LABOUR ECONOMICS-MICRO AND MACRO ASPECTS

Presented by:Aanchal AggarwalArzoo Dalal

LABOUR ECONOMICS:• ECONOMICS : Concerned with DISCOVERY OF RULES OR

PRINCIPLES that indicate how choices can be RATIONALLY & EFFICIENTLY RENDERED, since resources are SCARCE and WANTS are virtually UNLIMITED, society needs to manage its resources as efficiently as possible to achieve maximum fulfillment of its wants.

• LABOUR ECONOMICS: • Examines the organization, functioning, and outcomes of Labour Market

. • Decisions of prospective and present Labour Market participants.• Public policies relation to the employment and payment of Labour

Resources.

WHY DO WE STUDY “LABOUR ECONOMICS “:

• Socio Economic Importance: helps us in understanding the socio economic issues such as why is there a rapid rise in employment etc.

• Quantitative: Labour is our most important economic resource. Nearly 70 percent of the national income flows to workers as wages.

• Unique:– Demand for labour is a derived demand– It also depends on qualitative considerations

unlike the demand for the product.

CHARACTERISTICS OF LABOUR:

• Sells his SERVICES ONLY.• Not as PRODUCTIVE as Capital.• Less MOBILE than capital.• NO Quick and Immediate adjustment of

Supply to Demand.• Labour is a source of PRODUCTION and

ULITMATE GOAL.

Latest Statistics Pertaining to Labour:

ASSUMPTIONS WHILE STUDYING LABOUR ECONOMICS:

• Relative Scarcity: of time, personal income and societal resources

• Purposeful Behavior: Comparison between extra cost and benefits is made after which decision is taken

• Adaptability: Labour Markets adapt, adjust or alter their behaviour in response to changes in the market.

MICRO AND MACRO ASPECTS:

LABOURECONOMICS

MICRO ASPECTS

MACRO ASPECTS

Labour Economics: Micro Aspect

• Micro-Economics: it is concerned with the decisions of individual economic units and the functioning of specific markets.

• It focuses on – the determinants of labour supply and demand – and the ways by which supply and demand

interact to determine wage rates and employment in various labour markets.

MICRO ASPECTS:

MICROASPECTS

SUPPLY OF LABOUR

DEMAND OF LABOUR

LABOUR MARKET

Labour Economics: Macro Aspect:

• Macro- economics stresses the aggregative aspects of labour markets and in particular the:– Distribution of earnings– Labour Productivity– And the overall level of employment

MACRO ASPECTS:

MACRO

PRODUCTIVITYDISTRIBUTION OF

PERSONAL EARNINGS

EMPLOYMENT&

UNEMPLOYMENT

LABOUR MARKET:

LABOUR MARKET

WAGE STRUCTURE EFFICIENT PAY SCHEMES

MOBILITY AND

MIGRATION

LABOUR MARKET:

LABOUR MARKET

TRADE UNIONS & COLLECTIVE BARGAINING

GOVERNMENT DISCRIMINATION

MICRO ASPECTS:

• SUPPLY OF LABOUR:• WORK LEISURE DECISION.• PARTICIPATION RATE.• QUALITY OF LABOUR.

SUPPLY OF LABOUR:

• How are these labour supply decisions made?• How do individuals decide on the number of

hours of labour, if any, to supply in the labour market?

• Supply of labour can be studied by the help of:

Work-Leisure Model

Participation Rates

Quality of Labour

THE WORK LEISURE MODEL: BASIC MODEL

ASSUMPTIONS:

• An individual, having a fixed amount of time available must decide how to allocate among work and leisure.

• WORK: Time devoted to a paying job.

• LEISURE: Time for which the person does not get paid e.g. education, commuting, rest, relaxation etc

INDIFFERENCE CURVES

• An Indifference Curve shows the various combinations of real income and leisure time that will yield some specific level of utility or satisfaction to the individual.

• Properties of indifference Curves:– Negative Slope– Convex to origin– Indifference Map

Different Work-Leisure Preferences

• Workaholic : A person who places a low value on leisure and a high value on work (income).

• Leisure Lover : A person who puts high value on leisure and low value on work (income).

The two differ because of:

Preferences Occupation Personal

circumstances

Budget Constraint Line

• This shows all the various combinations Of income and leisure that a worker might realize or obtain given the wage rate.

UTILITY MAXIMISATION

• The individual’s utility maximizing position can be determined by bringing together the subjective preferences embodied in the indifference curves and the objective market information contained in each budget line.

• The farther the IC is from the origin, the greater the person’s total utility.

• Optimal Work-Leisure position is achieved where slope of IC is equal to the Wage Rate.

Quality of labour

• Any activity that increases the quality of labour may be considered as an investment in human capital.

• Investment in human capital involves expenditures not only on formal education and on the job training but also on health, migration, job search and the preschool nurturing of children.

The Human Capital Model

• Concepts relating to the human capital model:– Direct cost: costs in the form of fees for tuition,

books etc.– Indirect Cost: is the opportunity cost of going for

higher studies is the earnings which you give up for not entering the labour market after completing your graduation

– Future value= Present value(1+ interest rate)• This is due to the time preference of money

Demand for Labour

• Demand for labour is a derived demand which is dependant upon:– How productive that labour is in helping to create

some product or service– The market value of that item– For example: if Type A labour is highly productive

in turning out Product X, and if product X is highly valued by society, then a strong demand for type A labour will exist.

Short run and long run demand curve for labour:

• Short run demand curve for labour is downward sloping.

• Long run demand curve for labour is also downward sloping due to– Output Effect: it is the change in employment

resulting from the effect of wage change on the employers cost of production.

– Substitution Effect: it is the change in employment resulting solely from a change in the relative price of labour, output being held constant.

PARTICIPATION RATE: DEFINITION AND MEASUREMENT

• The labor force participation rate is determined by comparing the actual labor force with the potential labor force.

LFPR = actual labor force Х 100 potential labor force

SECULAR TREND OF PARTICIPATION RATES

• Declining participation rates of older males due to:

• Rising female participation rates due to:

Rising Real Wages and

Earnings

Social Security and Private

Pensions

Disability Benefits

Life Cycle Considerations

Rising real wage rates for

women

Changing preferences

and attitudes

Rising Productivity in the household

Declining birthrates

Rising Divorce Rates

Labour Participation rates in India(2007-08)

• The labour force participation rate (LFPR) was about 56 per cent for rural males and 29 per cent of rural females.

• The corresponding proportions in the urban areas were 58 per cent and 15 per cent, respectively.

LABOUR MARKETS

Wage Structure:

• Perfect Competition: Homogenous Workers And Jobs– Assumptions:

• Homogenous workers and jobs to all employees and firms in the economy.

• Information is perfect• Job Searched and migration costs are less

If all the above conditions are fulfilled then labor resources will flow among various employments and regions of the economy until all the workers have the same real wage.

Wage Differentials: Heterogeneous Jobs

• In reality homogenous jobs do not exist, heterogeneous jobs having differing nonwage attributes, requiring different types and degrees of skill exist.

• These differentials consist of an extra pay that an employer must provide to compensate a worker for some undesirable job characteristic that does not exist in an alternative employment.

Efficiency pay schemes• A worker is generally given compensation in the form of a

standard hourly wage rate.

• But besides that it also involves: Whole range

of fringe benefits

Health insurance Paid vacations

Sick leave Contributions to pensions

• Different Compensation schemes appeal to different workers so pay schemes must be carefully designed in order to increase the worker efficiency and productivity.

References:

• http://www.indiaonestop.com/unemployment.htm#Trends

• http://indiacurrentaffairs.org/employment-and-unemployment-situation-in-india-2007-08/

• Contemporary Labour Economics by Tata Mc Graw

• wikipedia