RELATIONSHIP BETWEEN EMPLOYMENT & WAGES IN LABOUR MARKETS

Miss S Wigglesworth

Monday 20th July

Objectives • Today we will be looking at the close relationship between wage levels and

employment in labour markets.

• In our second class we will be reviewing the dynamics of unemployment and inflation

and how they link.

Discussion • Why do film stars, footballers, investment bankers earn large

incomes?

• Why do cleaners, hospital porters and workers in clothing factories earn very

low incomes?

Average income and employment rate in Japan, UK, S.Korea and USA

•http://www.oecdbetterlifeindex.org/countries/united-kingdom/

Average Yearly Income (household)

Rate of employment (ages 15-64)

Japan 25 066 USD 71%

Korea 18 035 USD 64%

UK 25 828 USD 71%

Germany 30 721 USD 73%

USA 39 531 USD 67%

The concepts of the labour market &the cost of labour

• https://www.youtube.com/watch?v=jSDd6re92TY

In a perfect labour market?

• Everyone is a wage taker – nobody has power to affect wage rates (employer/employees)

• Freedom of entry – no restrictions on the movement of labour (jobs or different areas)

• Perfect knowledge – workers are fully aware of what jobs, wages & conditions of employment are available

• Homogeneous labour – workers of a given category are identical in terms of productivity, e.g. all bricklayers are equally skilled and motivated

Wages – in perfect competition (whole market)

• Wages and employment are determined by the interaction of the market demand & supply of labour:

Wages – in perfect competition (individual employer)

• Here firms are wage takers and thus face an infinitely elastic supply of labour (there is no limit to the number of workers available)

• But, no worker will accept a wage below Wm and will work somewhere else !

At the market wage, Wm, the employer will hire Q1 hours of labour

• The individual worker also has to accept this ‘wage.’

• There is as much work as the worker cares to do, but none at all above it, at that wage

• (i.e. demand curve for that worker is elastic)

Wages – in perfect competition (individual worker)

‘Labour’ as a factor of production

• Neo classical view

• Theory that tends to be associated with the political right & centre: Favour markets and capitalist system

• Say that wages depend on demand and supply

• Value free and does not involve a moral judgement – i.e. it doesn’t say whether income distribution is fair or just (or not)

Political left (e.g. Marxists) say:

• By treating labour as a ‘factor of production’ it demeans labour

• We are not machines

• It legitimises the capitalist system – where some own land, capital and others only have their own labour to offer

• It implies labour has no rights to the goods that it produces – property of the employer

Is this any way to treat a worker?

• Please now, read the article on the Neoclassical and Marxist view of

labour (the worker) and answer the associated questions !

Vs.

The Supply of Labour – MDU • When people work the sacrifice leisure time (its obvious!)• They also may be working in a job that is unpleasant or tedious

The rule:• Each extra hour worked will involve additional disutility (Marginal

Disutility of Work) & tends to increase as people work more hours

Why? • Less leisure time means we experience more disutility in

sacrificing a further 1 hour of leisure time

• Any unpleasantness they experience in work is increased due to boredom or tiredness.

• The increasing marginal disutility will give an upward sloping supply curve (hours) for each worker

• Why?• To persuade people to work an extra hour a higher hourly

wage must be paid to compensate for the higher marginal disutility incurred

• Explains why overtime rates are higher than standard rates

The Supply of Labour – MDU Marginal disutility of labour supply

Marginal disutility of labour supply

When wages go up – substitution effect

• At a higher wage people tend to work more hours

• So they substitute work (income) for leisure

• This is known as the ‘substitution effect’

• On the other hand, with a higher wage rate they can afford to work less & have more leisure time

• Leisure here is considered a normal good, one that is consumed in greater quantities as income rises

• I guess this all depends on your own views of leisure and work (however)!

When wages go up – income effect

Income effect

• Generally it is assumed that the substitution effect outweighs the income effect (especially at lower wage rates)

• A rise in the wage rate acts as an incentive: it encourages a person to work more hours (video – minimum wage USA)

• Generally it is assumed that the income effect outweighs the substitution effect at higher wage rates:

• ‘there’s not so much point now in doing overtime. I can afford to spend more time at home.’

Tax cuts? • In the 1980s conservative governments argued that cuts

in income tax were like giving people a pay rise

• So, incentivise people to work harder

• This is only correct, however, if the substitution effect dominates !

• If the income effect dominates – a tax cut will mean people work less !

• Above W the income effect of a higher wage rate is greater than the substitution effect

The market supply for given type of Labour

• The Supply (S) of labour will be upward sloping

• The higher the wage offered, the more people will want that job

• Position of the market supply curve depends on the no. of people able to do the job at a given wage

• This depends on: number of qualified people, non-wage benefits (environment, job satisfaction, status, power, security, holidays, pensions) & wages in alternative jobs

A worker’s indifference curve • Here, wages rise from £20-25 causes the person to

work less. Income effect outweighs substitution effect

• And the supply curve becomes backward bending

• B1 - at £10/hr a budget line B shows • At point ‘X’ the income of an individual is £80 (8hrs work, 4 hrs.

leisure) – maximises utility here

• B2 – at £20/hr – utility is maximised at point ‘Y’ by working 9 hours – the higher wage has encouraged the worker to work 1 more hour

• B3 – at £25/hr – maximises utility at point ‘Z’ – now, only 8 hrs. are worked & so the supply curve begins to bend backwards – now he can afford to take more time of for leisure (income effect outweighs substitution effect)

Definition of 'Elasticity'

• A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which

individuals (consumers/producers) change their demand/amount supplied in response to price or income

changes.

• Calculated as:

The elasticity of the supply of labour • Mobility of labour – willingness or ability of labour to move

to another location for a job (or another industry)

• The mobility of labour is high & has a high elasticity of supply, if:

• There alternative jobs in the same place• A company exists that needs similar skills • The worker has good information about jobs

Elasticity of demand for Labour • The rule is:

• If the demand for a particular category of worker increases, the wage rate will rise.

• All workers in that industry/job receive pay rises !

• The more inelastic the supply, the higher the rise will be

• Their ‘economic rent’ is high = an individual earning a premium wage above the average for the market

Immigration & outsourcing – USA• To what extent has immigration impacted upon

economies, wages and employment?

• Immigration and Jobs • Immigration reform in the US

• 14 facts that help explain America's child-migrant crisis

Immigration – EU

• “A government review looking into freedom of movement across the EU has not recommended any sweeping reforms to immigration

rules in a report likely to disappoint Conservative Eurosceptics...”

• “It found some pressure on primary school places and housing similar to the effect of immigration from other countries but "little

hard evidence regarding problems with community cohesion…"

• However, suggested that….• “[there is] a need to address concerns about criminality and abuse

of freedom of movement rights by a small minority of EU immigrants.”

• …”free movement could be scaled back to a system that gave preference to "national citizens" in the labour market.”

• …..”new countries should not be allowed access to free movement rights until their national income is 75% of the EU average…”

Immigration – Japan • “In countries that have accepted immigration, there

has been a lot of friction, a lot of unhappiness both for the newcomers and the people who already lived

there” • - Shinzo Abe

• Now read the article about Japan’s immigration decisions and answer the questions 1-3

• Please ask if you have questions

Who is poor and rich?• The demand for labour depends upon:• The wage rate • The productivity of the worker• Demand for the goods the labour force produces in the firm (derived demand)• How easy is it to substitute factors of production for labour? If Wages are

cheap, companies will hire more

• The low paid: some are low paid due to differing skills and competencies – those with labour in low demand or high supply or low productivity (low skills, out dated skills) will be paid less

• The higher paid: not possible to eliminate inequality under capitalism – the uneven distribution of land and capital from high earners will distort the market – wealth concentrated within a few hands

Why are the poor, poor?• Lack of economic power

• Not belonging to a union or belonging to one with weak bargaining power

• Ignoring better job opportunities

• Discrimination – by employers or fellow workers

• Solution? Higher motivation, ‘get up & go’ factor, being aware of new opportunities and applying for the role!

Who determines wages?• Firms with a position of power ‘monopsony’ in employing

labour – can set the wage ‘wage setters’ eg. A large employer in a small town can resist calls to increase wages.

• If a monopsony employer wants to attract more workers –it has to increase wages to attract others away from other industries

• If they employ low levels of labour = can set low wages

• Labour with Union support – union must be a monopoly organisation with influence & important production responsibilities

• Strong management & a strong union - if both have strong bargaining power & skill

• Here unions can refuse to supply labour (or strike) if wages are not agreed upon in effective discussions with managers – here unions can be v.powerful

Who determines wages?

Flexible labour markets • Case Study Japan

• The Japanese model is based upon 4 principles:

1. TQM – total quality management - all workers working on continuous improvements

2. Elimination of waste – JIT (Just In Time)3. Team work is superior over all other forms 4. Functional & numerical flexibility – for high levels of productivity

• The UK, and elsewhere in Europe and the US are adopting these approaches more & more ! Must be working and

improving motivation/productivity

Behaviour at work – motivation

• Discussion :

• In your opinion what motivates employees at work? Talk in your groups and share ideas at the

end

• Wages? Pension? Training? Money?

• https://www.youtube.com/watch?v=u6XAPnuFjJc

UNEMPLOYMENT & INFLATION The relationship and the Phillip’s Curve

Average unemployment % in decades 1960s 1970s 1980s 1990s 2000s

Australia 1.7 3.8 7.6 9 5.5

Canada 5.0 6.7 9.4 9.7 6.8

France 4.9 5.9 8.4 10.4 7.9

Germany 0.7 2 5.8 7.6 8.6

Greece 5.1 2.3 6.1 9.3 9.7

Ireland 5.3 7.5 14.2 11.9 5.3

Japan 1.3 1.7 2.5 3.2 4.7

Spain 2.4 4.5 15.4 16.2 11

UK 1.6 3.5 9.5 8.1 5.4

USA 2.2 3.7 8.3 9.2 7.8

Unemployment = the number of those working age without work, but who are Available for work at the current wage rate

Industrial economies – unemployment

The Phillips Curve?• There exists a relationship between unemployment and

inflation! Generally

The rule: • High inflation & low unemployment • Low inflation & high unemployment • Stagflation ? Higher unemployment & high inflation! (oil shocks)

• Phillips' Curve in 60 seconds!• Phillips Curve – in detail

The Phillips Curve? Reading task

What causes Inflation?• Demand pull & cost push inflation – both of which can happen together

(increased demand and cost rises)• Cost push inflation – encourages governments to expand Aggregate Demand, to

offset rises in unemployment• Demand pull inflation – can strengthen the power of certain groups – driving up

costs

• Expecting a rise in inflation & demanding a subsequent rise in line with these increases

• Industries rise & fall – contracting firms (wages & prices will be inflexible) – in expanding industries (may be rising) = a rise overall in wages/prices

The flows into and out of unemployment

Different types of unemployment?• Natural unemployment – aka. Equilibrium unemployment – due to time

taken to retrain for new jobs, if there is a lack of positions in your industry

• Frictional unemployment – when people leave jobs (volunteering or redundancy) and become unemployed while looking for another position

• Structural unemployment – due to changes in the structure of the economy (manufacture to service/coal & steel to finance)

• Technological unemployment – new techniques of production are often labour saving (if sufficiently cheap) so firms reduce workers

• Seasonal unemployment – summer and winter seasonal jobs

UK unemployment by duration

Next week….• We will be looking at the topic of investment banking in

the EU and globally

• We will also look at the topic of Economic growth and development now and in the past in the UK & Japan

• I will send you vocabulary to help you before next lesson