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Labor Economics

Labor economics is the branch of economics that focuses on the development, allocation, and application of human resources. It involves the systematic study of labor markets and behavior, focusing on how the wage rate affects the supply and demand for labor. Key concepts include marginal productivity theory, principles of substitution and diminishing returns, and indifference curves which show the optimal combination of goods and leisure for a given income. Labor supply is determined by factors like population, skills, training opportunities, mobility, alternative uses of time, and job opportunities.

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329 views

Labor Economics

Labor economics is the branch of economics that focuses on the development, allocation, and application of human resources. It involves the systematic study of labor markets and behavior, focusing on how the wage rate affects the supply and demand for labor. Key concepts include marginal productivity theory, principles of substitution and diminishing returns, and indifference curves which show the optimal combination of goods and leisure for a given income. Labor supply is determined by factors like population, skills, training opportunities, mobility, alternative uses of time, and job opportunities.

Uploaded by

annie
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Labor economics

• That branch of economics that focuses attention on the


development, conservation, allocation, and application of
human resources

• As a science, it means a systematic study leading to the


discovery of regular patterns of behavior

• Focuses on labor markets


 For purposes of study, we assume that everything else in the economy remains constant
(ceteris paribus)
 Hence, when we discuss the labor market, we assume the following:

1. The attractiveness of a job is measured by its daily wage rate. Other job conditions are taken
as given and constant. The wage is the sole variable that the employer can manipulate to
attract additional labor.
2. All job vacancies are filled through the market. We ignore the fact that, in practice, many
vacancies are filled through internal promotion.
3. Workers are interchangeable in the eyes of the employer and are of equal efficiency.
Preferences based on sex, experience, race, sex, and the like are discarded.
4. Employers and workers are perfectly informed. Employers know about workers who might
be attracted to the firm and what wage it will take to attract them, Workers know about vacant
jobs, the wage rates, and other job characteristics.
5. There is permanent full employment. We assume that there are always as many jobs available
as there are workers.
• If the price of labor (wage) is high, employers
can only hire few of them. If the price of labor is
low, employers can hire more of them.

• Can be more fully understood through the


marginal productivity theory
 Marginal productivity
 Value of the productivity of an additional unit of labor

 Assumes that there is a tendency for employers to hire labor as long as it makes a
greater proportionate contribution to net revenue than does any other factor of
production
 Holds that under conditions of perfect competition, employers tend to hire
employees up to the point where the value of of the marginal productivity of that
factor is equal to the wage rate, i.e. where the contribution of the last employee
hired equals his wage
1. Principle of maximization
2. Principle of substitution
3. Principle of diminishing returns
4. Principle of marginal comparison
 To maximize profits, employers combine factors of production in such a way that the value of output is at
a maximum compared with with the cost of producing that output
 Marginal cost (MC)
 Cost of using an additional unit of the factor
 Marginal revenue product (MRP)
 The added revenue or income the employer gets by using the added factor to increase his output
 In general an employer will use factors until their marginal costs and revenue products are equal
 MC = MR, where MC is the wage (price of labor)
 Scenarios: Will the employer hire additional labor?
 MR = 300, W= 250
 yes
 MR= 250, W = 300
 no
 MR= 400, W= 400
 Yes (because MR=MC at this point)
 Labor competes with and may be substituted for capital and vice versa. If a hand
tractor is more efficient than manual labor, the tractor will be substituted for labor.
 In general, an employer will substitute factors of production for each until the
values of their marginal products are all equally proportional to their prices.
 Example:
 2 factors: Labor and capital
 MC of Labor = PhP 200, MR of Labor = PhP 400
 MC of Capital = PhP 300, MR of capital = Php 600
 Will substitution take place?
 No. There is no incentive for the employer to prefer the use of one factor over the other since their
proportionate marginal contributions are equal.
 Holds that the additional output from successive increases of one output will
eventually diminish when other inputs are held constant
 The marginal product of the varying input declines after a point.
 States that the employer must pay his wage rate or go out of business
 If the employer pays less, other employees would hire his workers away from him
 MRP > MC
 If the employer pays a higher rate, he would operate at a loss
 MRP < MC

 The employer tends to calculate his labor needs by comparing the outputs of
variously sized work teams
1. Estimates of consumer demands
 Offers of employers are made because employers think that they can make a profit by producing goods &
services that others will buy.
 Demand for labor arises from the desire of consumers to buy goods and services

2. Labor costs as compared to other factors of production


3. Elasticity
 Elasticity of demand with regard to price
 Responsiveness of demand to changes in prices
 Inelastic demand
 No significant change in demand given a change in prices
 Elastic demand
 Demand significantly changes with a change in prices
 If employers can afford to sell their products at relatively low prices because the price of their labor is also
low, they can increase production and consequently hire more workers
4. Productivity of workers
 Ratio between output and input
 SHORT-RUN
 Period of time, usually meant to last for a year or less, in which decisions are made about
whether to sell labor services and how much to sell
 The conditions of labor supply such as geographical location, occupational choice, etc.
are fixed
 LONG-RUN
 Firms can adjust their inputs of all potentially variable factors of production over a period
of time
 Relationship between commodity inputs and utility
 Assumption: family members are better off with more, rather than fewer, commoditioes

 Utility
 The total satisfaction derived from the consumption of goods and services

 Assume 2 basic commodities: goods and leisure hours

Utility Function of a Family Member


Goods (vertical axis) leisure hours
(horizontal axis)
A 24 2
B 18 4
C 12 6
D 6 12
 A curve drawn on a graph whose 2 axes measure amounts of different goods
consumed. Each point on the curve (indicating different combination of the 23
goods) yields exactly the same level of satisfaction for a given consumer
 The consumer is indifferent to consuming any of the alternative combinations of
commodities along a given indifference curve
 The different combinations of consumption of hours and goods along an
indifference curve yields the same level of satisfaction
 Consuming A would yield the same level of utility as B, C, or D
 Series of indifference curves

• Each indifference
curve represents a
constant level of
satisfaction or utility
• Indifference curves
lying further from the
point of origin
represent higher levels
of utility
• In labor economic,
indicates the
combination of
commodities (e.g. goods
and leisure) that a
consumer can buy with
a given income (wage)
at a given set of prices
• it prevents family
members from
consuming infinite
quantities of
commodities
What happens when there is an
increase in both commodities?
• Same effect as change in income
• The point of tangency between
an indifference curve and the
budget line represents the
maximum utility obtainable
• At first labor supply rises as
higher wages coax out more
labor. But beyond a certain
point, higher wages lead
people to work fewer hours
and to take more leisure
• Once laborers attain a
certain level of economic
well-being, their preference
for leisure begins to
outweigh their desire for
higher income and they
would rather spend their
time on leisurely activities
1. Population
2. Participation rates
 Family circumstances, age, customs, & other conditions combine to determine what part of the total population will
enter the labor force and seek work
3. Skill, experience, and other job requirements
 Entrance into most markets requires qualifications

4. Opportunities for training


 Labor supply may be limited because relatively few workers can acquire the specified education and training

5. Mobility
 Versatility and ability to move into a variety of markets for which they are qualified

6. Alternative uses of time


7. Organization of buyers and sellers
 E.g. Depending on the union and the CBA (if one exists), only union members may be allowed to enter a particular
labor market
8. Job opportunities

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