Labor Economic Term Paper

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Labor Economics

Labor is a commodity that needs to be purchased for business activity. In the uncivilized world of the past labor could be exploited to the extreme, but in modern times trade union movement, increased public consciousness, health, safety and environmental regulations and labor regulations have meant that the near slavery condition of the past are totally unacceptable.

Nevertheless, labor remains a commodity requiring efficient, humane and cost effective management to increase profitability and balance human rights and investors' interests. This effort has resulted in labor economics developing as a branch of microeconomics. This paper reviews labor economics and its importance in the modern day economic and business activities.




Important Components of Labor Economics

Labor Supply and Demand

Quality of Labor (Investments in Human Capital)


Non-Wage Labor Costs

Wage Differentials

Workers Mobility

Pay & Productivity

8. Economics of Discrimination

9. Social Accountability

10. Trade Unions




Describing labor as a commodity [1] may seem as an obscene idea to some humanitarian idealist but the truth is that in modern economy labor is bought and sold with its price being set by supply and demand [2]. In the slave economy, the laborer himself was a commodity, the slave and his labor was bought and sold as an ox or other merchandise. The free laborer on the other hand, sells his labor for a specified time to the capitalist/employer best suited to his requirement/conditions. This simplified logic behind the labor economics just explains the reason for variations of wages in capitalist economy.

In modern economy social considerations, investment in human capital, labor market dynamics, public good all factor into Labor Economics. Labor economics is the branch of microeconomics that includes the study of wages, employment, and labor market dynamics. In order to cover the Labor Economics we need to consider the factors affecting the above-mentioned parameters viz.

1. Labor Supply & Demand

2. Quality of Labor (Investment in Human Capital)

3. Wages

4. Non-Wage Labor Costs

5. Wage Differentials

6. Worker Mobility

7. Pay & Productivity

8. Economics of Discrimination

9. Social Accountability

1. Labor Supply and Demand

In order to study the economic impact of supply and demand, the labor economist needs to understand the impact of various factors on the supply and demand of the labor force. The demand of labor in a particular activity is dependent on the demand for the output or final product of that activity, for example demand for workers in television industry depends on the demand for televisions. The market for labor of a particular in an industry depends on the demand of that category of labor in that particular industry. For example, the demand of electricians in television industry depends on the requirement of this trade in TV industry. The demand for electricians however is not limited to the television manufacturing industry and the total market for electricians would be the requirement in all industries. The labor demand of a particular trade will be dependent on the demand of that particular trade in all industries. The labor wages and labor supply of that particular trade would be dependent on this total demand of the trade.

The market labor supply of a particular trade depends on the wages and availability of labor of that trade. If the wages are attractive, some workers will work additional hours to earn more, workers in other trade may possibly retrain themselves to the more remunerative trade, and other individuals will enter into this trade to benefit from higher demand and better pay. If the supply of labor is lower than the demand, the wages rate will go up. In abundant labor supply situations the wage rate will obviously go down.

A graphical representation of the labor market and wages is presented in Figure 1 [3]. The equilibrium point is the intersection of labor supply and demand curves If the wage rate goes above the equilibrium level, the labor supply would increase, causing unemployment and drop in wages till the equilibrium is achieved again.

Figure 1: Equilibrium in Labor Supply and Demand [3]

2. Quality of Labor (Investment in Human Capital)

Another important factor in labor economics is the study of the benefit of improving the quality of labor. This could be done on a national level such as providing subsidized or free education to develop a population that is literate or well educated to add to the quality of available labor on a national level. Provision of student loans for higher studies is also a national input that benefits all by improving the quality of manpower.

3. Wages

Wages and its proper determination is one of the major components of labor economics. Generous wages payment adds to the cost of operations but it has the benefits of attracting the best quality of manpower resulting in efficiency improvement, higher productivity and can be justified as an intelligent decision.

The basic compensation of labor is called wage and the compensation per unit of time is described as wage rate [4]. Earning based on wage rate is only a part of the labor cost. Total compensation for labor includes earnings plus benefits such as insurance, social security and holiday payments.

Labor economists have devised many cost effective methods to improve productivity by paying efficiency wages [5]. The efficiency wages improve improves efficiency and productivity in many situations. Workers paid on measurable output on per unit basis (such as number of jeans sewn during a work shift) normally show increased output and can thus be compensated for their efficiency. Efficiency wages avoid shirking work; increased wages result low staff turn-over and increased worker satisfaction.

4. Non-Wage Labor Costs

The labor economist must recognize that the labor that wage rates are not the only labor charges resulting from labor hire. These costs often are not directly proportional to the number of hours worked. Labor hiring costs, training costs and employee benefits fall under this category. [6]

Hiring costs for labor can be substantial for companies seeking employees from the national market. The advertising, candidate interview and selection, worker processing for social security, pensions, health insurance etc. add to the human resources costs. There is also a risk that the person hired may turn out to be incorrect for the position requiring the whole process to be repeated.

Many companies prefer to promote staff within the company. This gives the advantage of ensuring that the employee is known and well trained. Internal promotion also offers an incentive to the employees to excel in their present jobs to move to position of higher responsibility. This option allows the company to hire entry-level staff only.

Training Cost is an investment in human capital. Highly trained staff hired at higher wage rate reduces the training cost. For company specific requirement such as training on operating of specialized machines training would still be required. The training costs include cost of hiring the trainers and training materials,

The investment society makes in educating its children is an investment in human capital. This is indirect cost from the market, cost of using trained workers & raw materials for on-the-job training of new employees and trainers opportunity costs as the trainer could be assigned other productive work.

Employee benefits include a variety of legally required contributions. These payments vary according to government and company policies and include social security contributions, provident funds, gratuities, health insurance vacation pay and pension plans

5. Wage Differentials

One of the main criticisms of communist economy has been that it does not adequately compensate for differences in the job requirements. The wage differentials motivate workers to take more arduous, risky or difficult jobs. Even in the same job category such as production line work requiring the same educational requirement, job stress the workers tend to show a preference for less demanding section of production line. However if sufficient wage differential [7] is introduced for the more demanding jobs the worker will tend to stay in the more demanding or dangerous job. This compensating wage differential can be thought of as the premium associated with employment in the more difficult section.

Wage differential can exist among the same level of employees due to the nature, difficulty or hazard involved in their work. It is also an essential part of increased responsibility and higher level of expertise or academic requirements such as senior supervisor, technician or manager.

It is labor economist's responsibility to work out reasonable wage differential to attract the right person for the right job and also to provide willing manpower for all job responsibilities.

6. Worker Mobility

Worker mobility allows the economist to consider the availability of manpower from within national or even across international borders. The shortage of medical professionals in USA allows the medical professionals from other countries to seek training and later employment in USA. Rate of return of human capital in many underdeveloped countries is much less than U.S.. This encourages the highly qualified professionals to immigrate to the U.S.

These days labor force within…[continue]

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