LABOUR MARKET ECONOMY

PREPARED BY : PATHIK PATELROLL NO : 40

HOW MARKET WORK?

THE LABOUR MARKET

Labour Market Structure

Labour market consists of 3 sectors. Rural workers constitute over 60% of the

workforce. Organised sector employs 8% of the

workforce, producing 40% of GDP. But its employment share declining.

Thus, urban informal sector is the growing sector – represents the residual.

3

Labour Market Size

Consists of 430 million workers in 2004-05, growing 2% annually, with a stable worker-population ratio of 40%.

Lower level of women’s participation in workforce (28%) – perhaps an underestimate.

Low level of open unemployment (3.1%) – high level of disguised unemployment (or under-employment), mostly in rural areas and in agriculture.

Child labour’s share in workforce declining – yet quite large in absolute numbers, at 13 million in 2001.

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THE DEMAND FOR LABOUR

There is an inverse relationship between demand for labuor & the wage rate.

If the wage rate is high – more costly to hire extra employees.

When wages are lower , labour becomes relatively cheaper than capital. A fall in the wage rate might create a substitution effect and lead to an expansion in labour demand.

(The demand for labour shows how many workers an employer is willing and able to hire at a given wage rate in a given time period)

Elasticity of labour Supply

(Elasticity of labour supply measures the extent to which labour supply responds to a change in the wage rate in a given time period.)

Shifts in Labour DemandThe labour demand curve shifts when there is a change in the conditions of demand in the jobs market.A rise in consumer demand which means that a business needs to take on more workers.An increase in the productivity of labour which makes labour more cost efficient than capital.A government employment subsidy which allows a business to employ more workers.A labour demand curve would shift inwards during a recession as business shed labour.

Labour Supply to an Industry / occupation(The labour supply is the number of hours people are willing and able to supply at a given wage rate.)

The labour supply curve for any industry or occupation will be upward slopping.As wages rise, other workers enter this industry attracted by the incentive of higher rewards.The extent to which a rise in the prevailing wage or salary in an occupation leads to an expansion in the supply of labour depends on the elasticity of labour supply.

Key factors: Industry/ Occupational labour supply

1. Real wage rate on offer in the industry itself.2. Extra pay: e.g. overtime payments, productivity pay, share options.3. Wages in substitute occupations: e.g. increase in the earnings for

plumbers and electricians may cause people to switch their jobs.4. Barriers to entry: Artificial limits to an industry’s labour supply(e.g.

minimum entry requirements) can restrict supply and increase wages.5. Improvements in the occupational mobility of labour: e.g. as result of

expansion of apprenticeship and other forms of work experience.6. Non-monetary characteristics of specific jobs : e.g. risk, requirement to

work anti-social hours, job security, working conditions, opportunities for promotion, chance to live and work overseas, employer – provided in working training, occupational pension schemes.

7. Net migration of labour: e.g. net inward migration boosts the active / available labour supply in many occupations such as skilled professionals working in the National health Service.

Elasticity of Labour Supply(Elasticity of labour supply measures the extent to which labour supply responds to a change in the wage rate in a given time period.)

Equilibrium wages in the Labour marketThe equilibrium market wage rate is at the intersection of the supply and

demand for labour. Employees are hired up to the point where the extra cost of hiring an employee is equal to the extra sales revenue from selling their output.

Key Causes of Pay Differentials in the Labour Market1. Compensating wage differentials : a reward for risk taking,

working in poor conditions and during unsocial hours.2. Reward for human capital : differentials compensate workers for

(opportunity and direct) costs of human capital acquisition.3. Different skill levels : market demand for skilled labour grows

more quickly than for semi skilled workers.4. Differences in labour productivity and revenue creation : workers

whose efficiency is highest and ability to generate revenue for a firm often rewarded with higher pay.

5. Trade unions : who might use their collective bargaining power to achieve a mark up on wages compared to non union members.

6. Other artificial barriers to labour supply : e.g. proffesional exams.7. Employer discrimination : a factor that can not br ignored despite

over twenty years of equal pay legislation in place.

Trade union in labour market•Trade unions are collective bargaining with employers to protect their members.•Most unions belong to the TRADE UNION CONGRESS.•Examples : amicus, unison, unite and national union of teachers.•The % of employees that wewe members of a trade union in the UK fell from 32% in 1995 to 25% in 2013•In 2013, just over 7 million people were registered as members of a trade union.

Key roles for Trade Union•Protecting and improving the real living standards of their members .•Protecting workers against unfair dismissal.•Promoting improvements in working conditions, work load & health and safety issues.•Workplace training and education.•Protection of pension rights for union members.

Is labour Market Rigid?

Labour market is conceived as a small and declining organised sector workers with high and growing wages with job security – amid an ocean of unorganised, and competitive labour market.

Implications?Leads to labour market rigidity: Substitution of capital for labour, Reducing economic growth, Hurting labour intensive manufactures and exports.

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Evidence? No nominal or real wage rigidity. ↓ In unit labour cost (Figure 2).

True in public sector too (Figure 3). No evidence of adverse effects of job security law. Secular ↓ in union strength. More lockouts than strikes (Figure 4). ↓ In wage-rental ratio (Figure 5). Thus, the rigidity hypothesis is suspect.

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Then What Is the Truth?

There exists functional flexibility that the unions are prepared to negotiate. Wage agreements are mostly linked to productivity, and incentives.

Job-security law has little bite. Evidence: 18% of organised industrial workers lost jobs 5 years, without a

murmur of protest. Does it mean the labour market is working fine? No. Need for rationalisation of the labour laws. Need for a new compact between capital and labour

under the changed economic environment.

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In Sum I

Economic growth accelerated since 1980, without a corresponding increase in employment.

Structural transformation has happened since 1980s, but employment growth has occurred more in services than in industry.

Income poverty is said to have declined, but nutritional poverty has not, as employment growth has not improved.

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In Sum II

Orthodoxy advocates market oriented reforms, infrastructure investment and deregulating the labour market to speed up industrialisation to transform the workforce rapidly.

Heterodoxy argues for improving agriculture productivity – which is still 1/3 of china’s – to augment employment and expand domestic market.

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In Sum III

NREGS was launched last year, perhaps the most ambitious EGS in the world.

With RTI and local self government institutions, there is a better chance of its success.

But, critics dub it as the biggest grave train of corruption.

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In Sum IV

Reformists believe lack of flexibility in industrial labour market is holding up industrial out and export growth.

Evidence does not seem to support such a proposition. But it does not mean that the labour market is working

fine – far from it. Need to a new compact between capital and labour in

the changed economic environment that includes income security, more rational labour laws, and greater shop floor democracy.

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Figure 1: Growth in Agriculture output, 1980-05

3.22.9

3.8

33.6 3.6

2.32

2.72.2 2

3.6

1.2 1.1 1.3 1.31

2

All Crops Foodgrains Non-foodgrains

Cereals Rice Wheat

Crops

Per ce

nt p

er y

ear

1981-90 1991-00 1991-05

24Figure 2: Unit labour Cost in Registered Manufacturing

020406080

100120140

Year ending

Inde

x

Unit labour cost

25

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 960

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

Figure 3: Unit labour cost in public sectorExcluding electricity

Unit labour cost

Rat

io

26Figure 4: Mandays Lost by Disputes

0100002000030000400005000060000

1982

-83

1984

-85

1986

-87

1988

-89

1990

-91

1992

-93

1994

-95

1996

-97

Strikes Lockout

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Figure 5: Wage-rental ratio

0

20

40

60

80

100

120

81 83 85 87 89 91 93 95 97 99

2001

Year ending

Inde

x

Wage-rental ratio

THANK YOU