LECTURE NOTES 1: Introduction to Labour Economics

Labour Economics as a branch of Economics I

• Labour economics is one of the branches of general economics.
• General economics is basically divided into microeconomics and macroeconomics. Microeconomics deals with individual markets in the economy.
• Such markets include the goods market, the labour market, the financial market, and the foreign exchange market. - Labour economics is concerned with the labour market as one of the many markets in the economy.
• Labour economics focuses its attention on the behavior of economic agents within the labour market and how the interactions of these agents can lead to desirable outcomes such as increased employment or undesirable outcomes such as unemployment.
• Labour economics is thus concerned, basically, with the interactions and factors that shape the labour market.
• It is concerned not just with the interactions between firms Workers, but, it is also concerned with the outcomes produced by these interactions.

Labour Economics as a branch of Economics II

• As a sub-field of general economics, labour economics uses the tools of microeconomic analysis to analyze labour market problems: how labour services are bought and sold in the labour market; what determines the wage rate; and, why do governments intervene in the labour market?
• The issues affecting the labour market go beyond national boundaries and in the last part of this course we shall see how international institutions and labour standards shape the labour market.

Possitive aspect of labour economics

• Labour economics is concerned with What is?. That is, it is concerned with how the labour market works.
• What makes the labour market work the way it does and how the outcomes, based on the interactions of actors in the market, came out to be what they are.
• This is the positive aspect of labour economics.

Normative aspect of labour economics I

• Labour economics is, however, not content with just understanding how the labour market works.
• It also wants to suggest solutions to labour market problems.
• This brings us to the arena of normative economics. - Normative economics is concerned with what should be done whenever a problem arises.

Normative aspects of labour economics II

• It is sometimes necessary to describe and analyse What should be done?
• For example, Should government increase the minimum wage?, What should we do about discrimination in the labour market?, Should immigration be allowed?, and so on.
• These and other related questions are the focus of normative economics.

The Need for the Study of Labour Economics I

• Why do we need to study labour economics?
• Studying labour economics will:
• 1. make us understand how the labour market works;
• 2. enable us acquire knowledge of the theories that are used to explain how the labour markets work;
• 3. enable us analyze the effect of labour market policies;
• 4. help us prepare for the world of work;

The Need for the Study of Labour Economics II

• 5. enable us understand how the main players in the labour market individuals, firms, and the government interact to shape outcomes in the labour market;
• 6. make us understand and acquire knowledge of what the labour market outcomes are and whether they are desirable or not desirable outcomes;
• 7. enable us acquire the skills to analyse labour market; and
• 8. enable us appreciate and understand labour market policies.

The Labour Market I

• The labour market is just like any other markets in the economy in that a commodity, Iabour, is bought and sold.
• That is, just like any other markets, there are two sides to the labour market, namely the demand side and the supply side.
• These two forces together shape the labour market and its outcomes.
• However, the character of the labour market is affected by institutional factors making the labour market to substantially differ from the products market in several important respects.

The Labour Market II

• Among these differences are:
• Labour services are inseparable from the worker Labour services are inseparable from the worker, because purchasers of labour services do not own it like you own the goods you bought.
• During the period of slavery, an individual slave is completely owned by his master just like you would own any property.

Labour market III

• But in modern times, an individual cannot be owned, an individual is free to dispose of his labour as he pleases;
• The labour market is a highly regulated market For example, we have minimum wage law, overtime laws, labour laws, compensation for industrial injury law, pension law, to mention just a few.
• Why are there so many laws regulating labour matters? It is because, first, as we noted above, you cannot separate the worker and his labour services.

The Labour Market IV

• So whatever happens in the course of providing labour services affect the worker directly or indirectly.
• A worker in the course of providing labour services can suffer severe injury or face even death.
• How will he get back to his former state and continue working if his employer fails to take action?
• Issues like this can compel the government to act by enacting laws that force employers to compensate workers.;

Labour market V

• People care about who they work for and who they work with; People are emotional beings: they have desires, fears, likes and dislikes, and so on. So they can choose where to work, and with whom to work based on these emotions; Fairness is very much valued Individuals often abhor injustices and so they can react sometimes even violently when they felt that an injustice has been done to them;
• Incentives in terms of pay and other compensations matters to the workers
• Every productive organization has to work out a pay and compensation schemes that is agreeable with the workers, otherwise such as organization may experience low productivity due to higher rate of labour turnover: the rate at which workers leave a firm and have to be replaced by new workers; and shirking at work: when workers avoid or neglect their duties and responsibilities;

The Labour Market VI

• Working conditions Working conditions include availability of instruments needed to carry out a task, provision of food, provision of vehicular movements, provision of recreation facilities and all those things that make the work more pleasant and enjoyable;

Labou rmarket VII

• The employment relationship lasts a long time Except those who are engaged on a day to day basis, employment of workers and their relationship to where they work often take several months or even years. Workers hardly move from one job to another because several factors can impede their movement. Such factors include family ties, language or religious barriers, or even stringent immigration laws ;
• There is a diversity of workers and jobs Workers are diverse in terms of age, gender, academic qualifications, skills, and even innate abilities. Jobs are also diverse. Some jobs require manual labour, others require a high level of education, still some others require a highly specialized skills, and so on;
• Incomplete information There is incomplete information, which makes employers to be in the dark as to who are the good workers and the workers to be in the dark as to where the good jobs are.

Types of labour market

Labour market can be categorized according to job search by employers and employees. This means that the abour market crucially depends upon the availability of information. Thus labour market can be a:

• Local labour market National labour market
• Primar labour market Secondary labour market ,
• Internal labour market,
• Virtual labour market
• Global labour market

Local labour market

• In the local labour market, there are many employers and employees.
• Numerous small firms exist to employ any number of workers they wish.
• Secretaries, electricians, petrol station attendants, carpenters, truck drivers, and so on, are usually employed at the local labour market.

National labour market I

• When job search by employees and firms takes place at the national level, we have a .
• On the other hand, when job search takes place at the local level by employees and firms, we have what is called local labour market.
• For example, professors, top executive positions in large private and public enterprises search for jobs and are searched for by employers at the national level and so their market is national labour market.

National labour market II

• The reason for the existence of national labour market is that at the national level employers and employees are often very few. - The main reason for having fewer or many employees is that employees that are searched for at the national level often have to invest several years in education.
• This limits the number of such employees that enter the labour market.

Primary and secondary labour market I

• The distinction between and is also a useful distinction to categorize jobs.
• In the primary labour market, jobs are characterized by high wages and stable employment relationships.
• On the the other hand, jobs in the secondary labour market are characterized by low wages and unstable employment relationships. - Jobs in the primary labour market include professional jobs such as the jobs of accountants, lawyers, teachers, medical doctors, and so on.

Primary and secondary labour market II

• On the other hand, examples of jobs in the secondary labour market include the jobs of petrol station attendants, drivers, carpenters, mechanics, dishwashers, hairdressers, and so on.
  
• Although jobs in the primary labour market are more desirable, yet secondary labour market also provides opportunities for those without skills and education or those who are retired and self-employed.

Internal labour market

• Job search that occurs within the firm is referred to as internal labour market.
• Employers frequently fill vacant positions from within the firm rather than sourcing vacant positions from outside.
• Promotion, for example, is used by employers to move employees to the next level.
• This serves as motivation for the employees and reduces the cost of searching for and recruiting new employees by the firm.

Virtual labour market I

• The virtual labour market emerges as a result of rapid developments in the information and communication technology.
• The internet for example has become an important source of information for both potential employers and potential employees. - Job search by potential employees occurs through browsing the world wide web for vacancies advertised through online job advertisement agencies that exist at both national and international levels.

Virtual labour market II

• Potential employers also are increasingly using the world wide web to post vacancies in the hope of reaching a large number of potential employees.
• In some cases would be employers even start the recruitment process through online platforms they provide to potential workers.

Global labour market I

• Globalization has brought a new dimension to the labour market. - In some cases employers demand and search for certain categories of workers with specialized skills transcend their national boundaries.
• Workers in the information technology and some specialized scientific endeavors may be sought for internationally.

Global labour market II

• In addition, international organizations such as the African Development Bank (AfDB), the World Bank, International Monetary Fund (IMF), Economic Commission for Africa (ECA), and all other organs of the United Nations system and the United Nations itself all seek for potential employees internationally.
• Several multinational corporations also sometimes seek for potential high level executives internationally.
• So we can safely say that there is a global labour market .

Decision Makers in the Labour Market

• The labour market consists of three key decision makers, namely, individuals, firms, and governments.
• Each of these decision makers has a more or less greater freedom of choice in how they relate to the labour market.
• This freedom of choice is the basis of the kind of decisions they make with regard to the labour market.
• Let us consider each of these decision makers in turn.

Individuals I

• Individuals have the choice to decide how they relate to the labour market. An individual can
• decide whether to enter or not to enter the labour market,
• Individuals are free to choose whether to work or not to work or even to work for themselves,
• decide which occupation or industry to enter,
• decide how many hours to work? An individual can decide to work full time or part time or just work for some hours of the day
• decide whether to join a union or not to join a union. A worker can decide to join a union to protect his interest, but he is also free not to join any unions,

Individuals II

• decide how much education to acquire. An individual might decide to quit after attending primary or secondary school and instead earn income from work. Some others might decide to postpone work so as to acquire more education in the hope of earning higher future income,
• decide what time to retire. In some cases retirement is compulsory after attaining certain age,
• decide where to live within his or her own country, and
• decide whether or not to migrate to another country

Firms I

• Employers or firms are also free to decide how they relate to the labour market.
• This freedom makes it possible for the employers to decide
• the quantity and quality of labour to hire,
• how much wages to pay its employees,
• the number of hours of work that employees have to put in,

Firms II

• whether it is necessary to outsource some work to outsiders instead of making them in the factory,
• whether to allow or disallow the formation of a union of employees, and
• decide whether or not to automate the production process using robotics.

Government I

• The government is empowered by law to intervene in the labour market either to resolve conflicts between employers and employees, make laws for the labour market, and make and implement labour market policies,
• In exercising its powers, governments have to make:
• laws for the labour market such as minimum wage law, compensation law, unemployment benefits law, injury law, and so on,

Government II

• rules and regulations that govern such issues as migration, pension, social security, and so on, and
• create labour market policies that deal with employment and unemployment matters.

Labour Market Outcomes

• The interactions among workers, employers, and the governments determine the outcomes in the labour market . These outcomes are:

Price of labour services

• The price of labour services, that is wages, wage differentials, discrimination in wages, and so on, are outcomes due to the interactions of the three participants in the labour market.
• Wages may reflect efficiency in a particluar labour market, while in others, due to certain impediments, it may not be so.
• In such cases this may be due to Government interventions through such laws as the minimum wage laws, so as to create a floor below which wages cannot be reduced.

Quantity of labour

• These are the level of employment, the rate of unemployment, and the level of underemployment, labour force participation rate, participation of women in the labour force, and so on.
• These outcomes have become issues that are raising serious concerns in developing as well as industrialized countries and has put labour economics in the front burner of public discourse.