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presentation 21
labor contribution
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
The demand for labor by firms, which is derived since it is not wanted for
itself but for the profits it can generate, is determined by:
• the demand for the product it helps to produce
• the portion of costs it represents
• the availability of substitutes
• the supply of investment capital
Demand for labor
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
Overall, an increase in these factors brings about an increase in the
labor hours the firm makes available. However, this does not mean that
the wages will increase.
The reason is that the demand for labor is dependent on how the firm
uses labor in its productive processes to maximize profits.
Two aspects
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
Aspect 1:
Firms are eager to
generate additional
revenue from using
additional labor
each time the firm
decides to increase
its output.
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
Aspect 2:
The utilization of
labor entails a cost.
To maximize its
profits, the business
will pay total wages
lower than the
revenue generated
by sales.
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
Any additional revenue will entail additional wages W to be paid out
since more labor is used. But in this case the firm may not be
maximizing its profits. To do so, it needs to lower the wages.
There follows that an increase in the factors affecting the demand for
labor bringing about an increase in the labor hours is met with falling
wages. Consequently the demand for labor is downward sloping
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
The supply for labor by workers depends on
1. Attitudes towards the workers in any given economy.
2. The number of hours workers are prepared to work.
3. The environment at home.
4. Remuneration they are offered.
5. Desired income or wage level.
6. The size of the population.
7. Self-worth and qualifications.
8. Labor division in society and in the firms.
9. Working conditions and the inherent risks in any type of job.
Supply for labor
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
The supply for labor is upward sloping since an increase in the above
factors brings about the increase in the labor hours made available by
the workers while pushing for higher wages.
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
There are two ways to approach the labor markets depending on the
industries and business markets of an economy
Where industries are passively competitive (e.g. hospitality)
• Workers can change jobs freely and easily
• There is predominance of low-skilled jobs and low wages
Where industries are dynamically competitive (e.g. pharma)
• Workers do not change jobs easily
• There is predominance of high-skilled jobs and high wages
Labor markets
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
Where industries are non-competitive by virtue of their size (e.g. Coca)
or their number (e.g. cement business) or topographical situation (e.g.
Volkswagen factories):
• Workers cannot change jobs easily
• There is predominance of low-skilled jobs and low wages (shop-floor)
and high-skilled jobs and high wages (engineers, management)
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
A non-competitor: Ford 1930s
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
If the wages of the non-competitor are deemed too low
• Either the state may intervene with min wage legislations
• Or unions may resort to industrial action
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
Labor market intervention
a/ state
But not knowing where the market wage is, the state may impose a
wage the firm will not accept, thus seek other ways so as to reduce
costs: the delocalization of production – unless the state is willing to
subsidize the difference (e.g. Renault’s 1970’s & 1980’s history).
Overall, wage differentials persist because workers and states lack the
economic power the firms have with a monopsonist leverage.
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
And which economic actor has the highest monopsonist leverage?
The state!
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
b / Unions
Typically, labor unions
seek to improve wages,
working conditions, and
worker productivity and
to maintain full
employment.
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
But labor unions are not without their critics: trade unions are seen to
contribute to unemployment and slow down innovation and productivity.
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
Worker participation in trade unions has decreased – why?
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
Overall, what is the labor contribution to growth?
A qualified answer must take into account the state of the labor market
of the various industries present in an economy, and the proportion of
unskilled to skilled labor.
Generally speaking dynamic industries where labor must be skilled,
despite the monopsony drawbacks, are the main drivers of economic
growth. Yet a condition must be met: that the education system is highly
efficient and effective to yield skilled labor – in a non-discriminatory
manner.
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
Contribution to growth
Education radically affects wages
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
… even globally
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
But education is market-based: high wages of skilled labor are inversely
proportionate to the supply of such labor
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros
If education commands higher salaries for the concerned individuals,
does it contribute to economic growth? If education is all about
improved productivity the answer is … NO! Why?
Economics, 6th ed., 2016, Prof. Dr. P. Zamaros