WAGE

DETERMINATION
SAZIA AHMED
Wage Determination under Perfect
Market Structure
■ The labor market, also known as the job market, refers to the supply of and demand for
labor, in which employees provide the supply and employers provide the demand. It is a
major component of any economy and is intricately linked to markets for capital, goods, and
services.
■ Under perfect competition, equilibrium wage rate is determined where demand for labour is
equal to supply of labour. In other words, under perfect competition, a labourer will get wage
equal to its marginal revenue productivity in the long run.
■ A perfectly competitive labour market will have the following features:
■ Many firms
■ Perfect information about wages and job conditions.
■ Firms are offering identical jobs
■ Many workers with the same skills
 Wage Determination under Perfect
Market
•The equilibrium wage rate in the industry is set by the
meeting point of the industry supply and industry
demand curves.

•In a competitive market, firms are wage takers because

if they set lower wages, workers would not accept the
wage.

•Therefore they have to set the equilibrium wage We.

•Because firms are wage takers, the supply curve of

labour is perfectly elastic therefore AC = MC.

•The firm will maximise profits by employing at Q1

where MRP of Labour = MC of Labour
Wage Determination under Perfect
Market
■ In Fig. 9 units of labour have been measured on X-axis and
wages on Y-axis. DD and SS are the demand and Supply
curves of labourers respectively. Both the curves intersect each
other at point E which determines wage rate OP in the market.
■ At this level of wages, ON units of labourers will get
employment. Now suppose, wages go up to OP1. At this price,
demand is ON1 and supply ON2. Since, the supply is more
than demand; it will lead to competition among labourers to
get employment which in turn results in a decrease in wage
rate.
■ On the other hand, if w age rate falls to OP 2, demand will be
more than the supply. This results in competition among the
producers to get the services of labour which in turn leads to
an increase in wage rate. Therefore, we may observe that
equilibrium will be restored at that point where demand curve
of labourers intersects the supply curve of labourers.
Wage Determination under Imperfect
Market Structure
■ In the world of reality there exists imperfect competition rather than perfect
competition. Therefore, Mrs. Joan Robinson and Prof. Pigou gave the wage rate
determination under the conditions of imperfect competition.

■ Perfect Competition in Product Market and Monopsony in Labour Market:

■ When there is a single buyer of labour in the market, monopsony is said to exist in the
labour market. If there is an increase in monopolist’s demand for labour, wage rate will
follow the same path which in turn tends to increase the average and marginal wage
rate. It can be shown with the help of a diagram.
Wage Determination under Imperfect
Market Structure
■ When there is a single buyer of labour in the market,
monopsony is said to exist in the labour market. If
there is an increase in monopolist’s demand for
labour, wage rate will follow the same path which in
turn tends to increase the average and marginal wage
rate. It can be shown with the help of a diagram.
■ In Fig. 14 units of labour have been measured on X-
axis while wages on Y-axis. ARP and MRP is the
average revenue product and marginal revenue
product curves. AW and MW are the upward sloping
average wage and marginal wage curves indicating
that if the monopolist wishes to employ more and
more labourers, he has to offer the higher wage rate.
Wage Determination under Imperfect
Market Structure
■ The monopolistic firm is in equilibrium at point E. At
point E both the conditions of equilibrium are fulfilled
i.e. marginal wage should be equal to marginal revenue
product and the marginal revenue product curve must cut
the marginal wage curve from above and then lies below
it. Thus, at this equilibrium level, he will employ OX
units of labour and OP wage rate will be determined.
■ Since wages are less than marginal revenue productivity,
means that the monopolist exploits the labour. Thus, in
this equilibrium the monopolist earns the supernormal
profits equal to the area PLMN. Therefore, it can be
concluded that imperfect competition in the labour
market results in the exploitation of labour.
■ When there exists monopoly in product market and
monopsony in labour market then there is difference
between marginal revenue product and value of marginal
product.
Collective Bargaining of Labor
■ The term collective bargaining refers to the negotiation of employment terms between
an employer and a group of workers. Employees are normally represented by a
labor union during collective bargaining.

■ The terms negotiated during collective bargaining can include working conditions,
salaries and compensation, working hours, and benefits.

■ The goal is to come up with a collective bargaining agreement through a written

contract.

■ According to the International Labour Organization, collective bargaining is a

fundamental right for all employees.
Major Bargaining Issues
■ Collective bargaining normally takes place between members of corporate management
and labor union leaders, who are elected by workers to represent them and their
interests.
■ Collective bargaining is initiated when employee contracts are up for renewal or when
employers make changes to the workplace or contracts.
■ These changes include, but aren't limited to:
■ Employment conditions
■ Working conditions and other workplace rules
■ Base pay, wages, and overtime pay
■ Work hours and shift length
■ Holidays, sick leave, and vacation time
■ Benefits related to issues such as retirement and healthcare
Process
■ Collective bargaining can be an intense process that can be stressful and difficult for all
parties involved. It often involves a lot of back-and-forths, with offers and
counteroffers. But the end goal is to reach an agreement.

■ The process goes through a number of stages. These steps can be summed up as
follows:
■ Identifying the issues and preparing the demands
■ Negotiating
■ Coming to a tentative agreement
■ Accepting and ratifying the agreement
■ Administering the agreement
Collective Bargaining
Using Collective Bargaining Power to Raise Standard
Wage Rate Directly
 Collective bargaining is a key means through which employers and their organizations and
trade unions can establish fair wages and working conditions. It also provides the basis for
sound labour relations.

 Typical issues on the bargaining agenda include wages, working time, training, occupational
health and safety and equal treatment. The objective of these negotiations is to arrive at a
collective agreement that regulates terms and conditions of employment.

 Collective agreements may also address the rights and responsibilities of the parties thus
ensuring harmonious and productive industries and workplaces. Enhancing the inclusiveness
of collective bargaining and collective agreements is a key means for reducing inequality and
extending labour protection.
Increasing the Demand for Labor
■ The demand for labour service in a unionised
industry is determined by factors outside the direct
control of the union, such as the availability of
substitute inputs and the demand for the product of
the firm. However, if trade unions can impose
greater discipline on workers, labour productivity
will rise.
■ In such a situation employers will voluntarily accept
the demand for higher wages. As Fig. 1 shows,
successful union actions to increase the demand for-
the services of union labours result in both higher
wages and an expansion in employment, but at the
expense of consumers (who have now to pay higher
price for the product of the unionised industry).
Restricting Employers Who Possess Monopoly
Power
■ A profit-maximizing monopolist will continue to employ additional workers so long as
marginal revenue product of labour (i.e., the additional revenue that can be made by
selling the output produced by the last worker) exceeds the marginal factor cost of
labour.

■ As a result, if the union has restricted the monopolist employers, they are bound to
increase the wage rate.
Restricting supply of labour
■ Trade unions normally raise wages by restricting the supply of L.
So, a union must be prepared to trade-off higher wage against
employment losses.

■ Fig. 10 illustrates the economic impact of successful union efforts

to obtain above-equilibrium wages for their members. To start with
we assume (1) that all labour is demanded by the two competitive
industries x and y(2) that all workers receive the same wage, and
(3) that jobs in the two industries have identical non-wage
characteristics. In such a situation all workers receive the same
wage, Wc.

■ Now, let us assume that workers in industry x in Fig. 10(a) are

organised into a trade union that immediately negotiates a wage of
Wu. The effective supply schedule to industry x becomes
WuFGLs. The result is a higher wage and lower employment.
Those who have lost jobs may be expected to move into non-
unionised industry y [Fig. 10(b)], raising employment and
lowering wages in industry y.
Can trade union raise wage?
■ Trade unions are often seen as a monopolistic element in the market
which distributes the efficient allocation of resources. Trade union do this
by restricting the supply of labour.

■ This is why the Nobel Laureate Friedrich A. Von Hayek comments:

“Powers of unions have become the biggest obstacle to raising the
living standards of the working class. They are the primary source of
employment.”

■ Trade unions are organisations of workers who represent the collective

interests of their workers and whose aim is higher wages.
LABOUR MARKET
AND
EMPLOYMENT
SAZIA AHMED
Meaning of Employment &
Unemployment
■ In the terms of economics, employment means the state of having a job or being employed. If
one has to employ someone, they have to pay them. The one who employs is called the
employer, and the one who is getting paid for providing services is the employee.

■ Unemployment occurs when someone is willing and able to work but does not have a paid
job. The unemployment rate is the percentage of people in the labour force who are unemployed.
Consequently, measuring the unemployment rate requires identifying who is in the labour force.
■ The term unemployment refers to a situation where a person actively searches for employment
but is unable to find work. Unemployment is considered to be a key measure of the health of the
economy.
■ The most frequently used measure of unemployment is the unemployment rate. It's calculated by
dividing the number of unemployed people by the number of people in the labor force.
■ Many governments offer unemployment insurance to certain unemployed individuals who meet
eligibility requirements.
Types of Employment
■ Full-Time Employees
■ Employees who come under this category usually work 30 to 40 hours a week. Employers determine the
minimum number of hours. An employer who has more than 50 full-time employees is considered as an ALE
(applicable large employer). Full-time employees receive many benefits from the organization like paid time
off, health insurance, provident fund, maternity leaves, etc. As per FLSA (Fair labor standards act), there is no
standard definition of a full-time employee, and employers have the freedom to decide how they employ their
full-time and part-time employees.
■ Part-Time Employees
■ When an employee works for less than 26 hours for an organization, they come under the part-time employees’
bracket. Such employees usually do not get the benefits that are offered to full-time employees, but employers
must pay the same taxes for employing part-time employees as they pay for full-timers.
■ Seasonal Employees
■ During peak seasons like summer months or holidays, employers need to hire people to cover their
productivity needs. For example, a retail company needs more people during the holidays. Many of the
seasonal employees are non-immigrant or H-2B visa holders. To employ people in this category, employers
must fulfill all labor certification documents and DOL requirements while requesting visas for these
employees. Since they are not permanent employees, they are not eligible for other benefits, but the
unemployment and social security benefits still apply to them.
Types of Employment
■ Temporary Employees
■ These employees get hired for a fixed period under a contract. A company hires temporary
employees to meet the needs of a certain project or task and let go of them once the
project is over. Mostly the time period is 6 months, but it could vary based on the project.
Like seasonal employees, the benefits of unemployment and social security apply to
temporary employees too. Employers can hire temporary employees on their own, or they
can go to a recruiting or consulting agency.
■ Leased Employees
■ When a staffing agency hires an employee and then leases the employee to a company for
a specific project, such employees are termed as leased employees. Typically such
employees work with a company that they are leased to for 1 year or more. Leased
workers exist on the payroll of the staffing agency who employed them and leased them
out, and not the organization they work for. The leased employees also receive other
benefits of a full-time employee through the staffing agency.
Unemployment Rate
■ The unemployment rate is the percentage of the labor force without a job. It is a
lagging indicator, meaning that it generally rises or falls in the wake of changing
economic conditions, rather than anticipating them. When the economy is in poor shape
and jobs are scarce, the unemployment rate can be expected to rise.

■ The unemployment rate formula is unemployment rate = (Number of unemployed

individuals /sums of employed and unemployed individuals) x 100%.

■ Example-Assuming the number of unemployed people is 500 and those employed are
3000, the unemployment rate will be: 500/3500 x 100% =14.29%.

■ https://www.rba.gov.au/education/resources/explainers/unemployment-its-measurement-a
nd-types.html
History of Unemployment
■ Although the U.S. government began tracking unemployment in the 1940s, the highest
rate of unemployed to date occurred during the Great Depression, when unemployment
rose to 24.9% in 1933.
■ Between 1931 and 1940, the unemployment rate remained above 14% but subsequently
dropped down to the single digits. It remained there until 1982 when it climbed above
10%.
■ In 2009, during the Great Recession, unemployment again rose to 10%.
■ In April 2020, amid the Coronavirus pandemic, unemployment hit 14.8%. The rate has
decreased consistently since June 2021. As of May 2022, the unemployment rate was
3.6%, which was unchanged from the previous month.
What Are the Main Causes of
Unemployment?
■ There are a number of reasons for unemployment.

■ These include -
■ recessions,
■ depressions,
■ technological improvements,
■ job outsourcing, and
■ voluntarily leaving one job to find another.
Unemployment – Dimensions/Types of
Unemployment
■ Voluntary unemployment refers to a situation when a person is unemployment because he is not
willing to work at the existing wage rate.

■ On the other hand, Involuntary unemployment refers to an unemployment in which all those
people, who are willing and able to work at the existing wage rate, do not get work.
Frictional Unemployment
■ This type of unemployment is usually short-lived. It is also the least problematic, from
an economic standpoint. It occurs when people voluntarily change jobs. After a person
leaves a company, it naturally takes time to find another job. Similarly, graduates just
starting to look for jobs to enter the workforce add to frictional unemployment.

■ Frictional unemployment is a natural result of the fact that market processes take time
and information can be costly. Searching for a new job, recruiting new workers, and
matching the right workers to the right jobs all take time and effort. This results in
frictional unemployment.
Cyclical Unemployment
■ Cyclical unemployment is the variation in the number of unemployed workers over the
course of economic upturns and downturns, such as those related to
changes in oil prices. Unemployment rises during recessionary periods and declines
during periods of economic growth.

■ Preventing and alleviating cyclical unemployment during recessions is one of the key
reasons for the study of economics and the various policy tools that governments
employ to stimulate the economy on the downside of business cycles.
Structural/Technological Unemployment
■ Structural unemployment comes about through a technological change in the structure of
the economy in which labor markets operate.

■ Technological changes can lead to unemployment among workers displaced from jobs
that are no longer needed. Examples of such changes include the replacement of horse-
drawn transport by automobiles and the automation of manufacturing.

■ Retraining these workers can be difficult, costly, and time-consuming. Displaced workers
often end up either unemployed for extended periods or leaving the labor force entirely.

■ Technological unemployment is the loss of jobs caused by technological change. It is a

key type of structural unemployment.
Seasonal Unemployment
■ Seasonal unemployment is when people who work in seasonal jobs become
unemployed when demand for labor decreases. This typically occurs when a specific
time of year ends or a new season begins, such as for a holiday or due to weather
changes. For example, someone who works at a resort during the summer might
experience unemployment once the fall arrives and summer facilities have to close.

■ Seasonal unemployment often takes place in locations that see high volumes of tourists,
as different tourist attractions can close or slow their operations depending on the time
of year and season. This is especially true for tourist attractions that exist outdoors, as
they might only be able to operate during certain types of weather.
Disguised Unemployment
■ Disguised unemployment is unemployment that does not affect aggregate economic
output. It occurs when productivity is low and too many workers are filling too few
jobs. It can refer to any part of the population that is not employed at full capacity.

■ An example can be an individual with a college or university degree taking up a job

as a teller due to an inability to find a job more fitting for their qualifications.
Individuals with illness or disability but who can perform certain tasks also fall under
disguised unemployment.
Different Groups in the Labour Market
■ Employed person & Unemployed person: A person who is both working and seeking
work is classified as employed, and a student who is attending school and also
seeking work is classified as unemployed.

■ Labour force: The labor force is the number of people who are employed plus the
unemployed who are looking for work. The labor pool does not include the jobless who
aren't looking for work.

■ Not in the labour force: People who are neither working nor looking for work are
counted as “not in the labor force,” according to the U.S. Bureau of Labor Statistics.
Since 2000, the percentage of people in this group has increased.
Labour Force Participation Rate
■ The labor force participation rate is an estimate of an economy’s active workforce. The
formula is the number of people ages 16 and older who are employed or actively
seeking employment, divided by the total non-institutionalized, civilian working-age
population.

■ In the 12 months ending May 2022, the U.S. labor force participation rate ranged
between a low of 61.6% and a high of 62.4% (which was the figure for March 2022),
according to the U.S. Bureau of Labor Statistics, which publishes the figures monthly.
The labor force participation rate was 62.3% for May 2022.

■ In other words, the participation rate is the percentage of the population that is either
working or actively looking for work. The labor force participation rate is calculated as:
(Labor Force ÷ Civilian Noninstitutional Population) x 100
Thank You