MIDLANDS STATE UNIVERSITY

FACULTY OF SOCIAL SCIENCES

HUMAN RESOURCE DEPARTMENT

MODULE: LABOUR ECONOMICS HRM -141

LECTURER: MR N.T SAMANGA

Email: samangan@staff.msu.ac.zw

OFFICE: NSB 24

This module concentrates on the application of economic theory and analysis to

the

problems of labour markets. It seeks to explain the factors that influence supply
and demand of labour. The module also looks at how labour market dynamics
affect employment decisions in terms of numbers employed in relation to cost of
labour and productivity.

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1. Introduction to labour economics:
 Definition
 Overview of the labour market.
 Definition of terms
2. Demand for labour:
 definition
 factors that affect demand for labour
o wage changes,
o changes in product demand
o changes in price of capital
o wages
o marginal product of labour
o substitution and scale effect,
 Elasticity of demand.
 Cross wage elasticity
3. Labour supply:
 definition
 market supply,
 supply to firms,
 determination of wages,
 reservation wages/ economic rents
 factors that determine hours of work
 Factors affecting labour supply
 compensating wage differentials,
 Hedonic wage theory.
4. Human capital theory :
 definition
 human capital investment theory
 concept of present value
 worker mobility
o geographic mobility
o employee turnover

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  women and acquisition of human capital,
5. Labour market discrimination:
 definition
 Theories of labour market discrimination
 Types of discrimination

6. Unemployment and the labour market:

 sources of unemployment,
 costs of unemployment
 types of unemployment
o frictional unemployment,
o structural unemployment,
o demand-deficient(cyclical) unemployment,
o Seasonal unemployment.
 Interventions by the Zimbabwean government to reduce unemployment
 Insider outsider theory
7. Trade unions and the labour market:
 Definition of trade unions
 the union model
 union membership demand and supply,
 unions and labour demand
 spill over effects and threat effects
 Unions and employment.

9. Frictions in the labour market

 Frictions to the employer

 Frictions to the employee

10. PESTEL factors and how they influence the labour market
 Political, Economic, Social, Technological, Environmental, and Legal
 Solutions.

Course work

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  Assessment shall be continuous assessment and a written examination .
 Continuous assessment shall constitute 40% of final assessment:
 Group assignment/ Presentation/Test
 Individual assignment
 Total mark from coursework constitutes 40% of final mark
 A written examination shall constitute 60% of final assessment

Recommended texts:

1. Adnett .N. (1996) European Labour Markets: Analysis And Policy, Longman.
2. Ehrenberg .R. And Smith R. (2009), Modern Labour Economics,10 th Edition, Pearson
Education.
3. Funck.B. , Lodovico.P. (2001) Labour, Employment, And Social Policies In The EU
Enlargement Process, The World Bank.
4. Marito.G., Jean .F. (2008) Youth In Africa’s Labor Market, The World Bank
5. Rubbery.J. And Wilkinson.F. (2002), Employer Strategy And The Labour Market,
Oxford
6. Sloman.J., Sutcliffe.M. (2011) Economics For Business, 3rd Edition, Pearson
Education.

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Labour economics

Labour economics: is the study of the workings and outcomes of the labour market, Behaviour of
employees and employers in response to the general incentives of wages, price profits and other
aspects of employment such as working conditions (Ehrenberg and smith, 2006)

Labour economics looks at the suppliers of labour services (workers), the demanders of labour
services (employers), and attempts to understand the resulting pattern of wages, employment, and
income.

Or it is the study of how workers are allocated among jobs, how their rates of pay are determined, and
how their efficiency is affected by various factors.

Labour economics is concerned with the factors that affect the demand for and supply of different
types of labour service and the operation of different kinds of the labour market.

It can also be defined as a study of the organisation, institutions and behaviour of the labour market in
an industrial economy. Labour economics is concerned with efficient utilisation and conservation
of manpower resources. Studies show how manpower is applied and utilised in modern society.

Scarcity: resource scarcity is when resources are limited or not available to meet all our wants.

Rationality: people have an objective and pursue it in a reasonable consistent fashion. Every
reasonable person will aim at utility maximisation or satisfaction based on the limited resources
they have.

Economists’ measure labour in terms of hours worked, total wages or efficiency.

Labour market

Allocates workers to jobs and coordinates employment decisions in the labour market. Like decisions
about career choice, hiring, quitting, compensations and technology must be coordinated every
day.

Just like any market the labour market has buyers who are the employers and sellers who are workers.
Just like we do not go to the market every day, it is the same with the labour market organisations

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 and employees do not buy and sell labour every day. The role of the labour market is to facilitate
all possible mutually beneficial transactions.

Labour market can be defined on the basis of industry, occupation, geography, transaction rules that
partly govern the buyer and seller. Transaction rules can be interrelated. E.g a taxi driver can
become a musician whereas in some situations for example a doctor cannot just become an
engineer.

Employees and employers then weigh the costs and benefits of various alternative transactions in the
context of achieving some goal or other. For example, an employee can determine whether to
look for another job, develop himself or the employer decides whether machines should replace
the labour or mix the two.

A labour market is one of the three major markets that an organisation has to manage well to survive
just like they do in the capital market and product market. Neo-classical economists view the
labour market as similar to other markets in that the forces of supply and demand jointly
determine price (in this case the wage rate) and quantity (in this case the number of people
employed).

The labour market is characterised by the demand and supply for labour. Demand side are the
employers whose decisions about the hiring of labour are influenced by conditions in all 3
markets.

 Demand for product, availability of resources, type of capital(machinery)

 Supply side- workers and potential workers, whose decisions about where and
whether to work or not considering also how they want to spend their time.
 The terms of employment (wages and working conditions) and levels of
employment affect market.

Labour economics can generally be seen as the application of microeconomic or

macroeconomic techniques to the labour market. Microeconomic techniques study the role of
individuals and individual firms in the labour market. Macroeconomic techniques look at the
interrelations between the labour market, the goods market, the money market, and the foreign
trade market. It looks at how these interactions influence macro variables such as employment
levels, participation rates, aggregate income and Gross Domestic Product.

Major changes in the labour market

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 A shift from the agricultural and manufacturing to service industry and mining for
Zimbabwe.
 A rise in part time employment and a fall in full time employment. A reduction in full time
employment is as a result of a decrease in manufacturing and an increase in part time
reflects an increase in the service industry.
 An increase in female participation rate.
 A rise in the proportion of workers employed on fixed term contracts or on temporary or
casual basis. Many organisations s today prefer to employ only their core
workers/managers on permanent basis because they want flexibility to respond to the
changing market conditions.
 Downsizing.
 High rates of unemployment
 Increase in the informal sector
 Flooding of skills in the labour market
 High mobility of labour
 Changes in labour legislation

Challenges faced in the labour market

 Entering the market unprepared.

 Working in the informal sector.
 Doing unpaid family work.
 Underemployed.
 Unemployed because of market entry problems spending almost five years without
getting a job.
 Stuck in low productive jobs.
 Young women engaging in non-market activities.
 Early entry in the market limits youths from acquiring the human capital they need to
get good jobs
 In some parts engaging in child labour therefore they lack skills resulting in high
levels of illiteracy
 High levels of unemployment.
 Failing to acquire higher education.

Government intervention

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  A national youth policy
 A micro and small enterprises development strategy.
 An education policy.
 Through the labour law.
 Entrepreneurship programmes through provision of funding.
 Developing apprenticeship
 Subsidising education.
 Equal employment opportunities.
 Monitoring impact of tax levies and incentives on employment.

Causes of labour market inequality

 Technological change – focusing on the more educated.

 Structural and institutional change – deindustrialisation.
 Increased unemployment – therefore low-skilled will be displaced by more qualified
workers.
 Insider outsider – existing workers in a firm, insiders can expropriate rents from their
employers since they are costly to replace. Hence outsiders the unemployed and new
entrants are disenfranchised in the wage fixing process. Since outsiders’ productivity
is lower than that of existing employees even trying to price themselves by
undercutting insiders may not be effective. Insider power can be derived from trade
unions.

THE LABOR FORCE AND UNEMPLOYMENT

Labour force: those above 16 years of age who are either employed, actively seeking work,
or expecting recall from a layoff, those who are just entering the labour market but have not
found work yet. Therefore, those who are above 16 and are not looking for work are therefore
not part of the labour force. Those employed are also part of the labour force.

The labour force is defined as the number of individuals age 16 and over, excluding those in
the military, who are either employed or actively looking for work.

The nonlabour force includes those who are not looking for work, those who are
institutionalised such as in prisons or psychiatric wards, stay-at home spouses, children, and
those serving in the military.

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These labour force trends change with people flowing from one side to another constantly on
the changes in the labour market. Changes in the labour force are due to flow variables such
as natural population growth, net immigration, new entrants, and retirements from the labour
force.

Labour force participation rate: the percentage of the population that is participating or e in
the labour force. The labour force participation rate is the number of people in the labour
force divided by the population of working age that is not institutionalised.

Labour force can be divided by gender that is who are participating more men or women or
which numbers would have increased. It can be divided by age.

 In Zimbabwe which age group participates more in the labour market?

Unemployment is the state of being willing and able to work but cannot find work. Those
who are not at work but want to work and are actively seeking work and they are able and
available for work. Those who are in school therefore do not qualify as unemployed because
they will not be actively seeking for work.

The unemployment level is defined as the labour force minus the number of people currently
employed. The unemployment rate is defined as the level of unemployment divided by the
labour force.

The employment rate can be defined as the number of people currently employed divided by
the adult population (or by the population of working age). In these statistics, self-employed
people are counted as employed. The unemployment rate is then the number of those in the
labourforce and working against those not working.

When the unemployment rate is low the labour market will be tight, jobs will be plentiful
and the few unemployed ones will quickly get jobs. It will be difficult for employers to fill
the jobs. When the unemployment rate is high then it means the labour market will be loose.
The workers will be in abundance but the jobs will be few. It will be relatively easy for
employers to fill their jobs.

Please note we can say the market is tight but in one area it might be loose. We in a market
some skills area abundant and some skills are scarce. Usually, the lower-level jobs are always
in abundance whereas the skilled workers are scarce. The labour market is very dynamic so
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both the employer and employee will have to adapt to change so as to survive in the market.
Many jobs are becoming obsolete due to changes in technology and globalisation and new
ways of doing things are created.

Changes in unemployment depend on inflows made up of non-employed people starting to

look for jobs and of employed people who lose their jobs and look for new ones; and
outflows of people who find new employment and of people who stop looking for
employment.

The earnings of labour

These are determined by the actions of buyers and sellers. The less they buy the lower the
price the more they buy the higher the price. These prices are then that pushes individual
decisions on what jobs to take for this affects their income and buying power.

Wages: Wages, payment received by an employee in exchange for labour. It may be in goods
or services but is customarily in money. The term in a broad sense refers to what is received
in any way for labour, but wages usually refer to payments to workers who are paid by the
hour, in contrast to a salary, which implies a more fixed and permanent form of income (e.g.,
payment by the month rather than by the hour).

Wage is a basic compensation for paid labour, and the compensation for labour per period
of time is referred to as the wage rate. Wage rate which is the price of labour per working
hour.

Nominal wage: is what workers are paid in money per hour. These are used to compare the
pay of various workers per given time. In economic theory, wages reckoned in money are
called nominal wages

Real wages: Real wages, i.e., the amount of goods and services that the money will buy. This
is where we divide the nominal wage by some measure of price to see how much can be
bought with the workers nominal wage. Real wages depend on the price level, as well as on
the nominal or money wages. E.g if the salary is $150, we divide that by the price of a
television set which will be $75. Therefore, the person’s real wage is 2 television sets. Real
wage is used to see the buying power of employees over a period of time as product prices
increase and the nominal wage remains the same.

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Real wages refer to wages that have been adjusted for inflation. This term is used in contrast
to nominal wages or unadjusted wages. Real wages provide a clearer representation of an
individual's wages. If nominal figures are used in an analysis, then statements may be
incorrect.

For example, in order to report on the relative economic successes of two nations, real wage
figures are much more useful than nominal figures. A report could state: 'Country A is
becoming wealthier each year than Country B because its wage levels are rising by an
average of $500 compared to $250 in Country B'.

Looking back over the decades, annual wages were considerably less than they are today. If
only nominal wages are considered, the conclusion has to be that people used to be a great
deal poorer than today. The cost of living was also much lower. In order to have an accurate
view of a nation's wealth in any given year, inflation has to be taken into account — and thus
using real wages as the measuring stick.

Earnings: wages by the number of time units. Earnings therefore depend on both wages and
the length of time the employee’s work. Wages and earnings are before taxation. Earnings
equals payment accrued over a period (typically a week, a month, or a year)

Compensation: the total of earnings and wages plus benefits. Usually, payments are in kind
e.g medical aid. Were employees get services than money.e.g days off. Deferred payments
are also called compensation e.g employer financed retirement, pension. Total compensation
equals earnings plus other benefits for labour.

Income: total of everything a person gets over a period of time usually annually. Earnings
plus benefits and unearned income (dividends, interest on investments, welfare payments and
unemployment compensation) equals total compensation plus unearned income.

THE DEMAND FOR LABOUR

Demand for labour is a derived demand in that workers are only needed for the contribution
they make toward producing some good or service for sale. That is hiring labour is not

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 desired for its own sake but rather because it aids in producing output, which contributes to
an employer's revenue and hence profits.

Since firms combine different factors of production capital and labour to produce goods and
services that are sold in the product market, the way they combine capital and labour depends
on product demand, amount of labour and the capital they acquire and the given prices for
labour and the choice of technology the organisation has.

So, when studying the demand for labour our interest is in how workers are affected by the
changes in these forces of capital, price and wages. Unlike other commodities the worker is
present when he supplies the service he has in production. The worker retains control over
how his services are used and after the transaction. Their services are highly perishable.
These factors are what makes the labour market different.

The labour demand theory assumes that employers seek to maximise profits and because of
this, organisations are constantly having changes done in the organisation so as to maximise
profits. The organisations thus change variables that they have control over such as number
of employees, price of product. Whereas wages and demand are determined by the market.
This reflects the small marginal changes made by organisations every day to increase profits.
The employer change one area and holding the other areas constant e.g., change the labour
but capital remains the same.

Wage changes

 If wages increase and everything else remains constant it means higher product prices. There
is normally an inverse relationship between the demand for labour and the wage rate that a
business needs to pay for each additional worker employed. If the wage rate is high, it is
more costly to hire extra employees. Because consumers respond to higher prices by buying
the product less employers would have to decrease the levels of output and employment.
Other things remaining constant. This decline is called the scale effect. Effect on desired
employment of a smaller scale of production. Demand for labour varies with changes in the
price of labour when other things remain constant. At $8 employers are willing to employ
only 50 people but at $4 employers are willing to employ 200 people. This was experienced
in Zimbabwe and it led to retrenchments, short time work, unpaid leave, downsizing, shut
downs by companies due to increase in wages.

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  If wages increase assuming everything else remain constant employers can adopt technology
that relies more on capital than labour. Desired employment is reduced again because of the
shift towards capital intense mode of production. This is substitution effect because when the
wages increase labour is substituted by capital in the production process
 When wages are lower, labour becomes relatively cheaper than for example using capital
equipment and it becomes more profitable for the business to take on more employees.

Changes In Product Demand.

1. Increase in product demand means at whatever price goods or services are bought. Increase in
product demand without labour and capital costs increasing causes an increase in output since
organisations would want to maximise profits. This causes the scale effect where increase in
product demand also causes an increase in labour and capital as long as their prices remain
constant. The labour curve therefore shifts to the right meaning at every possible wage rate the
number of employees increase e.g if an organisation was only willing to employ 50 at the wage
of $7, they are now willing to employ a 100 for the same wage.

2.However the coming in of new technology and the shifts in product demand can cause the
demand curve to shift to the left thus reducing employment. This is called the substitution effect
where organisations now replace labour by the new ways of doing things or the cheaper way of
increasing productivity which is in this case will be going capital intensive.

3. Demand for new products, substitution products or complementary products to the

organisations own product can cause an increase in Labour demand or a decrease to labour
demand.

Changes in price of capital

 If other factors remain constant and the price of capital decreases it affects demand for
labour positively. Using the scale and substitution effect, a reduction in capital prices
causes a reduction in the cost of production therefore increase in labour demand at any
wage rate which is the scale effect. If costs of production are lower any employer can
now afford more employees at that given wage rate.
 This can also cause the substitution effect. Organisations can then decide to go capital
intensive so as to mass produce. Therefore, substituting capital for labour. Less labour is

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 then required at a given rate. The demand curve therefore shifts to the right. A fall in
capital prices can cause either the substitution effect or the scale effect.

With wages when other things remain constant one moves along the curve whereas with other
changes it’s a total shift from one position to the other. E.g. 50 for $7 changes to 100 for the
same price.

Labour demand in terms of money wages.

Whether or not to employ depends on the money wages of the hired labour if they will not exceed
the revenue. For example, the cost of reducing theft by hiring more labour for security. If the cost
of hiring the labour exceeds the actual savings made then the employer will not employ. The
marginal cost of crime will exceed the savings generated by controlling that crime. The marginal
product of labour is then affected by other employees hired and the constant capital.

Marginal product labour

A firm's labour demand is based on its marginal physical product of labour (MPL). This is defined as
the additional output (or physical product) that results from an increase of one unit of labour (or
from an infinitesimally small increase in labour). The demand for labour is highly dependent
on the productivity of the worker – the more the worker adds to revenue, the higher the demand.
Marginal Physical Product (MPP) is the addition to the total product as a result of the
employment of an additional unit of labour. When employment expands, each employee starts
making little difference since they have less capital to work with.

A profit maximisation firm will therefore expand by one unit if the added revenue from selling
that unit is greater than the added cost of producing it. If marginal revenue exceeds marginal
costs there is an increase in output and there is a contraction in output if costs exceed revenue or
when revenue equal costs at break-even analysis. Therefore, if revenue of employing one more
person exceeds expense, then the company will not employ. Most organisations today in
Zimbabwe work with fewer people than they used to because of this concept. If revenue of
employing more people is also equal to costs employers will not employ because it will mean no
profits for the organisation.

The opposite is also true where organisations might need to subtract one unit of labour until the
marginal revenue exceeds costs.i.e retrenchments. If revenue from employing more people is
equal to costs organisations do not hire because they want the difference for profit. As more and

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more units of labour are employed, their additional output begins to decline. The value of
marginal physical product of labour is the value of the additional output produced by an
additional unit of labour. As the organisation increase employment levels the marginal product of
labour decreases.
 At the same time as more employees are employed real wages become expensive.

 When cost is greater than revenue the firm should downsize.

 When revenue is greater than costs the organisation will be making profits.
 When revenue equals to costs no profits will be made.

Marginal revenue productivity of labour will increase when there is

 An increase in labour productivity (MPP) e.g., arising from improvements in the

quality of the labour force through training, better capital inputs, or better
management.
 A higher demand for the final product which increases the price of output so firms
hire extra workers and thus demand for labour increases, shifting the labour demand
curve to the right.
 The price of a substitute input e.g., capital rises – this makes employing labour more
attractive to the employer assuming that there has been no change in the relative
productivity of labour over capital

Limitations of MRPL theory of labour demand

Although marginal revenue product theory is a useful aspect of labour market analysis it is
important to be aware of some of its limitations:

 In many real-life situations this is far from the case. The firm does not necessarily know
how hard a worker is working or how productive they are. This provides an incentive for
workers to shirk from providing their full effort — since it is difficult for the employer to
identify the hard-working and the shirking employees, there is no incentive to work hard
and productivity falls overall.
 In many cases it is hard to objectively measure productivity because no physical output is
produced or the output produced may not be sold at a market price. This makes it hard to
place an exact valuation on the output of each extra worker. How does one go about

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 measuring the final output of people employed in teaching or the health service? It is
easier to measure physical output in industries where a tangible product is produced each
day. It is also costly to measure people’s productivity.
 There are a lot of people classified as self-employed in Zimbabwe. How many of these
people set their wages according to the marginal revenue product of what they produce?
What too of those people who have the ability to set their own pay rates as directors or
owners of companies?

Market demand curves

The demand curve of an individual firm indicates how much labour that firm will want to
employ at each wage level. Here we are looking at individual organisations and how they
affect demand of labour in a market. E.g there are 3 organisations in the market and the real
wage is $50. Organisation 1 can afford 12 employees at that wage and 2 can afford 6 and 3
can afford 20 at that wage so the demand for labour in the market will be 38. But if the real
wage decreases it means 1 and 2 can now afford more labour therefore an increase in the
demand for labour. This also allows new competitors to come in as the real wages would
have fallen thus increase labour demand.

Elasticity of Demand

This is how responsive a firm will be in terms of how many workers they will employ when
there is a change in the labour market. It measures how responsive firms are to change the
number of workers they have when the wage rate changes. A change in marginal productivity
(i.e., the workers producing more or less of the products due to efficiency) or marginal
revenue (i.e., due to a change in the price received for the product) will cause a shift in the
demand curve.

Factors affecting the Elasticity of Demand for labour

Time – the longer the time period for adjustment, the easier it is to substitute
labour for machinery. However, in the short term, a firm may have little choice
but to employ the same number of workers even if wage rates increase rapidly.
Therefore, demand for labour is more elastic in the long run when there is

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more time for the firm to re-arrange their working practices and production
methods.

Proportion of labour costs to total costs – if the wages represent only a

small proportion of the total costs, then a rise in wage costs is not a particularly big deal, and
demand for workers will not change than much. But if they represent a larger proportion of
total costs, then a rise in wages will have a dramatic effect on the number of workers the firm
will employ and there will be a greater % reduction in workers demanded, i.e., elastic
demand.

Price elasticity of demand for the product – if the product being produced
and sold is price inelastic, then any increases in wages can be passed onto the
customer with minimal effect on the demand. Therefore, if the product
is price inelastic, then the demand for labour is also likely to be inelastic. The
opposite is also true, if the product is price elastic, then demand for labour will
also be elastic.

If wages increase at industrial level, it might not cause much effect for products that do not
have close substitutes since all the organisations will push the cost to the product. However,
if such wages increase at plant level, then it will affect some organisations because they will
increase the price of their product whereas other will not.

The ease and cost of factor substitution: Labour demand will be more elastic when a firm
can substitute quickly and easily between labour and capital inputs when the relative prices
of each change over time. When the two inputs cannot easily be changed in the production
process (e.g. when specialised labour or capital is needed), then the demand for labour will
be more inelastic with respect to the wage rate

Hicks-Marshall laws of derived demand

The wage elasticity of demand for labour is high under these four conditions.
Here we see where the scale and substitution effects come into play.

1. When the price elasticity of demand for the finished product is high then the elasticity for
labour is also high. When wages rise, production cost increase the price for the final product
goes up. The firm raises the products price and quantity demand declines for the finished

17
product. If the demand for the finished product is elastic then the greater the decrease in
output the greater the decline in employment needed to make that product.

The second factor of Hicks Marshall is

2. When other factors of production can be easily substituted for the category of labour, we
are talking about then labour elasticity is high. Since there are many substitutes if wages rise,
firms will just switch to another type of labour and employment of the category we are
talking about declines. If there are no substitutes for the category of labour, we are using then
the wage elasticity will be low.

The third factor of Hicks Marshall is

3. The supply of other factors of production will influence the elasticity of demand for
labour. Suppose the wage rate rises capital prices staying the same then the firm would
substitute the relatively cheaper capital for labour. But suppose the price of capital also rises
when wages go up. Then the firm would not want to substitute as much capital for labour
because capital is also more expensive and the elasticity of labour would be smaller.

The fourth Hicks Marshall factor is:

4 When the cost of employing labour is a large share of the total cost of operating the
business then the elasticity of labour tends to be large. Thus, a small increase in wages will
add a significant increase to the total cost and the firm will tend to fire workers to reduce
cost. However, if labour is only a small percent of the total operating cost and there is an
increase in wages then the total cost does not rise much and the firm can absorb it without
firing workers and the demand for labour would be inelastic.

Cross wage elasticity

Organisations can employ different categories of labour and capital. Demand for one
category can be affected by the price changes in other categories. e.g increase in carpenters
wages might cause a scale effect where increase in their wages causes a decrease in house
building therefore a decrease in the demand for plumbers and electricians. Or when price of
the building material increase causing a reduction in house building therefore less demand for
builders, plumbers and electricians.

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Cross elasticity tells us what effect a wage change of accountants k will have on the
employment of accountants j. (of course you can use labour and capital)

However, this can also cause the substitution effect where increase in the price of carpenters
can cause a substitution of carpenters by builders. Increase in the price of one occupation
causes an increase in demand for the cheaper alternative.

The impact of cross wages elasticity affects substitute occupations and complementary
occupations.

LABOUR SUPPLY

Labour is supplied by individuals who have decided to work but are choosing which
company to work for and which occupation to engage into. Labour supply is understood from
three levels. First the supply of hours by an individual worker, second the supply of workers
to an individual firm and third the total market supply of a given category of labour.

Market Supply

If a certain job occupation becomes more well paid most people would then want to join that
occupation. Market supply is determined by the number of people willing and able to do the
job at each given wage rate. College students will enrol more in that occupation that has
potential to pay more. Therefore, supply of labour to a particular occupation is positively
related to increase wage rate in the market holding other wages constant. People supply
labour because of money, parental influence, default of educational qualifications acquired,
best alternative available, lack of resources to pursue other options and employment
opportunities. etc

However, there are a few people that might not move because they have a passion for that job
or some because they hate what’s involved with the highly paying occupation. Most people
are driven by the wages though.

SUPPLY TO FIRMS.

Having decided to do a job individual then have to decide who to work for. If all
organisations pay the same wage the catch will be on compensation. If an organisation offers
lower than the market range then it will not get the best calibres of workers. No one would
pay more than the market price because they can just get the best quality at market price if a

19
 firm would pay lower prices, then it would lose applicants unless it offers better
compensation. Unlike market shift here labour cannot substitute to become engineers but they
can change organisations which they work for because they have already acquired skills of
particular occupation.

Determination of wage

Demand exceeds supply. Employers compete for a few workers therefore shortage of
employees. Because of the competition employers are forced to increase wages to attract and this
causes more workers to enter the market therefore increase supply. Increase in wages however
forces employers to employ few people and reduce demand.

Supply exceeds demand. Employers want fewer employees so those who want to find work become
surplus. Employers then because of surplus figure they can get more employees at a lower cost
which is employees of high calibre. Most employees will be willing to accept as long as there is a
job, others will leave the market and look for work somewhere else.

Market clearing wage where employers can fill jobs and employees can get jobs thus market will be at
equilibrium.

If changes however occur in demand and supply curve the equilibrium state is disturbed again. e.g
government regulations.

Reservation wages: The amount of money an owner of a factor of production must receive in
order for that owner to rent out that factor of production. Factors of production include labour,
capital and land.it is the reservation wage of the individual, which is the minimum amount of
wages that the person must receive in order to work.

 What influences a person’s reservation wage?

Economic rents: Is a payment to a factor of production in excess of the minimum amount

necessary to induce that factor into employment. Organisations pay in excess because they
cannot differentiate and it is the only way of attracting more workers. The difference of what the
individual was willing to take and the actual wage they get is the economic rent.

Economic rent typically defined by economists as payment for goods and services beyond the
amount needed to bring the required factors of production into a production process and sustain
supply.

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The decision to work under supply (hours supplied).

Working involves two major costs to the worker. When people work, they sacrifice leisure and
the work itself might be unpleasant. The more hours that someone works means disutility
because the more you work the less leisure a person has because they sacrifice leisure. The
unpleasantness they experience in doing the job will also tend to increase due to boredom or
tiredness.

In order to persuade people to work more hours a higher hourly wage must be paid to
compensate for the higher marginal disutility that is why overtime rates are higher than standard
rates.

Factors that push an individual to supply his/her labour and the time they are willing to supply it.

Opportunity cost of leisure– which cost is an individual willing to forego leisure or work. Once
somebody has entered the labour force how many hours will they choose to work? Their utility
function is determined by the choice between income and leisure. However, they are constrained
by the working hours available to them. For many people, the hours they work are fixed by their
employers and they have little or no flexibility in the total number of hours they supply. But the
majority of workers have an opportunity at some point to work additional hours, or perhaps
switch from a full-time job to a part-time position.

Wealth and income- how much the individual is worth therefore determining the income they
are going to gain from the actual working whether it will be worth it or not.

An increase in the real wage on offer in a job should lead someone to supply more hours of work over
a given period of time, although there is the possibility that further increases in the going wage
rate might have little effect on an individual’s labour supply. Higher real wages do lead to an
increase in the number of extra hours supplied, although the rate at which the individual is
prepared to give up their leisure time and work longer hours diminishes as the real wage rises.
But when real wages step upwards, eventually an individual may choose to actually work fewer
hours (ceteris paribus) giving us what is sometimes termed a “backward bending” labour
supply curve. The backward bending curve will occur because when wage rates go up there
will be two forces operating on the individuals labour supply on the one hand with higher wages
people tend to work more hours since leisure would now involve a greater sacrifice of income
and hence consumption. They substitute income for leisure. This is the substitution effect.

21
To understand why this might happen we consider the income and substitution effects that arise
from a change in the real wage being paid to an individual worker. We start with the income
effect.

The income effect: Higher real wages increase the income that someone can earn from a job, but
they also mean that the time that must be spent at work to earn sufficient to pay for a particular
product decline. Put briefly, higher pay levels mean that a target real wage can be achieved with
fewer hours of labour supply. So, this income effect might persuade people to work less hours
and enjoy extended leisure time. This causes the income effect where if income increases and
preferences are constant the more leisure hours are demanded thus reducing the supply of labour.
That is supply of working hours and demand for leisure hours.

The substitution effect: The substitution effect of a higher wage rate should unambiguously give
people an incentive to work extra hours because the financial rewards of working are raised, and
the opportunity cost of not working (measured by the wages given up when people opt for leisure
instead) has increased. That is if income is held constant and wages increase it raises the price
and reduce the demand for leisure therefore increase work incentive. Reduction in wage rate also
reduces leisure opportunity and the incentive to work. Substitution effect because as cost of
leisure changes work and leisure are substituted for each other therefore positive in terms of
supply.

With the income and substitution effects working in opposite directions, there is no hard and fast
prediction about whether people will choose to increase their labour supply as real wages
increase. The income and substitution effects are different for males compared to female
workers? Younger workers enter the labour market for the first time who are looking to save to
finance a deposit on a house or to fund other major items of spending? How might people closer
to retirement age respond to changes in real wages? What of workers in households where at
least someone else is in paid employment compared to a household where there is only one main
“breadwinner”?

Backward bending curve

The substitution effect of higher wages tends to dominate the income effect at low wage levels,
while the income effect of higher wages tends to dominate the substitution effect at high wage
levels. The dominance of the income effect over the substitution effect at high wage levels is
what accounts for the backward-bending shape of the individual's labour supply curve.
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Preferences

We have leisure time and goods people buy with income and these make people happy. With
prices constant more money means more goods bought. Leisure and money are therefore used to
reach satisfaction/utility. Because workers receive satisfaction from the job itself, should
preferences change, so too does the willingness to supply labour. You can give up income to
spend by having more leisure hours or work more hours for more money to buy goods. Either
way the individual will be satisfied. Indifference curves explain the difference in preferences
because at any point of the curve an individual is satisfied or reaches the same level of utility.
The individual is indifferent at any point they are.

Labour supply and household

 Specialisation of function- one partner specialises in household responsibilities while

the other specialises in work for pay. One connected to household work will supply
labour for work part time therefore the partners productivity at home affects the others
labour supply to the market.
 Recessions of the economy affect labour supply. If the woman is not working, she
would be forced to join the labour force for the family to survive.
 The life cycle of an individual affects labour supply. Whether young, middle aged or
old determines hours worked and mobility.
 Government subsidies on child care have helped increase supply to those who would
have stayed home to take care of the children.

Key factors affecting labour supply

The supply of labour to a particular occupation is influenced by a range of monetary and

non-monetary considerations.

The real wage rate on offer in the industry itself – higher wages raise the prospect of
increased factor rewards and should boost the number of people willing and able to work

Overtime: Opportunities to boost earnings come through overtime payments, productivity-

related pay schemes, and share option schemes and financial discounts for employees in a
certain job.

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Substitute occupations: The real wage rate on offer in competing jobs is another factor
because this affects the wage and earnings differential that exists between two or more
occupations. So, for example an increase in the relative earnings available to trained
plumbers and electricians may cause some people to switch their jobs. In recent times, the
British media has been fond of stories of people leaving jobs in academia (including high
level university research) and moving in household services because the basic rates of pay
and potential earnings are so much greater.

Barriers to entry: Artificial limits to an industry’s labour supply (e.g., through the
introduction of minimum entry requirements or other legal barriers to entry) can restrict
labour supply and force average pay and salary levels higher – this is particularly the case in
professions such as legal services and medicine where there are strict “entry criteria” to the
professions. Indeed, these labour market barriers are partly designed to keep pay levels high
as well as being methods of maintaining the quality of people entering these professions

Non-monetary characteristics of specific jobs – these can be important – they include

factors such as the level of risk associated with different jobs, the requirement to work anti-
social hours or the non-pecuniary benefits that certain jobs provide including job security,
opportunities for promotion and the chance to live and work overseas, employer-provided in-
work training, employer-provided or subsidised health and leisure facilities and other in-work
benefits including occupational pension schemes

Net migration of labour – A rising flow of people seeking work in other countries is making
labour migration an important factor in determining the supply of labour available to many
industries – be it to relieve shortages of skilled labour or education, or to meet the seasonal
demand for workers in agriculture and the construction industry

Elasticity of labour supply

The elasticity of labour supply to an occupation measures the extent to which labour supply
responds to a change in the wage rate in a given time period. It is the responsiveness of
labour supply to changes in wage rate, whether an increase in wages result in an increase in
supply.

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  Elasticity of supply is dependent on the difficulties and costs of changing jobs and the
time period.
 In low-skilled occupations we expect labour supply to be elastic. This means that a pool of
readily available labour is employable at a fairly low market wage rate.

 Where jobs require specific skills and lengthy periods of training, the labour supply
will be more inelastic. It is hard to expand the workforce in a short period of time
when demand for workers has increased.

Compensating wage differentials

Compensating differential is a term used in labour economics to analyse the relation between
the wage rate and the unpleasantness, risk, or other undesirable attributes of a particular job. A
compensating differential, which is also called a compensating wage differential or an
equalizing difference, is defined as the additional amount of income that a given worker must be
offered in order to motivate them to accept a given undesirable job, relative to other jobs that
worker could perform. Different wages paid to different workers or in different markets that
adjust for differences in the jobs or in the productivity of the workers. Wage differentials occur
for many reasons

One can also speak of the compensating differential for an especially desirable job, or one that
provides special benefits, but in this case the differential would be negative: that is, a given
worker would be willing to accept a lower wage for an especially desirable job, relative to other
jobs. Compensating wage differentials occur because jobs are not the same, they are located in
different areas and have different working conditions.

Three reasons for compensating wage differentials are worth noting:

Wage differentials in part act as a compensation for people who have to work unsocial hours or
who are exposed to different degrees of risk at work, both in the short term and long run. Some
jobs require a wage-rate that encompasses this risk premium – so workers in the mining sector
expect a higher return to adjust for the inherent dangers of their work.

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Some employers may have to offer higher wages and other ''fringe benefits'' to attract workers, if
the conditions of work in their firm or industry are dirty or dangerous. Coal miners get paid high
wages: and so, they should be. The work is dangerous, and can have health effects on the worker
in later life. Some employers have to offer higher wages if their firm is in an isolated area.

Risk and Hazardous Conditions: Jobs that are riskier, more dangerous, and have a greater
likelihood of injury, typically pay higher wages. For example, coal miners, deep sea divers, and
security guards are likely to be paid higher wages than similar jobs due to the hazardous nature of
their duties.

Education and Skill: Jobs that require more education, skill, and training also tend to pay higher
wages. Higher wages compensate for greater productivity and provide returns on investment in
education and training.

Location: Jobs that are at undesirable, more distant, or hard to reach locations also pay higher
wages. Organisations in cities that have high living costs, inhospitable climates, high crime rates,
find it necessary to offer higher wages to attract workers.

Compensating wage differentials have an important allocative function for the economy for two
reasons:
 First, they provide incentives for people to undertake less desirable work. Without extra
wages, this work is not done.
 Second, they provide incentives for employers to reduce the undesirable nature of the
work. If otherwise identical firms have different working conditions, then one is forced to
pay higher wages to attract workers. Higher labor cost encourages employers to improve
working conditions to remain competitive.

Compensating wage differentials are efficient if:

 Workers have complete information about the risks and hazards of a job
 If workers are free to choose between different employers

 if the labour market is not competitive and does not have well-informed workers, then job-
related risks do not generate compensating wage differentials.
 Such is the case for jobs that use new and untested technologies. For example, the risks of coal
mining and deep-sea diving are well known and generate relatively high compensating

26
 wages. However, the risks of working for extended periods with computer video screens or
recently developed chemicals are not yet known.

While wage differentials can enhance efficiency, they can also inhibit efficiency. When caused by
discrimination, union market power, or government policies, wage differentials create
inefficiencies in the economy.

Hedonic Theory of Wages

A hedonic model of wages might correspond to the idea that there are compensating
differentials that workers would get higher wages for jobs that were more unpleasant.

This is a theory for wage differentials in relation to the risk of injury. Hedonism means that a
person is always striving for more pleasure or happiness. In this model it means that workers
are striving to maximize their utility. There are many job characteristics that would warrant a
compensating wage differential. To simplify things let’s assume that every compensating
wage differential has already been taking care of and the only job characteristics we will deal
with is the risk of injury on the job.

There is both an employee and employer side of the market.

Employee Considerations

Employees obviously dislike injuries therefore if there is risk utility is covered to a certain extent.
The wage rate reflects the degree of risk of injury on the job. If you knew the probability of
getting hurt on a job then the wage rate you accept reflects this probability. If the chance of
getting hurt increases, then you would require a higher wage rate to compensate you for this
higher level of risk in order to maintain the same level of utility.

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Thus, for every risk level there is a wage rate that would compensate the employee so that they
can maintain the same level of utility. This can be shown by indifference curves with a positive
slope rather than a negative slope. For every level of utility there is a different indifference
curve. The indifference curves will show that a person getting a relatively high wage also faces
high levels of risk. Since the individual will have so much risk to start off with, they would be
willing to forfeit a large amount of wages to reduce risk because income is already high enough
to buy goods. As the risk level declines to point the person is less willing to give up risk/money
because danger is no longer imminent and consumption of goods is high so the indifference
curve is flatter. However how much to increase to reach utility depends on the individual
whether they are sensitive to risk or not. The more sensitive people will have steeper curves.
Different individuals have different tolerances for risk.

If you are very sensitive to risk (risk averse) then you would have a very steep indifference curve.
You would need a large increase in your wage rate to take on even a small additional amount of
risk. On the other hand, if you are not risk averse (thus don't mind risky jobs) You still need to be
compensated with higher wages to take on more risk but you do not need as large of a wage
compensation as the person who is afraid of risk. Thus, this person would have a flat indifference
curve.
Employer Considerations

Employers also face a wage/risk trade-off but they look at it from a different point of view than
employees. They have to consider whether to increase wages or reduce risk whichever is cheaper.

o It is expensive for an employer to reduce risk for his employees because it costs money to
purchase safety equipment, special training, time lost training.
o Pressures from the market place do not allow the firm to earn excess profits so they
operate on break even analysis making it difficult to incur costs of reducing risk.

As a result of these assumptions a firm must reduce wages to remain competitive if they have a
program to reduce risk of injury. (While we are talking about wages the firm can also consider
reducing other terms and conditions of employment to lower cost when they try to reduce risk.
e.g benefits offered). Reduction in risk results in reduction of wages. A competitive firm will
only earn a normal profit thus no economic profits exist. To compete they must lower wages if
they are spending more on risk reduction. From the firm's point of view, a low-risk work

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environment is associated with low pay while a high-risk environment is associated with high
pay.

If more is spent on safety less is spent on wages. Isoprofit curves are used to show an employer's
trade-off between wages and risk. The curve shows the various combinations of risk and wages
that will yield the same level of profit to the firm. ISO meaning equal. They are concurve to show
the reduction in returns(profits) for increased safety. The steeper the curve it shows how more
costly it is to engage in safety procedures. Every point on the curve gives the risk/wage
combinations that yield the same level of profit. The further to the left (northwest) the isoprofit
curve the less is the profit level. This occurs because each level of risk is associated with higher
wages. Iso profit curves to the southeast have the highest profit because each risk level is
associated with lower wages. The curves are concave from below which indicates that there are
diminishing marginal returns to safety expenditures. Firms will first eliminate the risk that is
easy to eliminate thus it is cheap to do so. Once the easy risk of injury is eliminated it becomes
more difficult to further reduce risk thus it is more costly to do so.

If it is cheap to prevent injuries then the firm does not have to reduce wages much because it
doesn't cost much to reduce risks, thus the iso profit curve is flat.

The Matching of Employers and Employees

Employees will try to get to the highest levels of utility possible. They will choose that
indifference curve that gives them the maximum level of utility. However, they are constrained
by what employers are willing to offer. The less risk the lower the wage and the higher the risk
the greater the wage rate.

Firms on the other hand try to maximize profits. However, since the market is competitive, they
can't offer higher than market rates because their costs will be uncompetitive and they will be
driven out of business by low-cost producers. If they offer too low a wage then they will not be
able to attract any workers. Thus, their profits are usually normal because of the competitive
nature of the market.

By combining indifference curves for different workers together with different firm's isoprofit
curves we can determine which workers will work for which firm and what level of risk and

29
 wages they will accept. Those who are risk averse will work in safe environments and those who
are not afraid of risk will work in high-risk companies for a higher wage.

There are two important consequences of this hedonic wage theory

1. Holding all things constant wages rise with risk. Thus, there is a compensating wage differential
for job characteristics that are viewed as undesirable by workers whom the employer must
attract.

2. Workers that have a strong preference for safety will tend to take jobs in firms where safety can be
generated most cheaply. Consequently, they seek out and accept safer lower paying jobs.

Normative analysis. OHS regulations

How does it affect the labour market to have OHS regulations instilled by the government?
For those who do not mind to work for a certain wage at a certain risk it means their utility level
will be affected. But the government does it to protect the workers because they believe the
workers are uninformed and that they have no choice because they are not mobile. This however
can cause layoffs, reduced benefits, reduce employment. The cost of compliance by companies
falls on employees and it reduces the bargaining power of employees.

HUMAN CAPITAL THEORY

Adam Smith defined Human capital as follows: The acquired and useful abilities of all the
inhabitants or members of the society. The acquisition of such talents, by the maintenance of the
acquirer during his education, study, or apprenticeship, always costs a real expense, which is a
capital fixed and realized, as it were, in his person. Those talents, as they make a part of his
fortune, so do they likewise that of the society to which he belongs.

Edenburg: Stock of competences, knowledge and personality attributes embodied in the ability
to perform labour so as to produce economic value. It is the attributes gained by a worker through
education and experience. Individuals thus generate, retain and use knowledge and skill and
create intellectual capital. Their knowledge is enhanced by interactions between them (social
capital) and generates the knowledge possessed by an organisation (organisational capital).

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Human capital is an intangible asset as it is not owned by the firm that employs it. It’s called
human capital because people cannot be separated from their knowledge, skills, health, or
values in the way they can be separated from their financial and physical assets. Specific Human
capital refers to skills or knowledge that is useful only to a single employer or industry, whereas
general Human capital (such as literacy) is useful to all employers. Economists view firm
specific Human capital as risky, since firm closure or industry decline leads to skills that cannot
be transferred.

The increasing reliance of industry on sophisticated knowledge greatly enhances the value of
education, technical schooling, on-the-job training, and other Human capital.

Human capital investment theory

Investment is an initial cost that one incurs in the hope that over some period of time that cost
will become profitable. Human capital accumulation is an important determinant of individuals
earning capacity and employment prospects. In most countries it is associated with significant
labour market gains for the individual in question, such as higher tax earnings, increased
participation in the labour market and improved employment probability. The opportunities
provided by a modern economy, along with extensive government and charitable support of
education, enable the majority of those who come from lower-income backgrounds to do
reasonably well in the labour market. The same opportunities that foster upward mobility for the
poor create an equal amount of downward mobility for those higher up on the income ladder.
Thus, for employees, current labour supply decisions are also determined by chances of
investment in terms of training, education and migration. This is because the level of skills that
an employee has from education, training including learning and experience all generate a certain
stock of productive capital and increase the value of one’s human capital by the increase in
wages.

Stages of investment

1st stage: Early childhood determined by parents. No discussion of human capital can omit the
influence of families on the knowledge, skills, health, values, and habits of their children. Parents
affect educational attainment, marital stability, propensities to smoke and to get to work on time,
and many other dimensions of their children’s lives.

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 2nd stage: teenagers and young adults in high school, college or vocational training.

3rd stage: in the labour market workers additions to their human capital through on-the-job
training, night school and workshops.

Human capital investment comes with costs:

1. Direct expenses- school fees, books and materials needed

2. Forgone earnings- that arise because during investment you either do not work or work
part time. The cost borne by the student and the student’s family—is the income that
college students give up by not working. A good measure of this “ OPPORTUNITY COST” is
the income that a newly minted high school graduate could earn by working full time.
3. Psychic losses- psychological expenses due to stress of learning.

The concept of present value:

Definition: It is today’s value of a payment (or payments) to be received in the future. It is the
value today of a future payment or series of payments, discounted at the appropriate discount
rate. Present value answers the question of how much money would have to be set aside today—
and invested (at the appropriate interest rate)—in order to accumulate the target (payment)
amount by the payment date. Thus, in relation to human capital the individual is looking at the
near-term investment costs with the present value of expected future benefits when making a
decision about additional schooling.

The human capital investment assumes that people want to maximise utility and take a lifetime
perspective to achieve this. Thus, the individual has to compare the present value of themselves
and expected returns after investment considering effects of delay.

What determines this present value?

a) The amount of the payment or payments. The greater the amount of the payment(s), the
greater the present value.
b) When in the future the payment(s) is to be made. The more distant the future
payment(s), the lower the present value.
c) The earning power of money over that future period of time-—the appropriate interest
rate to use to discount the future dollar amounts. The higher the interest/discount rate,
the lower the present value.

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4 predictions of the human capital investment theory

Present Oriented: does an individual think of the future or they live for the moment. If
individuals live for the moment they do not invest in human capital.

Age: the young ones can invest in college because they have more years of work ahead which
allows them to fully enjoy their returns.

Costs: difference in accessibility of funds. For some their parents pay, scholarships, some work
and pay their own fees, some borrow to pay their fees. Therefore, investment depends on how
costly it would be for an individual to obtain the funds. Government through subsidising has tried
to deal with this problem.

Earnings Differentials- the expected lifetime earnings that a college education allows. e.g in
Zimbabwe we change $ was earning more than a person with a university degree it reduces
investment in human capital. Earnings become more pronounced as people become of age. If
more educated people enter the market in the bid for a better return market forces occur and
returns might be lower than expected. The earnings of more-educated people are almost always
well above average, although the gains are generally larger in less-developed countries.

Human capital has ability bias. For those who are smarter are more likely to obtain more
schooling therefore these become more productive and hence earn higher wages. Some people
could be more productive thus earn higher than average wages even if they did not do much in
investing in human capital.

Women and the acquisition of human capital

The economics of human capital have brought about a particularly dramatic change in the
incentives for women to invest in college education in recent decades. Prior women were more
likely than men to graduate from high school, but less likely to go to college. Women who did go
to college shunned or were excluded from math, sciences, economics, and law, and gravitated
toward teaching, home economics, foreign languages, and literature. Because relatively few
married women continued to work for pay, they rationally chose an education that helped in

33
 “household production”—and no doubt also in the marriage market—by improving their social
skills and cultural interests.

 In the labour market earnings of women are less than that of men in the same line of work and
education
 Women are also less likely to be in the labour force than men and if employed are less likely to
work full time, if they do work full time, they average less hours than men.
 Life expectancy of women is shorter than that of men (child birth)
 Because of the reproductive role women have to at some points drop out of the market therefore
lack of continuity of experience as compared of men therefore in making human capital
investment decisions women avoid areas where their skills depreciate during the periods, they
leave the labour market.
 “A marriage affects men and women very differently in terms of their future earning abilities,
and is therefore an important cause of the male/female wage gap". These wages, he contends, are
the opportunity cost of being a mother and raising children

All this has changed radically. The enormous increase in the labour participation of married
women is the most important labour force change during the past twenty-five years. Many
women now take little time off from their jobs, even to have children. As a result, the value to
women of market skills has increased enormously, and they are bypassing traditional “women’s”
fields to enter accounting, law, medicine, engineering, and other subjects that pay well which has
increased human capital investment by women.

WORKER MOBILITY

In economic terms labour mobility can be visualised as another example of international

exchange of a factor of production leading to mutual gains. Most countries tend to encourage
migration within their national boundaries, domestic labour mobility is generally regarded as a
good thing but they display less enthusiasm for mobility between nations.

Worker mobility is the extent to which workers are willing to move from one region or country
to another (geographical mobility) or to change from one occupation to another (occupational
mobility). In horizontal mobility there is no change of status, whereas in vertical mobility there
is. An upward change in status will increase a worker's mobility, whereas a downward change
will reduce it.

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 Labour mobility is the extent to which the workers are able or willing to move between different
jobs, occupations, and geographical areas. It is called horizontal mobility if it does not result in
in a change in the worker's grading or status, and vertical mobility if it does. Skilled workers
have low occupational mobility but high geographical mobility; low-skilled or unskilled workers
have high degrees of both types of mobility. Low labour mobility causes structural
unemployment and governments try to avoid it by worker retraining schemes and by encouraging
establishment of new industries in the affected areas.

Using the human capital investment theory mobility of workers is an investment in which
costs are borne in some early period in order to obtain returns over a long period of time. If
the present value of the benefits associated with mobility exceeds the costs both monetary
and psychic, people will then change jobs or move to new areas. But if the benefits are not as
large as the costs, then people will decide against such a change. This ‘human capital’
approach therefore emphasises that migration is an investment decision, involving a fixed
irrecoverable cost of movement and an uncertain future stream of returns.

Mobility is movement from one country to another, among regions within a country. Most of
people move due to transfers or economic factors and changing employers. Human capital theory
assumes people will migrate from areas of relatively poor earnings possibilities to places where
opportunities are better. The pull of good opportunities in future places is stronger than the push
of poor opportunities in the areas they are in. Thus, it does not necessarily mean where they come
from opportunities are poorest, they just want higher real earnings.

Determinants of mobility

 Increase utility in a year derived from changing jobs.

 The length in time one expects to work at the new job.
 The utility lost in the move itself (direct and psychic costs)

Therefore, the increased benefits of the new job, the less happy one is in the job they are, the
smaller are the immediate costs associated with the change and the longer one expects to be in a
new job.
Geographic mobility
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People are willing and able to move between regions or areas in order to take a new job. Mobility
is determined by:
o The willingness of people to move
o The cost and availability of housing in different areas
o The extent of social, cultural and family ties
o The amount of information available to workers about jobs in other areas
o The cost of re-location
o Anxiety of the idea of relocation

Characteristics of those who move

Age: younger ones are the ones who more often move because they have a longer period to
write off the initial cost. They still have longer periods of return if they move. The more the
present value of these benefits the more people move. Most moving costs are psychological
due to emotional attachment which young ones do not have. Therefore, younger workers will
be migrating whilst older workers will be returning.

Education: pushes/indicates who will move in a certain age group migration involves
figuring the opportunities and how good they are. It also depends on the labour market of the
individual whether it’s local or international. Graduates are more international as compared
to less educated. For the less educated it is leaving a job and going to try out in a different
place whereas for graduates it is because they have another job. Therefore, the educated
migrate because of greater prospects of future promotion and advancements in the host
country.

Distance: human capital theory shows that if costs of moving is high migration will fall. The
costs are either in terms of trustworthy information on opportunities that are available and
usually for areas close to home that’s where it is more reliable. Costs in terms of time, money
to move and for trips taken to coming back to see friends and relatives plus the psychological
costs. Therefore, people move short distances. Lack of education also deters long distance
than age.

The earnings in countries left: in countries where there is a small gap between the skilled
and unskilled in earnings, more educated ones will move than the unskilled because the

36
 unskilled are already gaining more than they would get in countries with big gaps.e.g
Zimbabwe. In a country where there is a significant gap the skilled workers will be doing
well but the unskilled gain more if they move to regions with reduced gap thus these cant
invest in their own country.

People are thus unemployed because they are not prepared to move areas (e.g leave their
home area) in order to take up work. This is due to cost of moving, houses prices in other
areas, friends in current area and children’s education.

Geographic mobility gives rise to illegal immigrants. Immigration is often a necessity to

maintain a growing and healthy economy. Also important to recognize is the difference
between legal immigration and illegal immigration. Legal immigration is typically a facet of
a government's economic policy, and while illegal immigration is generally thought to be a
bad thing, it can sometimes be good economic policy to turn a blind eye. A person is defined
to be an immigrant if he was born abroad and is either a non-citizen or a naturalized
citizen; all other persons are classified as natives. An illegal immigrant is a person who does
not have the required documentation to seek work and stay in that country.

Trends evident in the pattern of migration

 The number of people migrating has increased

 Migration has become more globalised.
 Emigration patterns have been influenced by the regionalisation of the world economy
 Migration is not just a developed country phenomena, developed countries e.g South Africa
attract migrants.

Effects of illegal immigrants on host country

Negative effects

 Statistical analysis shows that when immigration increases the supply of workers in a skill
category, the earnings of native-born workers in that same category fall. The negative effect will
occur regardless of whether the immigrant workers are legal or illegal, temporary or permanent.
Any sizable increase in the number of immigrants will inevitably lower wages for some native

37
 workers. Conversely, reducing the supply of labour by strict immigration enforcement and
reduced legal immigration would increase the earnings of native workers.
 Indicating that native wages are lower in markets penetrated by immigrants, would indicate that
immigrants worsen the employment opportunities of competing native workers.
 The adverse impact of immigration is largest for the most disadvantaged native-born minorities.
 It causes diversity which is a source of social friction(xenophobia).

Positive effects

Migration has many positive spill over effects on the economy

 Immigrants have little impact on the labour market, perhaps because immigrants do jobs that
native do not want to do.
 Immigration restrictions tended "to keep wages high." That is why many employers rely on
illegal immigrants and would not be able to maintain their businesses without them. They would
be forced to close, possibly resulting in a negative ripple effect on a local economy. Thus, cheap
labour which also mean cheaper products.

 If immigrants tend to cluster in cities with thriving economies, there would be a built-in spurious
correlation between immigration and wages. Natives may respond to the wage impact of
immigration by moving their labour or capital to other cities.
 Immigration should lower the wages of competing workers and increase the wages of
complementary workers, of workers whose skills become more valuable because of immigration.
 At the same time, high-skill natives may gain substantially. They pay less for the services that
labourers provide, such as painting the house and mowing the lawn, and natives who hire these
labourers can now specialize in producing the goods and services that better suit their skills.
 In many first-world countries, the birth rate (china) is exceeded by the death rate, and populations
are declining. Immigration then becomes an economic necessity, because jobs need to be filled.
Immigration, then, can also be instrumental in keeping the economy growing, which in turn helps
to create jobs.
 Another facet of immigration policy is that to have a robust economy, a country must be able to
persuade the best and brightest from other countries to immigrate. These helps develop
technologies and build industry, which leads to economic growth and growth in the job market.
 Immigrants purchase goods and services and contribute labour and tax dollars while requiring
services such as healthcare, education and law enforcement. Their participation can depress

38
 prices for all consumers buying goods and services. Their increase means demand for more
services that natives are willing to do hence job creation.
 Illegal immigrants pay social security payroll taxes but are not eligible for benefits. Therefore,
they have positive effects on public finances they migrate at an early stage and do not draw
heavily from the education and health facilities.
 When the wages of lower-skilled workers go down, the rest benefits by paying lower prices for
things like restaurant meals, agricultural produce and construction.
 Illegal immigrants seem to have very little impact on unemployment rates. But they also create
demand that leads to new jobs. They buy food and cars and cell phones; they get haircuts and go
to restaurants.
The evidence suggests that the overall costs imposed on the economy by undocumented
immigrants are equivalent to or outweighed by the benefits. However, this issue remains
contentious in part because the costs of illegal immigration are not often borne by the people and
institutions benefiting from illegal immigration

Impact on countries left

 Reduce burden on public goods provision.

 Loss for potential revenue especially since those who migrate are young and they live after
receiving public schooling at taxpayers’ expense but they will not be around to pay taxes from
their adult earnings. (cadetship)
 Loss of skills because the skilled with better prospects move more.

A “brain drain” tax has been proposed to deal with this problem. Emigrants would pay an
extra education related tax that would be passed back to their governments. However, the
control and supervision needed in order to implement such a proposal would be costly.

Employee turnover

Employee turnover is mobility of employees among employers without necessarily changing

residence.

Factors that affect employee turnover

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Wages: employees quit low wage jobs than higher paying jobs. So those employed at low paying
jobs than they can get are likely to quit when they get something else. Those who change have
more to gain than those left.

Employer size: the bigger the firm the fewer quits because these offer more opportunities for
transfers and promotions and generally pay better wages than smaller organisations due to its
high capital base. These pay more to retain because they invest a lot in workers to get innovation
thus it will cost them more to lose these workers.

Gender differences: women have higher quit rates than men due to little human capital
investment in them and due to their reproductive roles and their spouse’s mobility.

Cyclical effects: the ability to get a better job quickly can cause some people to quit easily. If
market is tight more quit as oppose to a loose market.

Employer location: when costs of quitting are low mobility is more likely. Especially for
organisations in urban areas where mobility from one job to another does not require change in
residence as compared to agricultural estates in remote areas.

Why individuals do not move

o Lack of information of available jobs in other occupations

o Extent and quality of remuneration packages
o Extent of skills and qualifications to do the job
o Anxiety about changing jobs

Is mobility good or bad?

o -promotes social well being

o -Improves job matching in the labour market
o -threat of mobility increases compensation wages.
o -Mobility however reduces motivation to both employer and employee to invest in human
capital

LABOUR MARKET DISCRIMINATION

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Nobel-prize winning economist Kenneth Arrow has defined discrimination as “the valuation
in the market place of personal characteristics of the worker that are unrelated to worker
productivity”. Labour market discrimination exists if individual workers who have identical
productive characteristics are treated differently because of the demographics groups they
belong to, through different productive characteristics they have when they enter the market
and differences in the way they are treated in the market.

These personal characteristics may be sex, race, age, national origin, sexual preference,
political affiliation, beauty/physical features, convict, religion, sex change, albinos and
disability.

Employers may not treat workers, be they actual or potential employees in the same way – in
which case discrimination is said to occur. It is a possible cause of market failure and we
consider different aspects of labour market discrimination in this note.

Discrimination is a cause of labour market failure and a source of inequity in the distribution
of income and wealth and it is usually subject to government intervention e.g., through
regulation and legislation. Discriminatory treatment of minority groups leads to lower wages
and reduced employment opportunities, including less training and fewer promotions. The
result is that groups subject to discrimination earn less than they would and suffer a fall in
relative living standards.

What has the Zimbabwean government done to curb discrimination?

Theories of labour market discrimination.

These are there to explain the source and mechanisms causing labour market discrimination

Personal prejudice model

This theory assumes employers, customers and employees dislike associating with people of
a given race/gender. They prefer not to associate with members of certain demographic
groups.

Employer discrimination/employer ignorance

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Discrimination arises because employers are unable to directly observe the productive
ability of individuals and therefore easily observable characteristics such as gender or race
may be used as proxies – the employer through ignorance or prejudice assumes that certain
groups of workers are less productive than others and is therefore less willing to employ
them, or pay them a wage or salary that fairly reflects their productivity, experience and
applicability for a particular job. If employers have a preference for employing white males
in better jobs despite the availability of equally qualified women or black males the whites
will just see them as less productive than the whites therefore employer devalues these groups
and it is subjective. Therefore, discriminators give up the benefits of employing the blacks
and minorities in order to indulge their prejudice therefore wages will have to be lower for
these groups if they get hired.

However, this model implies that discriminators maximise utility (through prejudicial
preferences) instead of profits.

Customer discrimination

The 'Taste' Model (Gary Becker) - Discrimination arises here because final customers
dislike buying goods from salespeople from different races i.e., people prefer to associate
with others from their own group. This where customers prefer to be served by white males
or the opposite gender therefore employer fights to please the customer therefore will work
on these customer prejudice. Therefore, discrimination is from the customers therefore
marginal product of labour of these individuals is reduced this will increase segregation in
occupations which offer services because firms will hire the preferred group and charge
higher prices for this than firms who do not offer. Therefore, customers will pay an added
price for their preference. Racial components of customers are seen through rational
components of employers.

Employee discrimination

The 'Taste' Model (Gary Becker)- discrimination arises here because workers have a
distaste for working with people from different ethnic backgrounds. Were certain employees
do not want to associate with minorities/women e.g., men refuse to take orders from a female
boss or whites from blacks. Such situation causes quits and sabotage. Non-discrimination
employers just pay the premium to keep white workers but a discriminatory one would

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discriminate. Employee discrimination is a cost to the employer and so is letting them go.
This can be beat by doing occupational segregation e.g., women into secretarial work.

Effects of discrimination

Occupational Crowding: Occupational segregation can be caused by crowding. – Females

and minorities may be crowded into lower paying occupations. Where blacks or women are
crowded into certain jobs so that it becomes cheaper to employ them.

Wage discrimination- wages are always a function of production such as human capital,
organisational size and the price for that job in the market. Therefore, economics say the
wages differ because of different levels of job experience. Wage discrimination occurs when
workers of the same productive characteristics are paid unequally, even in the same
occupation.

Occupational discrimination: Linked to human capital through schooling, job training

experience. Women and men can have different occupational distributions, but are
discriminated this is seen through segregation where there is distribution of jobs by
demographics. Female dominated jobs and male dominated jobs. Some job segregation is due
to premarket discrimination that is treatment by parents, schooling etc. where women are
encouraged towards low paying jobs/household than men.

Gender discrimination: Although big changes have occurred in the labour market in terms
of the participation rates and employment levels of females, there is little doubt that a
permanent gap exists between average pay rates for females and males in the labour market.
However, there is evidence that this gap is closing albeit slowly. Women seem to earn lower
than men earn because of their age and human capital investment. Most older women are less
educated for those educated their earnings per life are flatter than men’s.

Factors that explain the gender pay gap

Human capital: i.e., there are differences in educational levels and work experience between
males and females. This is most marked when one compares married males with married
females. Breaks from paid work, including time to raise a family, also impact on women's
level of work experience. In addition, the barriers to entering male occupations are far greater
than that of women jobs. For example, male jobs take a lot of education and training which is
costly, and only those who are socially and intellectually advantaged can succeed in such a

43
demanding profession. The women jobs however require minimal training. The supply for
male jobs therefore would be much more inelastic than the supply for female jobs. The
demand would also be inelastic as there is a high demand for males, so the employer will pay
higher wage rates to attract the profession.

Part-time working: a significant proportion of women work part-time and part-time work
typically pays less well than full-time jobs. Within jobs pay is also affected by hours spend at
work and experience and women have fewer hours therefore they do not get the
compensating wage differential for extra hours of work, because of their reproductive role,
spouse mobility, interrupted work experience and are less likely to be promoted and it is also
because women occupy part time jobs.

Travel patterns: on average, women spend less time commuting than men with the result
that they will have a smaller pool of jobs to choose from. It may also result in lots of women
wanting work in the same location near to where they live which will result in lower
equilibrium wages for those jobs.

Occupational segregation: women's employment tends to be concentrated in certain

occupations. Most women are overrepresented in low earning jobs and underrepresented in
high earning jobs therefore the difference in pay is also due to occupational distribution. But
even in some occupations women earn less than men but it’s also because most of these jobs
require higher learning and some women don’t engage in that. Occupations which are female-
dominated are often relatively poorly paid jobs (e.g., Caring, Cashiering, Catering, Cleaning
and Clerical jobs) and there is continued under-representation in higher paid jobs within
occupations – the so-called "glass ceiling" effect.

Employer discrimination: gender pay gap is attributable to direct discrimination against

women.

The effects of monopsony power: Females may be relatively geographically immobile

(because they are tied to their husbands' place of employment) and may be paid less than a
competitive wage by a monopsonist employer.

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We also have women with productive potential and same education are put in lower paying
jobs or levels of responsibility by employers who reserve higher paying jobs for men that is
occupational discrimination.

A reduction in the demand for female labour relative to male labour will result in a reduction
in the employment of females and a reduction in the relative wages of females compared to
males (assuming that supply of female labour is not perfectly elastic)

Government Intervention to reduce the gender pay gap.

o The Equal Pay Act sought to provide legal protection for female workers and
encouraged employers to bring the pay for males and females into line.
o The Sex Discrimination Act outlawed unequal opportunities for employment and
promotion in the workplace because of gender and it set up the Equal Opportunities
Commission.
o Attention has switched in recent years away from legislation towards encouraging
more women to stay on in further and higher education providing and targeted
assistance for single parents to find work and thereby increase the labour market
participation ratio among female workers.
o Women empowerment programmes e.g MSU
o Pregnant children allowed to finish school.
o Affirmative action, quota system
o Ministry of women affairs.

But there are also unexplained differences were men and women have the same level of
education and experience but are still paid differently. This is probably due to the different
characteristics affecting productivity that might differ by gender e.g responsibility both
genders put on work and household activities and some is just general discrimination in the
market.

By Race: Differences in employment ratios. Black women have a higher participation rate
than white women where as for the men it is the opposite. The black men’s ratio is decreasing
because they are discouraged by the wages. Differences in wages for blacks and whites can
be attributed to education, experience.

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Earnings Differentials between Ethnic Groups: Difference according to different ethnical
group. Ethnic minority groups in are more likely to experience unemployment than dominant
groups. And in terms of their earnings from the labour market, ethnic minority workers are
over-represented in low-paying occupations such as service industries, which employ
three-quarters of ethnic minority male employees and self-employed work. Ethnic minorities
face two kinds of discrimination in the labour market.

1. Less access to higher status occupations than their counterparts

2. Lower pay for a given job.

UNEMPLOYMENT

Unemployment refers to those people in the labour force and are looking for employment and
they haven’t found any. Dermot (2004) define unemployed as those of the working age who
in a specific period are without work and are available for and have taken steps to find work.
Those who have been laid off and are waiting to be recalled or those without jobs but are
actively looking for a job are also referred to as unemployed. Changes in unemployment
depend on: inflows made up of non-employed people starting to look for jobs and of
employed people who lose their jobs and look for new ones; and outflows of people who find
new employment and of people who stop looking for employment.

Sources/causes of unemployment

 New entrants in the labour market

 Re entrants who had experience before
 Job losers/ those who lost their jobs
 Voluntary job leavers/ those who quit jobs
 Those laid off
 Hard core unemployables due to their personal characteristics e.g health, convicts
 Long records of unemployment in field due to increased unemployment.
 Trade union activity
 Supply exceeds demand
 Immigrants
 Restructuring

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  Level of skills
 Discrimination
 High minimum wages
 Rigidity of labour laws.
 High unemployment benefits
 Immobility
 Rigidities in the product market.

Costs of unemployment (Dermot McAleese: 2004)

 Financial loss to the unemployed.

 The more someone remains unemployed the more difficult it is to get a job, low self-
esteem and causes health problems.
 Costs to family and friends, strained relationships.
 Broader costs to the economy in form of heavy social welfare costs (unemployment
benefits)
 Government loses tax revenue because the unemployed do not pay tax.
 High unemployment creates insecurities and resistance to organisational and
technological change.
 Lost human capital investment.
 Youth unemployment means many young people lose their skills and employability.
 Causes social and political instability.

When looking at the overall macro economy, several types of unemployment have been
identified, including

Frictional unemployment

Frictional unemployment is the term used to describe unemployment that results from
difficulties in matching qualified workers with new jobs. Many qualified workers seeking
work are not able to find new jobs right away, usually because of a lack of complete
information about new job openings. While it is likely that qualified workers will soon be
matched with new jobs, these workers are considered frictionally unemployed during the time
that they spend searching for their new jobs.

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If the labour market is competitive such that the market wage is at equilibrium labour
demanded will equal labour supplied. In such situations there will be full employment
therefore no unemployment. However, it does not take into account frictional unemployment
because some people will be unemployed in between jobs e.g information flows are imperfect
and it needs time and effort for unemployed workers and employers with job vacancies to
find each other.

Frictional unemployment is determined by the flow of individuals in and out of the labour
market and the speed with which people find jobs. New entrants also will come in e.g
graduates just getting into the market. When workers move from one job to another for this
short period, they increase unemployment rate.

So, changes in the labour market causes changes in the unemployment rate. Long time before
job matches causes unemployment. Therefore, if demand exceeds supply frictions will still
occur. This reflects the fact that it takes time for people to find and settle into new jobs.

Technological advancement often reduces frictional unemployment, for example: internet

search engines have reduced the cost and time associated with locating employment.

Structural unemployment

This employment results from structural changes in the economy that cause workers to lose
jobs. The same structural changes also prevent these workers from obtaining new jobs.
Structurally unemployed workers are not qualified for the new job openings that are
available, mainly because they lack the education or training needed for the new jobs.
Consequently, the structurally unemployed tend to be out of work for long periods of time,
usually until they learn the skills needed for the new jobs or until they decide to relocate

This is caused by long run changes in the economy which changes the demand and supply of
labour. These changes cause a mismatch between the job seekers and their qualifications with
the jobs available on the market. This is caused by rigidity in the market which hinder
mobility or its too expensive to retrain to match to relocate. This therefore occurs where there
is a mismatch between skills demanded and skills supplied in that area. If costs of re-
adjustment and mobility were low then this type of unemployment would be eliminated fast.
This therefore reflects a mismatch between the skills and other attributes of the labour force
and those demanded by employers.

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Rapid industry changes of a technical and/or economic nature will usually increase levels of
structural unemployment, for example: widespread implementation of new machinery or
software will require future employees to be trained in this area before seeking employment.
The process of globalisation has contributed to structural changes in labour, some domestic
industries such as textile manufacturing have expanded to cope with global demand, whilst
other industries such as agricultural products have contracted due to greater competition from
international producers.

Occupational imbalances: Unemployment differences among different occupations. This

occurs where changes in the demand of certain occupation changes. If demand for one
occupation changes due to for e.g changes in technology, and the employees cannot move
over to a better occupation then unemployment occurs. But where they can easily move to the
other occupation employment is maintained. Individuals cannot switch from one job
occupation to the other due to the training required or skill. Structural employment arises
however when costs of adjustment are sufficiently high to prevent such movements.

Geographic imbalances: This is unemployment rate differences among provinces or cities,

where one city has a higher level of unemployment than the other. Unemployed individuals
cannot be mobile to occupy the jobs in the cities with lower unemployment levels and this is
caused by lack of information about the job, direct money costs to move which might be too
high, psychological costs or immobility. E.g mines. Structural factors can cause
unemployment between cities but this will not stay indefinitely, eventually people will move
and the new entrants to the market will avoid such cities therefore reducing the
unemployment levels of those areas.

International differences

Unemployment differences among nations, caused by immobility, distance, barriers to entry

in that market e.t.c

Structural unemployment occurs when the unemployed have a lower probability of finding
work. The flow of workers will increase if employees suddenly find it easy to be mobile and
when employers find it cheaper to create jobs. Pareto efficiency wages affects unemployment
because they cause supply to exceed demand. Some will quit jobs and wait for any
opportunity to get a better paying job thus increase unemployment. Unemployment will thus
affect efficiency wages because wages have to be low to reduce supply. If unemployment is

49
high others do not need to pay premium wages that are high to get quality employees
therefore there is a negative effect of unemployment on wages.

Demand deficient(cyclical) unemployment

Frictional unemployment occurs due to the dynamics that occur in the labour market,
imperfect information flows. Structural unemployment due to imbalance but demand
deficient unemployment is caused by business activities/business cycle. This is due to
insufficient demand of product in the overall economy.

During a recession, aggregate expenditure is deficient causing the underutilisation of inputs

(including labour). If there is reduction in demand for product it therefore affects demand for
labour. That is if demand for product is insufficient to provide work for the available labour
force despite of skills and location of its members. (Loose market). Therefore, if demand
shifts to the right with inflexible wages unemployment levels will increase. Organisations
then lay off workers and reduce rate at which they replace those who quit or retire thus
reduce those employed.

Besides reduced employment wages are also reduced and employees quit because of these
lower wages. Therefore, increasing the unemployment rate. This causes a fall in real wages
because price increases but the nominal wage does not increase, wages are rigid and cannot
be cutback thus adjustments made by the organisation causes unemployment. Layoffs also
depend on employer human capital investment on the employees, those laid off are the least
experienced those that the company has not invested in that much.

Seasonal unemployment

This is induced by fluctuations in the demand for labour. But these fluctuations are
anticipated regularly and follow a pattern over the years e.g agricultural employees’ rainy
season they increase contract workers winter they reduce. Therefore, on off seasons
employees are laid off instead of reducing wages. Firms pay higher wages during seasons to
attract workers and to compensate for the months they are unemployed.

Natural rate of unemployment —

That rate at which job vacancies equal the number of unemployed workers. The rate at which
the level of unemployment is unchanging and both the flows into unemployment and the

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duration of unemployment are normal. This is the summation of frictional and structural
unemployment, that excludes cyclical contributions of unemployment e.g., recessions. It is
the lowest rate of unemployment that a stable economy can expect to achieve, seeing as some
frictional and structural unemployment is inevitable. Economists do not agree on the natural
rate, with estimates ranging from 1% to 5%, or on its meaning — some associate it with
"non-accelerating inflation". The estimated rate varies from country to country and from time
to time.

What are the unemployment rates in Zimbabwe?

To curb issues of unemployment most governments have the social welfare programme to
assist those without jobs. How does this affect unemployment levels?

 By reducing the costs associated with being unemployed more generous benefits
cause an increase in the reservation wages of the unemployed people. Thus lengthen
the duration of unemployment.
 Individual’s eligibility of entering this programme affect their job search behaviour.

What has the Zimbabwean government done to reduce unemployment???

Indigenisation, projects e.g danhiko, Agribank offering loans to farmers, SMES, EPZ,
facilitate self-employment through flea markets e.t.c

UNIONS AND THE LABOUR MARKET

A labour union is an organisation of workers whose primary objectives are to improve the
working conditions of their members. Unions bargain with employers over various aspects of
the employment contract that is pay and benefits. The impact of unions depends on their
power and militancy.

Industrial unions represents most or all workers in an industry regardless of their occupations.

Craft unions represent workers in single occupational group.

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Unions want to give workers some voice in the way that employers manage the workplace
especially in handling various HR issues. Their aim is also to increase compensation levels of
workers especially wages.

Employers are constraints to unions because employers have to make agreements that permit
them to operate successfully both with their workers and within their product markets.

Unions are a major feature of the labour market and half the labour belongs to them. Most
view unions as forms of monopolies that benefit their own members at the same time impose
substantial costs on members of society.

Some view it as a way that helped working members to improve their economic status and as
a force behind social legislation.

The union model

Here the union sets the price of labour and the employer adjusts employment to maximise
profits given the new wage rate. The union values both the wages and the employment levels
of members. It deals with the preferences of its members they reach utility either way if there
is low employment levels and higher wages or if there is low wages and high employment
levels. Thus, preference for the union is indifferent.

Union membership

Demand and supply for union membership changes. Employee’s desire to be union members
depends on the price of union membership that is the fees, monthly dues and the time one is
expected to spend on union activities. Increase in price will result in decrease in membership.

To represent employees in collective bargaining is also costly for the union therefore
willingness to supply their services has a positive slope that is it depends on the price of
union membership.

Changes in union membership might be caused by:

 Perceived net benefits e.g wage increases

 Changes in attitudes about unions.
 Changes in legislation that makes it easier for unions to win cases.

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Factors that have affected union membership

 Demographic changes in the labour force: more women are joining the labour force
and they are more loyal thus less likely to join unions.
 Increased mobility of workers
 Increase in individualism not collectivism (HR)
 A shifting industrial mix: shifting from labour intensive to capital intensive thus
unions cannot afford to negotiate higher wages as this affects employment levels
greatly.
 Increase in small businesses which do not take in unions.
 Increased competitive pressures: increase in foreign competition caused by
deregulations between countries thus availability of cheap labour from other countries
thus organisations can move to these areas.
 Increased product competition forcing employers to make decisions that have
negative effects on employees
 Increased employer resistance to union efforts using legal and illegal means.

Unions today are facing competitive employers who are struggling to make profits. Unions
can only increase wages at the expense of employment. If unions force wages up the marginal
firms will go bankrupt and leave the industry then fewer workers will be employed. Fall in
output will lead to higher prices therefore the remaining firms then pay higher wage rates.

Unions will be in weak positions; jobs will be lost if wages increase at the same time the
unemployed people would undercut union wages unless the union can prevent firms from
employing non-union members. Therefore, the union is faced with a decision between wages
and employment. Its actions will depend on its objectives.

Increases in wages will not result in a decrease in employment if productivity increases. Both
parties can agree to increase net income so that there is an increase in wages without affecting
profits.

Impact of union actions on the labour demand curve

Unions aim to relax market constraints, to increase demand for union labour or to reduce
wage elasticises.

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  Thus, supporting legislation that at least indirectly achieve union goals e.g through
direct public relations campaigns.
 Through shifting product demand by lobbying quotas on imports so as to make sure
employment levels will be high and competitive pressures do not affect their union
members.
 Through restriction of substitution of labour by capital.

Effects of unions on wages

 Unions through strikes are able to force increase in wages.

 Union negotiations also affect non-union wages therefore differences between union
and non-union members are thin.

spill over Effects

If unions increase wages this causes employment to be reduced causing unemployment. If all
the employees, then spill over to the non-union sector, the supply curves in both sectors will
shift. Employment in the union sector will be reduced but excess supply of labour will exist
at the old market clearing wage. This causes wages to go down in the non-union sector until
market clearing wages. Therefore, unions increase wages at the expenses of some of its
members and this causes the union relative wage advantage to be greater since spill over even
lowers the wage rate paid to individuals initially.

There is also the concept of wait unemployment were those who are out of jobs from the
union sector will be waiting for a vacancy in the union sector rather than working in the non-
union sector. Therefore, not everyone will spill over.

Threat Effects

Threat effect can occur in two ways

Non-union employees would also want a union to represent them when they see the wage
increases occurring to union members. The non-union employers in fearing union will
increase labour costs and limit managerial prerogatives will buy off employees buy paying
above market wages which would be enough to stop employees to want to join unions.
Therefore, wages increase because of the threat of union entry in the non-union sector.
Increase in wages will mean the employer will demand fewer employees. This causes

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 unemployment for the excess labour from both union and non-union sector that will be out of
jobs. The increase of wages in the non-union sector therefore makes the union advantage
smaller. There won’t be a difference for those part of the union and those in the non-union
sector since they both have wage increases in the end.

The second threat effect will be the threat of employees in the non-union sector to quit and
join the union sector. To avoid these employers increases wages to retain employees.

Effects of unions on employment

 Too much pressure to increase wages causes unemployment. They reduce

employment growth.
 They increase labour productivity by communicating the needs and wants of
employees to the employer thus increased motivation.
 Can maintain employee numbers when they negotiate with organisations to
remain labour intensive

Do unions improve social welfare?

 Improve working conditions

 Makes the labour market effective by moderating it.
 Assists employees where there is low mobility.

 Time wasted in strikes

 Resources wasted
 Represent interests of their members.
 Create wage differences

PAY AND PRODUCTIVITY

Workers are often different from each other in work habits that greatly affect productivity but its
often difficulty(costly) to observe before and sometimes even after selection takes place.

Productivity of individuals differ, according to the human capital and motivation theory it is a
function of innate ability, the level of effort and the environment (weather, working conditions).

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 Productivity thus includes the initiative to help advance the employers objectives. It is the duty of
the employer to push the initiative in the employee through compensation, pay.

However, the question is does pay increase worker productivity and how?

Methods of pay linked to performance

pay for performance

pay on individual output. This is a strong incentive for productivity. This however depends on
how much a workers output is influenced by forces outside his/her control. E.g machine
breakdowns and resources for workers to meet targets. Therefore pay-output becomes a poor
incentive because the workers pay are affected by conditions that the worker cannot control.

For some jobs it is also difficult to measure the output. If basis for measuring is biased workers
will work on those areas being measured on the expense of others to please the employer.

Time-based pay

Pay by hours worked there is no relationship with output. In such situations if effort is not
awarded employees, then will not put extra effort. Even if u try and supervise them to do more
work it is just an extra cost. For productivity-based pay to be effective it should be fair and the
procedure clear and transparent. Once workers feel the system will be unfair, they will put less
input and effort.

Higher pay might improve productivity because.

 Attracting better workers: higher pay enlarges the firm’s applicant pool.
 Build employee commitment: pay increase productivity because they are a foundation to
higher commitment.
 Perceptions of equity by the employees: if they think the high pay represents equity, they
increase productivity.

Does pay result in productivity?

 Issues of fairness to the individual relative to others. If one gets less than the others in
the same organisation for the same job it might cause resentment, stealing, sabotage to
settle the score.
 Group loyalty

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  Ron Elsdon, director, retention services, Drake Beam Morin, says money is important,
but it's generally not a sufficient tool to motivate people. Compensation is the price
that it takes to play the game, and salaries should be competitive. However,
leadership, career development, and flexibility are critical for motivating and
maintaining a productive workforce.
 There are many reasons why productivity may drop within an organization. Offering
monetary rewards will not solve the problem. It will only perpetuate it. If employees
see that a drop in productivity results in monetary incentives for a return to normal
productivity levels, that doesn't send a very good message. Instead, organizations
should evaluate what motivates employees today, and look to increase productivity
by appealing to those needs.
 By putting less emphasis on monetary rewards as incentives, companies can appeal to
the personal values and lifestyle choices of today's employees.
 Workers today are willing to sacrifice more money in order to achieve a greater
work/life balance. A recent global poll of Drake Beam Morin consultants revealed
that less complexity in life and a better work/life balance is a key desire of many
people in career transition. They are looking to downshift their careers and get more
balance back into their lives.
 This does not mean, however, that they are taking their careers less seriously.
Employees today place a high level of importance on professional development as a
motivational tactic. Handing an employee, a check might be a short-term way to
recognize value to the organization, but fostering the growth and development of your
employees is a great way to tell them that you are willing to invest in them for the
future.

Concerns

The distortion effort: employees can observe the measures of performance more easily and
emphasise on the measured aspects and ignored those not measured.

Time based pay with the coming in of new technologies how will the employer know how
long it takes to complete a job. Thus, workers might loiter for the required time so as to get
higher pays. It gives workers the incentive to go slow.

Why do large firms pay more?

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 o They have better opportunities to make their workers more productive and they need
better workers.
o They use interdependent production processes which need workers to be more
dependable and disciplined.
o Cannot afford to lose a worker.
o They invest a lot in their workers.
o Their job vacancies are costly.
o They tend to be more capital intensive thus an unfilled job or an unexpected quit will
be severely disruptive to work.
o To be highly competitive.

Impact of COVID 19 on the labour market

 The world economy has formally entered into recession (IMF 2020)
 Prior to the Covid-19, the labour market was being influenced by technology,
globalisation, demographic transitions and this affected skills in demand and even the
size of the market
 Towns and cities benefited from the above-mentioned changes. Covid 19 accelerated
the changes and it also changed the trends or patterns
 Covid-19 Made it difficult for enterprises esp small and medium enterprises could not
sustain business operations
 Workers’ salaries reduced (jobs and income losses)
 Increased difficulties for jobseekers and new entrants
 informal workers could not go to work and this increased poverty (informality is the
last resort option for survival)
 Because of uncertainty enterprises will delay investments and hiring new workers
 Quantity of jobs (unemployment and underemployment)
 Deteriorating Quality of work (job security and wages)
 Vulnerable groups (women and youths). Disruptions to education, training and work-
based learning including apprenticeship. Domestic workers have lost employment,
closure of ECD Centres, care services and schools
 Covid 19 has accelerated digitalisation and teleworking
 Polarisation has affected non tertiary educated workers, women and migrant workers

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 Job losses (esp old age and low skilled) and creation of new opportunities (esp the
young ones)
 Labour market integration has been reduced because of low worker mobility

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