Chapter 15 Labour

Definition of Labour Labour is the human activity directed towards the production of wealth. Its payment is the wage rate.

Demand for Labour The demand for labour as a factor of production is a derived demand, i.e. labour is demanded for its contribution to the production process or from the demand for the goods it produces. The demand curve for labour is its MRP curve, which is downward sloping from left to right. Every worker is demanded up to and including the worker whose MRP and wage rate are equal.

Factors Affecting an Individual Firm’s Demand for Labour The MRP of the worker Wage rate The demand for a firm’s output Price of other factors of production Government incentives Availability of new technology Corporation tax Entrepreneurs’ expectations

Factors that Determine the Supply of Labour The supply of labour in the economy is the total number of hours worked in the economy during a specific period. It is determined by a number of factors, including: Size of population Wage levels in the economy Levels of income tax Number of hours worked

Factors that Determine the Supply of Labour (Continued) Labour mobility Government policies Participation rate, which is dependent on: Social attitudes Attitudes of homemakers State of the economy Welfare benefits

The Labour Supply Curve The equilibrium wage rate Horizontal supply curve of labour Restricting entry into a profession Trade unions and wage rates Wage drift Ratchet economy

Geographical Mobility Geographical mobility is the ability/ease of a worker to move from one area to another.

Factors that Inhibit Geographical Mobility Existing social connections in the area where a family lives The disruption that could be caused to children’s education The cost of selling and buying a house elsewhere A general fear or reluctance to consider a major change in one’s life

Economic Policies that Could Increase Geographical Mobility Increase housing Educational facilities Social infrastructure Supports by governments Updated information

Occupational Mobility Occupational mobility is the ease/ability of a worker to move from one job to another. Occupational Mobility

Factors That Inhibit Occupational Mobility Lack of transferable skills High costs associated with retraining Some professions present barriers to entry

Economic Policies that Could Increase Occupational Mobility Education courses Training Government policies Trade union barriers

What factors influence the elasticity of demand for labour? Percentage of labour costs to total cost Substitutability of labour Elasticity of demand for the finished good Productivity of labour

What factors affect the efficiency of labour? Amount of training Management expertise Level of education Innate talent Quality/quantity of other factors available Living conditions of the workforce Degree of specialisation Climatic conditions Dedication of the worker

How appropriate is MRP for setting wages in the public sector? Physical output is not always produced Non-market output Capital and labour used together

Why do different categories of workers receive different wages? Different skills Length of training Educational qualifications Nature and conditions of the job Possession of innate talent Tradition attached to certain jobs Non-monetary benefits Negotiating strength of the workers’ trade union

John Stuart Mill (1806 – 1873) Wage fund theory Increasing returns to scale Law of diminishing returns