LABOUR MARKET

ECONOMICS

INTRODUCTION TO LABOUR
MARKET ECONOMICS
 The Labour Market
• The market for a factor of production -
labour (measure of work done by human
beings)
• Explains the functioning and dynamics of
the market for labour e.g. the pattern of
wages, employment and income.
• Refers to the demand for labour – by
employers and the supply of labour
(provided by potential employees)
• Demand for labour is a derived demand -
not wanted for its own sake but for what
The demand for labour is dependent on the
it can contribute to production demand for the final product that labour
produces. The greater the demand for office
space the higher the demand for construction
workers.
 The Labour Market: Key Role
Players – Individuals Decisions
• Individuals’ Decisions:
1. When to enter the labour market
2. How much education /training
3. Type/extent of job search
4. Occupational industry
5. Labour hours/household work
6. Accept/quit/relocate
7. Wage rate
8. Union/association
 The Labour Market: Key Role
Players – Firms Decisions
• Organizations or firms Decisions:
1. The number of workers
2. Wages and benefits
3. Hours
4. Layoffs
5. Subcontracting
6. Pension/retirement policies
 The Labour Market: Key Role
Players – Factors Influencing Firms
Decisions
• Global competition: Free trade, industrial restructuring,
Deregulation, Privatization.
• Legislative environment: Human rights, minimum wage,
overtime, maternity leave, workers compensation,
occupational health and safety, pensions, labour laws,
collective bargaining.
• Changing workforce: Age , gender, ethnic diversity
 The Labour Market: Key Role
Players – Governments Decisions
• Individual rights versus employee competitiveness
• Public support
• Training and education
• Insurance
• Compensation
• Pensions
• Skills development
 Characteristics of the Labour
Market
1. Stakeholders – Labour, management, and government (each
with different goals
2. Sociological – Family and community ties, role of women,
and social norms
3. Institutional - unions and multinational corporations
4. Legislative constraints – minimum wage laws, health and
safety regulations, employment insurance, pensions
5. Market imperfection – market uncertainties and risk
6. Complex wage rate implications – ROI on education, training
and mobility, union power, productivity, standard of living
 The Labour Market:
• Demand for Labour
• Influenced by:
– Cost of hiring labour
– Wages/salaries
– National Insurance contributions
– Pension contributions
– Administration costs associated with tax payments and
adhering to employment laws and regulations
 The Labour Market
• Demand closely linked with the value of the product produced by labour

– e.g. 1 person produces 50 mugs per week, each mug sells for R2 each. Total value
of output = R100

– To be profitable the wage rate must not therefore exceed £100 per week

• Marginal Revenue Product – the addition to total revenue from the sale of
one additional unit of output produced by the worker
MRP = MPP x P
• MPP = Marginal Physical Product – the addition to total output produced by
employing one extra or one fewer unit of labour
 The Labour Market
The demand for labour will shift
Wage Rate (r per week)
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At a
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 The Labour Market
• Productivity:
• A measure of output per person per time
period
Total Output
Productivity = --------------------
Quantity of Factor
 The Labour Market

• Productivity
– Not always easy
to measure
– Influences costs – output =
potential revenue
counterbalanced
by wage costs
– Indicates efficiency Measuring productivity in service
industries, especially the public sector
– Competitive advantage can be difficult. How would you
measure the productivity of a teacher?
 The Labour Market
• Supply of Labour determined by:
– Size and structure of the population – age, gender, etc.
– Skill levels required
– Education and training
• Number in higher education
• School leaving age
• Qualification types
– Fashion
– Time period
– Opportunity cost of work – income and substitution effects
 The Labour Market
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 The Labour Market

• The relative demand and supply of labour can

help to explain differences in wage rates for
different occupations
– e.g. Supply of those able to train as nurses higher
than those with the talent to be successful
professional footballers, hence the higher wage
rate
of footballers!
Nurses help care for people and save
lives, footballers entertain. One earns
R90,000 per week, the other R350.
 The Labour Market
• Other factors influencing wage
differentials:
– Status attached to the job
– Discrimination
– Race
– GenderMonopsony – a dominant
buyer in the market
– Sector – public or private
– Trade Union power or influence
– Length of career
– Risk or danger involved
– Social or unsocial hours Some jobs might attract a premium
because of the danger or risk
– Shift patterns associated with carrying it out!
– Productivity
 POLICY ISSUES
Labour supply:
Work incentive effects of income maintenance and tax
transfer programs like employment insurance.
Labour demand:
Effects of globalisation and outsourcing, trade policies,
collective bargaining, legislation, human rights