Labor Economics Population, Participation Rates,

Labor Economics

Population, Participation Rates, and Hours of Work

The chapter commences with several references to the changes affecting the contemporaneous labor market, such as the increasing numbers of households in which both parents have jobs or the increasing role played by immigrants and minorities in the composition of the workforce. These features, alongside with other, refer to labor supply, which generically depends on four primary aspects: size and demographics (births, deaths immigration), labor force participation, total hours works and finally, the quality of the work. The chart below shows how the elements interconnect to influence the total labor services available:

McDonnel, B.M., Chapter 3,

Population Size and Demographics

The size of the labor force represents the numbers of individuals who are working or willing to work; it depends directly on the population within a country. In the United States, this has significantly grown since 1950 to 2006. Most of this growth is attributed to increased natality rates (especially the baby boomers) and increased net immigration (changing policies).

Source: McDonnel, B.M., Chapter 3, p. 57

The author then moves on to explaining participation rates as allocation time, based on Becker's model. This points out that the decision to work is influenced by household characteristics and by the changing patterns in spending time. The income effect sees that as income increases, consumption increases and the worked hours tend to decrease. The substitution effect revolves around the idea that an increase in wages will lead to the substitution of time-intensive activities with goods-intensive activities.

Participation Rates

The labor force is formed from the individuals over 16 and who are not institutionalized. The labor force participation rate is measured in terms of entire population and potential labor force and can be calculated according to the formula:

or Source: McDonnel, B.M., Chapter 3, p. 63

The chart below reveals the trends affecting workforce participation for the previous five decades:

Source: McDonnel, B.M., Chapter 3, p. 63

As a general idea, males' participations have decreased; women's have increased; the two tend to converge and form a gender balanced workforce participation.

Declines in male participation rates are most obvious for the older population, those over 65 years, but also an estimated 17% for the 55-64 age group (1950-2006). They have been attributed to increasing access to private pensions, increasing wages, better disability benefits and a reallocation of time.

Increasing rates from females are most obvious for the younger generation, but also present in the mature ones. Elder women have not registered increases. The reasons for this are numerous, but the most relevant ones could include increasing wages for female workers, modifying personal goals and attitudes, increased focus on career in detriment of family life, reduced birth rates, increased rates of divorce, higher household productivity (i.e. with the aid of technology, women have to spend less time in the kitchen), desire to maintain an high living standards or women's better access to various positions.

The situation is similar for other races, in the meaning that the gap tends to narrow.

Hours of Work

Two specifications are important to be made here. First of all, working hours declined before WWI, but after 1940, they increased. The economists have yet to reach a common ground on the causes of the trend. The chart below presents the trends in working hours:

Source: McDonnel, B.M., Chapter 3, p. 83

The decline throughout the 1910-1940 period could be explained by a change in time spending preferences (basically a preference for leisure rather than work) and the increasing wages, which allowed the individual to live in decent conditions, without working extra. The explanation of increasing workweek hours after 1940 could be attributed to a greater importance of the substitution effect, rather than the income effect. Education attainment increased, so did the preferences for work. Also, employers' paying the extra hours, the reduced after tax income (as a result of increasing taxes after 1940) and the media campaigns (advertisements which created desires to purchase, and therefore need for more money) may have all contributed to increasing working hours.

Chapter 4 - Labor Quality: Investing in Human Capital

The recent changes in the global context, such as increased competition or technological advancements, have generated unstable working positions and the need to invest in the human resource. Investments in the human capital revolve around all actions implemented to increase the quality and productivity of the tasks performed. They refer to issues such as training and education, but also to support in resolving less work-related matters.

Investment in Human Capital: Concept and Data

The investment in human resource is based on the hope that the organization will register additional benefits in the future. In this instance then, education and on-the-job training are essential. Also, their role has increased dramatically over the fast decades. Finally, education and training are motivated by increased future earnings. The chart below reveals how better educated individuals register higher incomes:

Source: McDonnel, B.M., Chapter 4, p. 91

The Human Capital Model

Upon completion of high school, an individual can choose from going to college or getting a job. The first alternative implies additional costs, but will generate increased earnings in the future. The chart below reveals the income registered by the person in both scenarios (CC is the earning curve for a college graduate; HH is the income curve for a high school graduate):

Source: McDonnel, B.M., Chapter 4, p. 92

The decision is influenced by the time value of money, which states that a dollar is worth more today than it may be worth tomorrow. The future value is however larger and often sufficient incentive. The investment should be made if the present value is grater than zero. Another means of making the decision would be the calculation of the internal rate of return and its comparison to the interest rate; if the internal rate of return is greater than the interest rate, the investment should be made. Ultimately, an investment depends on the earnings stream after the investment the costs of the investment, the wage difference between the two alternatives.

Human Capital Investment and the Distribution of Earnings

This part of the chapter deals with the reasons why several individuals possess varying degrees of education and why they also register varying incomes. A primary reason could be the diminishing return, revolving around the idea that the return decreases with every year of additional education. Then, as the educational costs continue to increase, the benefits become less obvious. Other factors of influence refer to the state of equilibrium between supply and demand. Personal issues which differentiate individuals and therefore their educational and wage attainment refer to characteristics that could make them the target of discriminations, personal skills, abilities, communication and interaction capabilities, or their access to money that would fund their investment. The imperfections of the labor market may also determine individuals to choose against or in favor of education.

on-the-job training

Training may be formal when special programs are being implemented, or informal, when the employee learns from co-workers or by simply engaging in activities. The organizational decision of whether or not to implement training programs will be justified by a comparison of the expected benefits against the incurred costs. Both employee and employer pay for training through general training and specific training.

Source: McDonnel, B.M., Chapter 4, p. 119

The general training implies that the employee accepts a lower wage throughout the training period. The specific training sees that the employer invests additional funds, but at the completion of the program, his benefits will increase.

Criticism of Human Capital Theory first critique revolves around the consideration of all costs as investments, even when these are subsidy and consumption costs, required regardless of external influences. Another critique is addressed to the economists who compare the positions held by high school and college graduates only in terms of income, when there are other differentiating factors. A third theory suggests that the income differences are not entirely, or primarily, based on different degrees of education. Finally, an ultimate critique is that education does not increase skills and abilities, but labels students, which will be able to get jobs according to their labels.

Chapter 5 - the Demand for Labor

The demand for labor is based on the market demand for the products and/or services delivered by the respective organization. Consequently then, the demand for labor force is directly dependent on how productive the labor is in creating a product or a services and the market value of the product or the service.

Firm's Short Run Production Function

The production function revolves around the relationship between resources consumed and output generated. As the labor input increases, the output also increases; when it reaches a maximum, it decreases:

Source: McDonnel, B.M., Chapter 5, p. 130

The marginal product has a trend on three courses. First of all, it increases, to then decreases. Ultimately, it reaches negative values. This is not solely due to the quality of the labor, but also due to the fact that the resources become more burdened as the activities progress.

Source: McDonnel, B.M., Chapter 5, p. 130

Short-Run Demand for Labor: The Perfectly Competitive Seller

Under the conditions imposed by the perfect seller, meaning that the market is characterized by perfect competition, the marginal revenue product equals the value of the marginal product. This then means that the labor supplies decreases. The situation is best revealed by the chart below, which presents how the VMP and MRP curves, with their decreasing marginal productivity, generate a reduced demand for labor:

Source: McDonnel, B.M., Chapter 5, p. 136

Short-Run Demand for Labor: The Imperfectly Competitive Seller

This situation is the most common one in the actual market place and it basically means that each economic entity has the right to establish its retail price based on organizational determinants, unlike the case of the perfect competition, where the price is set by the market.

The demand for labor in this situation is directly linked to intense competition in the market and the strategies that derive from it, such as cost reduction, increased production or the creation of economies of scale. In the imperfect market then, the demand for labor will decrease as the marginal product decreases with every unit of employed workforce. The chart below reveals the scenario:

Source: McDonnel, B.M., Chapter 5, p. 142

The Long-Run Demand for Labor

Long-run estimations foresee that labor (as resource) and output are variable and attempt to see how labor demand changes in the given circumstances. It concludes that the demand curve follows a descendant trend. This is explained by the fact that a newly employed or recently fired individual, with the consequent changes in employees' wages, will generate a short-term effect on output and a long-term substitution effect. In some situations, a combined effect can occur. Both these forces, alongside with the demand for the product manufactured, technological advancements or relationship between workforce and capitals have the capacity to positively or negatively influence the demand.

The Market Demand for Labor

However identifying the market demand for labor would seem like a simple matter, it is fact hardened by the need to consider several constants as variables. In other words, what was constant within the organization, may easily be viewed as variable in the market context.

Source: McDonnel, B.M., Chapter 5, p. 149

Given that an organizational constant, but a market variable, such as the wage of the employee, decreases, the demand for labor will increase as economic entities will hire more to produce more. The retail price of the manufactured item will also decrease; the marginal revenue product will also follow a descendent trend.

Elasticity of Labor Demand

The previous parts of the chapter have concluded that the labor demand on the short-term is less elastic than the demand on the long-term. It now sets to identify the factors which influence this elasticity. The author finds them to revolve around the calculation of the elasticity coefficient (wage elasticity coefficient as a result of the percentage change in quantity of labor demand divided by the percentage change in the wage rate), the total wage bill rules, the elasticity of the item produced, labor costs in total costs, inputs and supply elasticity.

Determinants of Demand for Labor

The most important forces which influence labor demand are the productivity of the respective organization, the market demand for the respective product or service, the size of the staff employed by the organization or the prices of the commodities required in the manufacturing of the item. For the better understanding of the concepts presented, the chapter ends with examples from the real life.