LECTURER: DR PRISCILLA TWUMASI BAFFOUR … · INTRODUCTION: DEFINITION, OBJECTIVES AND FUNDAMENTAL...

ECON 429: Labour Economics I

LECTURER: DR PRISCILLA TWUMASI BAFFOUR

INTRODUCTION: DEFINITION, OBJECTIVES AND FUNDAMENTAL CONCEPTS

Priscilla T. Baffour Slide 1

Definition and Objectives of Labour Economics

• Labour Economics is the study of how labour markets work.

• ‘Labour economics examines the organisation, functioning and outcomes

of labour markets: the decisions of prospective and present labour marketparticipants; and the public policies relating to the employment andpayment of labour resources’ (McConnell and Brue).

• Its a mechanism that brings consumers of labour services andproducers together to interact for the benefit of both.

Focuses on the determination of wages and employment inthe labour market that results in the distribution of incomeamong individuals and households.


Definition and Objectives of Labour Economics

• As in any market, economics of the labour market deals withthe behaviour of employers (demanders) and workers(suppliers) in response to general incentives of profit, prices,wages and other non-monetary factors that affect theemployment relationship and their influence on economicwell-being of individuals and society.

• In effect, economics of the labour market is the application ofscientific methodology to the interaction between thedemand and supply of labour and labour market institutionsand their influence on labour market outcomes.


Objectives of Labour Economics

Labour is unique from other factors of production, as a result, answers will be sought from the following questions;

– What factors influence workers occupational choice and for that matter employer;

– How employers choose among prospective employees

– Wage and employment determination


Objectives of Labour Economics

– Why wages and salaries differ among jobs andindustries.

– Events, trends and other developments in thelabour market (union strikes, women participationin the labour market etc).


Structure

• Labour outcomes to be dealt with thissemester includes:

– Changing level and composition of labour supply

– Changing level and composition of labour demand

– The structure of earnings

– Labour management relations and collectivebargaining

– Changes in composition and levels ofunemployment


The Framework

• The structure used to facilitate understanding of the labour market is;

Demand side Supply side Institutions

Labour Market Outcome


Framework Cont.

• Labour market outcomes are the observed events, behaviour

or developments in the labour market that we try to

understand.

• Important to note you can understand the outcome only

when you know the processes that led to the them, thus the

mechanics of how the labour market works.

• As indicated in the framework, actors in the labour market

are;

• Households

• Firms

• Government


Actors in the labour market

• Households make decisions such as:– when to enter the labour market

– how much education or training

– which occupation or industry

– number of hours to work

– whether to quit or retire

• Firms decide on:– number of workers to hire

– hours of work

– when to layoff or close plant

– pension or retirement policy


Actors in the labour market

• Government establishes the environment by:

– providing training

– unemployment insurance

– workers compensation

– pensions

– laws to protect workers and firms


Framework Cont.

• Labour outcomes to be dealt with this semesterincludes:

– Changing level and composition of labour supply

– Changing level and composition of labour demand

– The structure of earnings

– Labour management relations and collective bargaining

– Changes in composition and levels of unemployment


Uniqueness of the Labour Market

Labour is embodied in the seller: Although wages are important, other noneconomic factors affect labour. Human beings have preferences with regards to the conditions under which they work.

Most employment relationships are long term:

Workers become experienced and efficient on the job overtime. Cost associated with hiring new workers.

Labour can acquire knowledge and better skills to be moreproductive in the long-run compared to other factors ofproduction which deteriorate over time. Labour develops skillsover time, so its better to have a long term employmentrelationship. However, if skills acquired are not utilised, labour inthe long-run deteriorates.


Uniqueness of the Labour Market Cont.

Heterogeneity (diversity) of workers and jobs:

Individuals differ by education, ability, age, experience, sexphysical appearance, personality etc. Jobs differ in terms ofremuneration, degree of difficulty, risk accessibility etc.Heterogeneity could be explicit or implicit. Jobs arechosen not solely because of remuneration, factors such assafety, prestige etc. Employers also choose workers based onpersonality appearance etc.

Labour is Perishable: labour cannot be stored, depreciation ofthe source of labour (human beings)


Uniqueness of the Labour Market Cont.

Multiple Sub-Labour Markets: eg. Skilled vrsunskilled, market for teachers, nurses etc. makes theexchange in the labour market different from that ofcommodity market.

People have preferences in the usage of time: (work for income, raise kids, rest, holiday etc)


Fundamental Concepts in Labour Economics

• Labour market consist of all institutional arrangementsdeveloped to facilitate interaction between demand andsupply of labour services.

• The institutional arrangements include advertising,employment agencies, information networks etc.

Forms of Labour Market– The scope of the labour market: ie. Local, national and international

labour markets

– Type of occupation

– Regional labour market

– Type of job or labour contract

– Sector


Fundamental Concepts in Labour Economics Cont.

• Kerr (1954) uses 5 main models to categorise labourmarkets;

1. Perfect Market (synonymous to perfect competition)

2. The Neo-Classical Labour Market (modified perfect marketwith rigidities) ie, supply of skilled labour vrs. Large employers.

3. Natural Labour Market: Avg. worker has a confined view ofthe market, as such restricted to the local labour market(employers become monopsonist with its consequences).

4. Institutional Labour Market: wages and employment aredetermined by rules and regulations rather than marketforces.


Fundamental Concepts in Labour Economics Cont.

5. Managed Labour Market: Government attempts to dealwith inefficiencies in resource allocation. (Reduce unionpower and product market monopolies).


Labour market institutions

• Labour market institutions – these are laws, rules,policies, practices, norms and conventions externalto specific individuals who are engaged in theexchange of labour but guides and further orconstrain their actions in the market.

• Egs. Industrial relations and labour laws, labourunions, employers association and minimum wagelegislation etc.


LECTURER: DR PRISCILLA TWUMASI BAFFOUR … · INTRODUCTION: DEFINITION, OBJECTIVES AND FUNDAMENTAL...

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