concepts in Labour Economics Labour market consist of all institutional arrangements developed to facilitate interaction between demand and supply of labour services. The institutional arrangements include advertising, employment agencies, information networks etc. Forms of Labour Market The scope of the labour market: ie. Local, national and international labour markets Type of occupation Regional labour market Type of job or labour contract Sector Priscilla T. Baffour Slide 15
Fundamental Concepts in Labour Economics Cont. Kerr (1954) uses 5 main models to categorise labour markets; 1. Perfect Market (synonymous to perfect competition) 2. The Neo-Classical Labour Market (modified perfect market with rigidities) ie, supply of skilled labour vrs. Large employers. 3. Natural Labour Market: Avg. worker has a confined view of the market, as such restricted to the local labour market (employers become monopsonist with its consequences). 4. Institutional Labour Market: wages and employment are determined by rules and regulations rather than market forces. Priscilla T. Baffour Slide 16
Fundamental Concepts in Labour Economics Cont. 5. Managed Labour Market: Government attempts to deal with inefficiencies in resource allocation. (Reduce union power and product market monopolies). Priscilla T. Baffour Slide 17
Labour market institutions Labour market institutions these are laws, rules, policies, practices, norms and conventions external to specific individuals who are engaged in the exchange of labour but guides and further or constrain their actions in the market. Egs. Industrial relations and labour laws, labour unions, employers association and minimum wage legislation etc. Priscilla T. Baffour Slide 18