LABOUR ECONOMICS-MICRO AND

MACRO ASPECTS

Presented by:
Aanchal Aggarwal
Arzoo Dalal
 LABOUR ECONOMICS:
• ECONOMICS : Concerned with DISCOVERY OF RULES OR
PRINCIPLES that indicate how choices can be RATIONALLY &
EFFICIENTLY RENDERED, since resources are SCARCE and WANTS
are virtually UNLIMITED, society needs to manage its resources as
efficiently as possible to achieve maximum fulfillment of its wants.

• LABOUR ECONOMICS:
• Examines the organization, functioning, and outcomes of Labour Market .
• Decisions of prospective and present Labour Market participants.
• Public policies relation to the employment and payment of Labour
Resources.
 WHY DO WE STUDY
“LABOUR ECONOMICS “:
• Socio Economic Importance: helps us in
understanding the socio economic issues such
as why is there a rapid rise in employment etc.
• Quantitative: Labour is our most important
economic resource. Nearly 70 percent of the
national income flows to workers as wages.
• Unique:
– Demand for labour is a derived demand
– It also depends on qualitative considerations
unlike the demand for the product.
 CHARACTERISTICS OF LABOUR:
• Sells his SERVICES ONLY.
• Not as PRODUCTIVE as Capital.
• Less MOBILE than capital.
• NO Quick and Immediate adjustment of
Supply to Demand.
• Labour is a source of PRODUCTION and
ULITMATE GOAL.
Latest Statistics Pertaining to
Labour:
 ASSUMPTIONS WHILE STUDYING
LABOUR ECONOMICS:
• Relative Scarcity: of time, personal income
and societal resources
• Purposeful Behavior: Comparison between
extra cost and benefits is made after which
decision is taken
• Adaptability: Labour Markets adapt, adjust or
alter their behaviour in response to changes in
the market.
MICRO AND MACRO ASPECTS:

LABOUR
ECONOMICS

MICRO MACRO
ASPECTS ASPECTS
Labour Economics: Micro Aspect
• Micro-Economics: it is concerned with the
decisions of individual economic units and the
functioning of specific markets.
• It focuses on
– the determinants of labour supply and demand
– and the ways by which supply and demand
interact to determine wage rates and employment
in various labour markets.
 MICRO ASPECTS:

SUPPLY OF
LABOUR
LABOUR
MICRO MARKET
ASPECTS
DEMAND
OF LABOUR
 Labour Economics: Macro Aspect:
• Macro- economics stresses the aggregative
aspects of labour markets and in particular
the:
– Distribution of earnings
– Labour Productivity
– And the overall level of employment
 MACRO ASPECTS:

MACRO

DISTRIBUTION OF EMPLOYMENT
PRODUCTIVITY PERSONAL &
EARNINGS UNEMPLOYMENT
 LABOUR MARKET:

LABOUR MARKET

MOBILITY
EFFICIENT PAY
WAGE STRUCTURE AND
SCHEMES
MIGRATION
 LABOUR MARKET:

LABOUR MARKET

TRADE UNIONS &

COLLECTIVE GOVERNMENT DISCRIMINATION
BARGAINING
 MICRO ASPECTS:
• SUPPLY OF LABOUR:
• WORK LEISURE DECISION.
• PARTICIPATION RATE.
• QUALITY OF LABOUR.
 SUPPLY OF LABOUR:
• How are these labour supply decisions made?
• How do individuals decide on the number of
hours of labour, if any, to supply in the labour
market?
• Supply of labour can be studied by the help of:

Work-Leisure Participation Quality of

Model Rates Labour
THE WORK LEISURE MODEL: BASIC MODEL
ASSUMPTIONS:

• An individual, having a fixed amount of time available must

decide how to allocate among work and leisure.

• WORK: Time devoted to a paying job.

• LEISURE: Time for which the person does not get paid e.g.
education, commuting, rest, relaxation etc
 INDIFFERENCE CURVES
• An Indifference Curve shows the various
combinations of real income and leisure time that
will yield some specific level of utility or satisfaction
to the individual.
• Properties of indifference Curves:
– Negative Slope
– Convex to origin
– Indifference Map
 Different Work-Leisure Preferences
• Workaholic : A person who places a low value on
leisure and a high value on work (income).

• Leisure Lover : A person who puts high value on

leisure and low value on work (income).

The two differ because of:

Personal
Preferences Occupation
circumstances
 Budget Constraint Line
• This shows all the various combinations Of income and
leisure that a worker might realize or obtain given the
wage rate.
 UTILITY MAXIMISATION
• The individual’s utility maximizing position can be
determined by bringing together the subjective
preferences embodied in the indifference curves and
the objective market information contained in each
budget line.
• The farther the IC is from the origin, the greater the
person’s total utility.
• Optimal Work-Leisure position is achieved where
slope of IC is equal to the Wage Rate.
 Quality of labour
• Any activity that increases the quality of
labour may be considered as an investment in
human capital.
• Investment in human capital involves
expenditures not only on formal education
and on the job training but also on health,
migration, job search and the preschool
nurturing of children.
 The Human Capital Model
• Concepts relating to the human capital model:
– Direct cost: costs in the form of fees for tuition,
books etc.
– Indirect Cost: is the opportunity cost of going for
higher studies is the earnings which you give up
for not entering the labour market after
completing your graduation
– Future value= Present value(1+ interest rate)
• This is due to the time preference of money
 Demand for Labour
• Demand for labour is a derived demand which
is dependant upon:
– How productive that labour is in helping to create
some product or service
– The market value of that item
– For example: if Type A labour is highly productive
in turning out Product X, and if product X is highly
valued by society, then a strong demand for type A
labour will exist.
 Short run and long run demand
curve for labour:
• Short run demand curve for labour is
downward sloping.
• Long run demand curve for labour is also
downward sloping due to
– Output Effect: it is the change in employment
resulting from the effect of wage change on the
employers cost of production.
– Substitution Effect: it is the change in employment
resulting solely from a change in the relative price
of labour, output being held constant.
PARTICIPATION RATE: DEFINITION AND
MEASUREMENT
• The labor force participation rate is
determined by comparing the actual labor
force with the potential labor force.

LFPR = actual labor force Х 100

potential labor force
SECULAR TREND OF PARTICIPATION RATES

• Declining participation rates of older males

due to:
Rising Real Social Security Disability Life Cycle
Wages and and Private Benefits Considerations
Earnings Pensions

• Rising female participation rates due to:

Rising real Changing Rising

Declining Rising Divorce
wage rates for preferences Productivity in
birthrates Rates
women and attitudes the household
 Labour Participation rates in
India(2007-08)
• The labour force participation rate (LFPR) was
about 56 per cent for rural males and 29 per
cent of rural females.
• The corresponding proportions in the urban
areas were 58 per cent and 15 per cent,
respectively.
LABOUR MARKETS
 Wage Structure:
• Perfect Competition: Homogenous Workers
And Jobs
– Assumptions:
• Homogenous workers and jobs to all employees and
firms in the economy.
• Information is perfect
• Job Searched and migration costs are less

If all the above conditions are fulfilled then labor

resources will flow among various employments
and regions of the economy until all the workers
have the same real wage.
Wage Differentials: Heterogeneous
Jobs
• In reality homogenous jobs do not exist,
heterogeneous jobs having differing nonwage
attributes, requiring different types and
degrees of skill exist.
• These differentials consist of an extra pay that
an employer must provide to compensate a
worker for some undesirable job characteristic
that does not exist in an alternative
employment.
 Efficiency pay schemes
• A worker is generally given compensation in the form of a
standard hourly wage rate.
• But besides that it also involves:

Whole range
Health
of fringe Paid vacations
insurance
benefits

Sick leave Contributions

to pensions

• Different Compensation schemes appeal to different workers

so pay schemes must be carefully designed in order to increase
the worker efficiency and productivity.
 References:
• http://
www.indiaonestop.com/unemployment.htm#
Trends
• http://indiacurrentaffairs.org/employment-an
d-unemployment-situation-in-india-2007-08
/
• Contemporary Labour Economics by Tata Mc
Graw
• wikipedia