CHAPTER 8:

Labor and employment

1
The Labor Problem.

• "The labor problem" is the economics term widely used toward

the turn of the twentieth century with various applications. It has
been defined in many ways, such as "the problem of improving
the conditions of employment of the wage-earning classes."
 there are four main Labor problems:
✘ 1. Unemployment and underemployment
✘ 2. Inadequate wages
✘ 3. Industrial and labor management conflict
✘ 4. Economic insecurities
 • Unemployment and underemployment
✘ Unemployment and underemployment have become one of the
world’s major problems, especially in early industrial countries. At
the same time, the terminological and conceptual fluctuations in
this field have grown in intensity.
 Inadequate wages
✘ Business owners often deal with several external factors that have
significant impacts on their business. Government regulation is a
powerful external force that creates difficult business
environments. Minimum wage is a national economic policy
responsible for many business decisions. Business owners must pay
individuals the minimum wage according to federal or state
guidelines. Although federal guidelines set the standard national
minimum wage, states have the ability to go above and beyond this
level if they choose.
 Industrial and labor management conflict
✘ During tough economic times, conflict arises in industrial relations
between labor and management over such matters as wages and
benefits, layoffs, safety, work hours and unionization. According to
"HR Magazine," personnel with conflict management skills are in
short supply, in part because of increasing globalization of the
industrial work force and the rise in conflicts between workers and
management
 Economic insecurities
✘ One reason to think that economic insecurity might ‘matter’ is the
fact that governments have spent a lot of money, over many years,
to reduce it. Increasing the economic security of the populace has
been major goal of the welfare state, which has produced
substantial levels of public expenditure in all developed economies.
 DEMAND

✘ Demand is an economic principle referring to a

consumer's desire and willingness to pay a
price for a specific good or service over a given
period of time.

8
Demand curve

10
 SUPPLY

✘ Supply is a fundamental economic

concept that describes the total amount
of a specific good or service that is
available to consumers.

11
12
SUPPLY CURVE

13
 - Where both employers and
workers agree on wages rates is
reached at the interaction of
the demand and supply of labor.
 CLASSICAL THEORY
THE THEORY STATES THAT A FIRM IN A COMPETATIVE INDUSTRY WILL
HIRE WORKERS UP TO THE POINT WHERE THE VALUE OF MARGINAL
PRODUCTS JUST EQUALS THE COST OF FACTOR.
 𝒘 = 𝒑𝑴𝒏

w=money wage rate

p=level of prices
𝑴𝒏 =marginal physical product of labor
 REAL WAGE RATE
𝑤
= 𝑀𝑛
𝑝

REAL
WAGE

𝑤
𝑝1

𝑤 𝐿𝑑
𝑝2

LABOR
EMPLOYME
𝐿1 𝐿2
NT
 DEMAND FOR LABOR AND TOTAL PRODUCT
✘ IF THE REAL WAGE RATES ARE HIGH, DEMAND FOR LABOR WILL ONLY
BE LOW BECAUSE THE CAUSE OF HIRING WORKERS ARE EXPENSIVE.
 REAL DEMAND
WAGES FOR
RATES LABOR

LESS WORKERS HIRED

LESS OUTPUT
 LESS
WAGES WORKERS

LESS WORKER WILL ENTER THE

MARKET
 REAL DEMAND
WAGES FOR
RATES LABOR

MORE WORKERS HIRED

MORE OUTPUT
 DEMAND FOR LABOR AND TOTAL PRODUCT

𝑤
✘ 𝐿𝑑 = 𝐷
𝑝
✘ 𝐿𝑑 = demand for labor
TOTAL TP
PRODUCT

𝑇𝑃2

𝑇𝑃1

LABOR EMPLYMENT
𝐿1 𝐿2
 SUPPLY LABOR
𝑤
✘ 𝐿𝑠 = 𝑆
𝑝
✘ 𝐿𝑠 = supply of labor
REAL WAGE

𝑤
𝑝1

𝐿𝑑
𝑤
𝑝2

LABOR
𝐿1 𝐿2 EMPLOYMENT
THE KEYNESIAN
THEORY
✘ Keynesian theory is a product of the Great
Depression of the 1930s. It was John
Maynard Keynes' assertion that
expenditure, meaning how much an
economy spends on goods and services, is
the key to economic stimulation.
✘ Keynesians identify four components of expenditure:
1. Consumption - which refers to what consumers spend.
2. Investment - which refers to what businesses spend on
increasing capacity.
3. Government purchases - meaning what all levels of government
buy from the private sector.
4. Net exports - which are what the nation sells abroad, less what it
buys from other nations.
✘ Keynesian theory sees spending as the driver for economic growth,
Keynesians consider personal savings, whatever a consumer earns
but does not spend, to be a drag on the economy.
 Labor Markets are not Self-Correcting

✘ Classical theorists maintained that the market will take care of

itself. If we just leave the market alone, it will correct itself.
✘ However, the Keynesian theorists argue that the aggregate of labor
markets is not self-correction. They advance two reasons:
1. The forces causing and maintaining full employment is largely
outside of labor markets.
2. The self-correcting mechanism has to proved effective, i.e., free
market do not seem to reach an equilibrium position at the
point of full employment.
 Labor Supply is a Function of Money Wages

✘ J.M. Keynes assumed that workers prefer to make their decisions in

terms of money wage.
✘ He assumed that money wages were apt to be “sticky” or rigid
downwards.
✘ Workers would strongly resist cuts in money wage rates and would
later prefer under-employment that cuts in money wages rates.
 The Cure to Unemployment
✘ Keynesians theorists maintain that wages need not fall to maintain
full employment.
✘ Three reasons can be advanced for the undesirability of wage cuts
as solution to solve the unemployment problem:
1. Inflation
2. Government
3. Trade unions
✘ With the way prices are going up now, reducing
wage rates would affect the welfare of the
workers.
✘ The government has set up minimum wage
legislation disallowing wage rates to go down.
✘ Trade unions especially in the more organized
industrial sector always work for the welfare of
workers, thus, increase in wage rate.
✘ For the Keynesians, to cure the problem
of unemployment, national income must
increase.
✘ One way of increasing national income is
to entice investors to invest more.
Subsistence theory of
wages
 Subsistence theory of wages

• Subsistence theories emphasize the supply aspects of the labour market

while neglecting the demand aspects. They hold that change in the supply
of workers is the basic force that drives real wages to the minimum
required for subsistence (that is, for basic needs such as food and
shelter). Elements of a subsistence theory appear in The Wealth of
Nations, where Smith wrote that the wages paid to workers had to be
enough to allow them to live and to support their families. The English
classical economists who succeeded Smith, such as David
Ricardo and Thomas Malthus, held a more pessimistic outlook. Ricardo
wrote that the “natural price” of labour was simply the price necessary
to enable the labourers to subsist and to perpetuate the race. Ricardo’s
statement was consistent with the Malthusian theory of population,
which held that population adjusts to the means of supporting it.
✘ Subsistence theorists argued that the market price of labour
would not vary from the natural price for long: if wages rose
above subsistence, the number of workers would increase and
bring the wage rates down; if wages fell below subsistence,
the number of workers would decrease and push the wage
rates up. At the time that these economists wrote, most
workers were actually living near the subsistence level, and
population appeared to be trying to outrun the means of
subsistence. Thus, the subsistence theory seemed to fit the
facts. Although Ricardo said that the natural price of labour
was not fixed (it could change if population levels moderated in
relation to the food supply and other items necessary to
maintain labour), later writers were more pessimistic about
the prospects for wage earners. Their inflexible conclusion
that wages would always be driven down earned the
subsistence theory the name “iron law of wages.”
Factors affecting
the theory
 The lassez-faire theory
• Laissez faire is often associated with the well-known economist Adam
Smith and his book Wealth of Nations (1776), which noted that human
beings are naturally motivated by self-interest, and when there is no
interference in their economic activities, a natural and more efficient
balance in society exists.
• Laissez faire is the belief that economies and businesses function best
when there is no interference by the government. It comes from the
French, meaning to leave alone or to allow to do. It is one of the
guiding principles of capitalism and a free market economy. It is the
belief that each individual's self-interest to do better, strong
competition from others, and low taxes will lead to the strongest
economy, and therefore, everyone will benefit as a result.
 ROBERT MALTHUS
• Thomas Robert Malthus (13 February 1766 – 23 December 1834) was an English cleric
and scholar, influential in the fields of political economy and demography.. Malthus
himself used only his middle name, Robert.
• Malthus's early writings were pamphlets that addressed economic and political issues
of his time. In opposition to the popular 18th century European view that society was
constantly improving, he wrote about the dangers of excessive population growth.
• In his 1798 work, An Essay on the Principle of Population, Malthus examined the
relationship between population growth and resources. From this, he developed
the Malthusian theory of population growth in which he wrote that population growth
occurs exponentially, so it increases according to birth rate.
• For example, if every member of a family tree reproduces, the tree will continue to grow
with each generation. On the other hand, food production increases arithmetically, so it
only increases at given points in time. Malthus wrote that, left unchecked, populations
can outgrow their resources.
✘ According to Malthus, there are two types of 'checks' that can reduce a population's
growth rate. Preventive checks are voluntary actions people can take to avoid
contributing to the population. Because of his religious beliefs, he supported a concept
he called moral restraint, in which people resist the urge to marry and reproduce
until they are capable of supporting a family. This often means waiting until a later
age to marry. He also wrote that there are 'immoral' ways to check a population,
such as vices, adultery, prostitution, and birth control. Due to his beliefs, he favored
moral restraint and didn't support the latter practices.
✘ Positive checks to population growth are things that may shorten the average
lifespan, such as disease, warfare, famine, and poor living and working environments.
According to Malthus, eventually these positive checks would result in a Malthusian
catastrophe (also sometimes called a Malthusian crisis), which is a forced return of
a population to basic survival.
✘ The Irish potato famine of the 19th century has been considered a classic example of
a Malthusian catastrophe. In addition to dealing with political and economic
relations with England and fragmentation of their land, the rapidly growing Irish
population was running out of food.
✘ There are often other factors involved in events that could be labeled as Malthusian
catastrophes, so many scholars take caution when providing modern examples.
 DAVID RICARDO
✘ David Ricardo (18 April 1772 – 11 September 1823) was a British political
economist, one of the most influential of the classical economists along
with Thomas Malthus, Adam Smith and James Mill.
✘ Ricardo became interested in economics after reading Adam Smith's The
Wealth of Nations in 1799. He wrote his first economics article at age 37,
firstly in The Morning Chronicle advocating reduction in the note-issuing of
the Bank of England and then publishing "The High Price of Bullion, a Proof
of the Depreciation of Bank Notes" in 1810.
✘ On the Principles of Political Economy and Taxation(19 April 1817) is a book
by David Ricardo on economics.[1] The book concludes that land rent grows as
population increases. It also presents the theory of comparative advantage,
the theory that free trade between two or more countries can be mutually
beneficial, even when one country has an absolute advantage over the other
countries in all areas of production.
✘ Ricardo contributed to the development of theories of rent, wages,
and profits. He defined rent as "the difference between the produce
obtained by the employment of two equal quantities of capital and
labor." Ricardo believed that the process of economic development,
which increased land utilization and eventually led to the cultivation
of poorer land, principally benefited landowners. According to
Ricardo, such premium over "real social value" that is reaped due to
ownership constitutes value to an individual but is at best[16] a paper
monetary return to "society". The portion of such purely individual
benefit that accrues to scarce resources Ricardo labels "rent".
✘ In his Theory of Profit, Ricardo stated that as real wages increase,
real profits decrease because the revenue from the sale of
manufactured goods is split between profits and wages. He said in
his Essay on Profits, "Profits depend on high or low wages, wages on
the price of necessaries, and the price of necessaries chiefly on the
price of food."
Burdened By Crisis
 Less
Resources
Deterioration of
Living Standards
Increasing Unemployment
Losing The Edge
Graphical Illustration
✘ implies that the demand and supply of
labor are determined by forces beyond the
control of any single individual or entirety
.

61
LABOR CODE OF THE PHILIPPINES PD 442, AS
AMENDED

A decree instituting a labor code, thereby revising and

consolidating labor and social laws to afford protection to labor,
promote employment and human resources development and ensure
industrial peace based on social justice.
Article 8. Transfer of lands to tenant workers. Being a
vital part of the labor force, tenant-farmers on private
agricultural lands primarily devoted to rice and corn
under a system of share crop or lease tenancy whether
classified as landed estate or not shall be deemed owner
of a portion constituting a family size farm of five
hectares if not irrigated and three hectares if irrigated.

In all cases, the landowner may retain an area of

not more than seven hectares if such landowner is
cultivating such area or will now cultivate it.
Employee’s right to self-
organization and the
right to strike
✘ These rights are expressly provided by the 1987
Constitution and the Labor Code

• Employers should not interfere with or deny their employees

their right to form organizations for their mutual aid or
protection to form unions for the purpose of negotiating the
terms and conditions of employment with their employer.

• Employees also have the right to strike but this may only be
exercised after complying with guidelines provided by the DOLE.
Otherwise, the strike may be considered illegal and may be a
cause for terminating their employment.