THE LABOUR MARKET

The wages or salary you get paid is determined largely by what type of job you take. If you take a post as a
clerk, you are likely to get more pay than if you start at lower post. Equally , if you become a manager in a
bank , you will get paid more than a clerk. So the question is why is it that some workers get paid more than
others?
Why is it that some people with exceptional sporting talent, for example Tiger woods, Lionel Messi,
Dwayne Johnson etc. so highly paid? The answer to these questions, like many such questions in economics is
that it all depends on supply and demand.

Hollywood star Dwayne 'Rock' Johnson leads

the pack, topping the list of the 10 highest-  Lionel Messi agreed to a contract extension with
paid actors, collecting $89.4 million between Barcelona to stay with the club through the 2020–21
June 1, 2018, and June 1, 2019 (Source season. The contract promises an annual salary and
internet) bonus of at least $80 million (source internet)
 THE DEMAND FOR LABOUR

Firms demand for labour is due to its decision to produce certain goods or services. Labour is therefore demanded not for
its own sake but because it is essential for the production of goods or services.
The demand for labour shows how many workers is willing and able to hire at a given wage rate in a given time period.

There is inverse relationship between demand for labour and the wage rate.
1. If the wage rate is high more costly to higher extra employees.
2. When wages are lower, labour becomes relatively cheaper than capital. A fall in the wage rate might create a
substitution effect and lead to an expansion in labour demand.
 THE MARGINAL REVENUE PRODUCT OF LABOUR

Profit-maximizing firm is concerned with how much worth is that product which is produced by labour. Employment of a
labour by a firm can be understand with the following schedule and example.
Number of workers Output of Clothing Marginal product Average product
0 0 0 0
1 100 100 100
2 180 80 90
3 240 60 80
4 280 40 70
5 295 15 59
6 306 11 51

Suppose wage rate for employing a labour is $ 600 per month and lets assume that a unit of clothing sells for $ 10. When the
firm hires the first worker, this worker generates $ 1000 of revenue for the firm, this is turn represent $ 400 profit i.e. ( Sale =
100 x 10 = 1000 and less cost of labour 600 = $ 400 profit. The amount of revenue generated by an additional worker is
generated by an additional worker is referred to as marginal revenue product of labour. Adding a further worker generates $
800 and $ 200 profit. i.e. ( 80 x 10 = $ 800 less cost of another worker $ 600 = $ 200). There comes a point wen, after the third
worker has been employed, a further worker adds more to cost than to revenue( it’s cost $ 600 to employ the worker but only $
400 worth of clothing is produce. So above this level of employment the value of marginal product that is being produced is less
than the wage.
Following points will be consider by a firm when there will be hiring of labour:

1. A firm should continue to hire labour as long as the additional worker adds more to revenue than he or she
adds to the firm’s costs
2. The market wage is determined by the marginal revenue product of labour.
3. The marginal revenue product curve for labour is the firm’s demand curve for labour.
4. If the wage rate rises or falls, then fewer or more workers will be employed.

It follows for this analysis that the wages paid to workers are a direct reflection of their marginal
revenue product. So a street cleaner has a lower marginal revenue product than a clerk, who in turn has a
lower marginal revenue product than a teacher and so on. It also follows that it is actually possible to measure
marginal revenue productivity.
 SUPPLY OF LABOUR
The labour supply or supply of labour refers to the total number of hours that labour is able and willing to supply at a
particular wage rate. It is useful to consider labour supply at three levels: that of the individual worker, that of a firm or
industry and that of the economy as a whole.
Different factor affects supply depends upon which of these levels we are dealing with.
THE INDIVIDUAL LABOUR SUPPLY

Wages are important factors for decision of any individual worker to enter into the labour market. If the wage is too low,
someone may determine that it is not worth the effort of going to work and decide to stay at home. Not many people are in
this position- most of us need to work to live. Economics theory assumes that there is a positive relationship between
labour supply and the wage rate. So as the wage rate increases, more people are willing to offer their services to employers.
Beyond a certain point, though, individuals will take the view that they prefer leisure to work. This point is indicated by the
backward-sloping curve .
 FACTORS THAT CAN AFFECT AN INDIVIDUAL SUPPLY OF LABOUR

1. Income tax– In all countries this tend to be progressive. Low-wage workers pay little or no tax. As
wages rise, more of the increase is pain in tax to the government.
2. Demographic changes and immigration – Some jobs, such as fruit picking are unpopular with native-
born workers and rely on immigrant labour. If immigration slows down, there can be vacancies in these
particulars jobs.
3. The non-wages benefits of a job – Un peasant jobs will have fewer people willing to do them therefore
supply will be relatively lower. Although many unpleasant jobs, such as cleaning are relatively low
skilled so may still be low paid.
 LABOUR SUPPLY TO A FIRM OR INDUSTRY

This supply curve consists of the sum of the individual supply curves of all workers employed in a firm or
industry. It is usually upward sloping throughout . As happens with an individual worker, the number of
workers wanting to supply their labour increases with the wage rate that is offered. The slope of this supply
curve is measured by the elasticity of supply of labour .
In general the more skills required the more inelastic will be the supply of labour.
WAGE DETERMINATION UNDER FREEE MARKET FORCES

Important features of the workings of the labour market are :

1. The wage paid to labour equals the value of the marginal product of labour.
2. The willingness of labour to supply their services to the labour market is dependent upon the wage rate that is being
offered.

Each firm purchases labour until the value of the wage paid in the market must equal the value of the marginal product
of labour once it is has brought demand and supply into equilibrium. The market therefore clears at the equilibrium
wage.
Any change in the demand or the supply of labour will change the equilibrium wage. The value of the marginal product of
labour will also change by the same amount, as by definition it must always equal the wage rate.

Go back to the same example of clothing if income of the consumers in developed economies will increase there will be
large demand for cloths so demand curve for clothing will shift to the right, indicating that more will be demanded at any
price. In turn, this affects the demand for labour producing the clothing, by the shift to the right of the labour demand
curve.
The role of trade unions and government in wage determination
Trade Unions are organisations that seek to represent labour in their place of work. They were set up and continue to exist
because individuals (labour) have very little power to influence conditions of employment, including wages. Through
collective bargaining with employers, they act on behalf of their member to:

•Increase the wages of their members

•Improve working conditions
•Maintain pay differential between skilled and unskilled workers
•Fight job losses
•Provide a safe working environment
•Secure additional working benefits
•Prevent unfair dismissals.
Traditonally trade unions have been strong in manufacturing and less important in the service sector, transport excepted.
It is important in a competitive labour market, a powerful trade union is able to secure wage for its members above the
equilibrium wage rate.
 At the equilibrium wage , the quantity of labour
employed is L. If a strong trade union can force up wages
to say Wu which is above the equilibrium, the number of
workers who are offered jobs by employers falls to Lu. At
this wage though the number of people who would like to
work is higher. This is shown by Le. Consequently , there
is a shortfall between those who want to work and those
who can actually work, due to the influence of the trade
union. Shown as the difference between Le an Lu.

In practice it is really quite difficult to prove whether or not this theory actually applies in labour markets. A much quoted
example is that of actors and actress in various countries like in Uk and USA where there are very strong unions which
restrict the numbers able to work in films, television and theatres. The wages of their members are supposedly supported
in this way.