Summer Semester 2012

 Wage is income of a labour. It is also know as salary.  There is two concepts of wage: money wage and real wage. Money wage is defined by the amount of money earned by a labour for working an hour. On the otherhand, real wage is defined by the real purchasing power of the amount of money earned by a labour for working an hour.

 Simply by demand for labour and supply of labour. So the point is what constitute demand for and supply of labour.

 Marginal Productivity of Labour constitute demand for labour. So the point is what boost labour productivity ? ◦ Quality of labour ◦ Quality and quantity of cooperating factors of production ◦ The level and utilization of technical and engineering knowledge.

◦ Quality of labour Refers to the literacy education, training, and skills of the labour force. A country with an illiterate work force can hardly hope to employ modern technologies that require use of sophisticated computers and machinery. ◦ Quality and quantity of cooperating factors of production Wage is high in the USA in part because the nation is well endowed with fertile and other resources. Advance Western economy has dense networks of road, rails and telecommunication system.

 The level and utilization of technical and engineering knowledge. But quality of labour and associated resources do not tell the whole story. Poor management and labour strife (means angry and violent disagreement between two or group of people) is serious hurdle for productivity. Superior technological methods arise from better basic and applied science, advanced engineering designs and better management.

 In mainstream economic theories, the supply of labor is the total hours (adjusted for intensity of effort) that workers wish to work at a given real wage rate.

 Major determinants of labour supply are the size of the population and the way the population spends its time.  Population is determined by natural births and deaths and by immigration. So limiting the supply of any grade of labour is to keep wages high, on the other hand, wage is low.  Economic theory would suggest that the real wage is a key determinant of the number of hours. An increase in the real wage on offer in a job should lead to someone supplying 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.  Labour force participation and hours worked.

 Labor supply curves are derived from the 'labor-leisure' trade-off. More hours worked earn higher incomes but necessitate a cut in the amount of leisure that workers enjoy. Consequently there are two effects on the amount of desired labor supplied due to a change in the real wage rate. As, for example, the real wage rate rises the opportunity cost of leisure increases.  This tends to cause workers to supply more labor (the "substitution effect"). However, as the real wage rate rises, workers earn a higher income for a given number of hours. If leisure is a normal good - the demand for it increases as income increases - this increase in income will tend to cause workers to supply less labor (the "income effect"). If the "substitution effect" is stronger than the "income effect" then the labor supply curve will be upward sloping and vice versa.

 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 declines. 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.  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.

 How labour responds to higher wages. What will be the effect of higher wages ?  The supply curve of labour show one response.

 In the graph, X axis is for quantity of labour and Y axis is for wage rate. The worker desire to work extra hour until the wage reach from W1 point to W2 point, because each addition hour is now better paid. After the critical point W2 worker prefer take one week vacation to relax, so supply decrease. Because, with a higher income, worker buy more goods and services and in addition want more leisure time.

 The labour market will tend toward that equilibrium pattern of wage differentials at which the total demand for each category of labour exactly matches its competitive supply. Only then there will be general equilibrium with no tendency for further widening or narrowing of wage differentials.

 Graph Quantity of labour 0 Wage rate D S S D E Unemployed labour A B In the graph we observe that equilibrium in the labour market is at point E where supply SS curve meet demand curve DD The graph further show that any situation above E mean, there is surplus labour supply (or unemployed labour supply) like AB. These unemployed labour forces are responsible for pushing wage down further to the equilibrium position at point E.