LECTURE NOTES 2: BASIC CONCEPTS

Labour 1

• Labour refers to human effort and capabilities to carry out a specfic task directed toward achieving a specfic goal.
• Labour involves the use of energy or efforts to carry out a task directed at producing a good or service.
• Labour can be of any kind. Hunting is labour as much as fishing to satisfy consumption needs. But the labour that is of interest to us here is one that passes through the market. That is, wage labour.
• Wage labour refers to efforts carried out with a view to a reward in the form of wages and profits.
• Labour can be either physical or mental. Physical labour is also referred to as manual labour in which an individual employs mainly his bodily functions such as the use of hands and legs to carry out a specific type of work.

Labour 2

• Manual labourers abound everywhere. The kind of work they engaged in involves very little mental effort. Examples include loaders, construction workers, miners, restaurant workers, wheel barrow pushers, messengers, cleaners, and so on.
• Mental labour, on the other hand, refers to the kind of work that involves Examples include the use of brain power but very little physical effort. Examples include journalists, doctors, teachers, lawyers, economists, accountants, managers, and so on. - - Thus, in each case the effort that dominates is the defining line.
• For manual labour, the physical side dominates, and for mental labour, the mental side dominates.
• We can further categorise labour into skilled labour and unskilled labour.

Labour 3

• Skilled workers are those who have had some form of education and training and have thus acquired a higher capacity to do more with less. That is, they have become more productive and efficient.
• Unskilled workers are those who have had no education and training which makes them less productive and less efficient. - Thus, a skilled loader who has had training in operating a loading machine will load a 20 ton cement on a truck in, say, 30 minutes, what will take an unskilled loader who has to use his back 4 hours to do.

Labour 4

• Another way in which labour is categorised is that between productive and unproductive labour.
• Productive labour is the labour that produces a good or service that is valued (that is desirable) by society.
• Unproductive labour then is labour that is not valued; that is, not desirable by society.
• An example of unproductive labour is the labour of a burglar. Even though a burglar has to expend eort to achieve his goal, but he deprives another of his valuable possession.
• This kind of labour is undesirable from the point of view of society. It is thus an unproductive labour.

Worker 1

• A worker is an individual who chooses to work for wage. That is why this kind of worker is called wage labourer.
• And it is in this kind of labour that economists are interested in.
• But the characteristic of a worker and what is wage can do for him as his income differs across developed and developing countries.
• In developed countries, a worker earns his wage and spends it alone or only with his immediate family. His immediate family often consists of his wife and children. This means no one else share in his income.
• In the developing countries, however, a typical worker does not spend his wage or income alone or only with his immediate family. He often has to take care of his aged parents, his brothers and sisters, his cousins and nephews, his immediate and distant relatives, neighbours, and the community in one form or the other.
• It is crucial to keep this in mind whenever we talk about wage labour in developing countries.

Worker 2

• Another distinction with regard to a worker in developing and developed countries is that a typical worker, in most developing countries, is not detached from the land.
• He may still own ancestral land which he can fall back upon whenever he loses his job in the city.
• This means rather than keep searching for job as part of the unemployed, he may withdraw totally from participating in the labour force, and take on farming as an alternative occupation.
• This contrasts sharply with his his counterpart in the developed world who, due to historical circumstances, has been completely detached from the land.
• If he loses his job, he has no village land to return to but must keep searching for job as part of the unemployed and so will not leave the labour force.

Worker 3

• Another assumption which is made with regard to the typical worker in both developed and developing countries is that such an individual does not have a bequest (that is an inheritance).
• Someone who inherited considerable amount of wealth from his parents can afford to opt out of the labour force.
• Thus a worker then is an individual who is free to choose between work and leisure but who must also be completely detached from land and have no bequest.

Labour Force 1

• Labour force simply refers to the total number of people who are currently economically active.
• Economically active means those who are currently working and those who are not currently working but searching for work.
• The labour force is that part of the population of a country which is either employed or unemployed.
• That is, the total number of people who are employed plus the total number of those who are unemployed make up what is called the labour force.
• The labour force consists thus of those who work for pay and who are either employed and or unemployed.

Labour Force 2

• Since we are referring to the population, then it means we have the population that is employed referred to as the employed population and the population that is unemployed as the unemployed population.
• Data from the International Labour Organization (ILO) indicate that as at 2020, the global labour force stood at 3.3 billion people, which includes individuals age 15 and above who are either employed or searching for work.
• The size of the labour force in developed countries is generally smaller due to factors such as the aging population and lower birth rates.
• The labour force, for example, in Germany was 45.2 million, and in the United States it is 161.5 million as at 2019, respectively.
• Developing countries by contrast have a larger labour force due to higher birth rate. Labour force in Nigeria is approximated to be 70.2 million people, while in India it is 512 million as at 2019.

Rate of Employment

• The proportion of labour force employed is referred to as the rate of employment or the employment rate.
• The employment rate is calculated as follows.

\[ \begin{equation} Employment\hspace{1pt} rate = \frac{Number Employed}{Labour Force}x100 \end{equation} \]

• Alternatively, the formula can be written as

\[ \begin{equation} Employment\hspace{1pt} rate = \frac{Number\hspace{1pt} Employed}{Employed + Unemployed}x100 \end{equation} \]

• This is the percentage of persons in the labour force who are employed.
• It is a measure of the extent of utilization of labour force in the economy.
• The higher the number employed given the size of the labour force, the higher is the rate of employment, and vice versa.

Rate of Unemployment 1

• The unemployed are those who have lost their jobs but are searching for job. Searching for jobs means that they taken steps such as registering at an employment agency, and or visiting potential employers to apply for jobs.
• Statistically speaking, the unemployed are those who in the last one week have been actively searching for jobs. That is they were simultaneously:
• without work; that is, not employed,
• currently available to work; that is available for employment during the statistically relevant period, and
• searching for work; that is, had taken specific steps in a specified recent period to look for employment.

Rate of unemployment 2

• The unemployed must bear search cost as information on vacancies and employers that need workers are often not freely available.
• A measure of unemployment that often catches newspaper headlines is the rate of unemployment or the unemployment rate. - The is calculated as follows.

\[ \begin{equation} Unemployment\hspace{1pt} rate = \frac{Number\hspace{1pt} Unemployed}{Labour Force}x100 \end{equation} \]

• Alternatively, the formula can be written as

\[ \begin{equation} Unemployment\hspace{1pt} rate = \frac{Number\hspace{1pt} Unemployed}{Employed + Unemployed}x100 \end{equation} \]

Rate of unemployment 3

• This is the percentage of persons in the labour force who are unemployed.
• It is a measure of imbalance in the labour market representing the extent of unutilized labour force in the economy.
• Thus the higher the number of unemployed given the size of the labour force, the higher is the rate of unemployment

Underemployment 1

-Underemployment can be of: - time-related, - skill-related, - income-related - nutrition deficiency related, and - disability related

Underemployemt 2

• Time-related underemployment refers to an employed individual who can work for more hours per day, but could only secure jobs that offer lesser working hours. This means this individual can work for 10 hours in a day, for example, but could only secure jobs that offer only 4 hours. In statistics speak, time-related underemployment consists of those who are working for less than 40 hours per week.
• Income-related underemployment exists when individuals are working but receive pay below what they could have earned when fully employed. Income-related underemployment is closely related to skills-related under-employment.
• Skill-related underemployment occurs when the employed are working below their skills, educational qualifications, and experience. For example, a graduate of economics working as a taxi driver or an engineer working in a restaurant. This kind of underemployment has psychological effects on the individual. The person working below his productive capacity will clearly earn less. An engineer working as a taxi driver will earn far less than working as a full time engineer.

Underemployment 3

• Nutrition-related underemployment often arises in the case of those who are nutritionally decificient.
• These are those who consume less calories per day and so are incapable of working for several hours.
• This phenomenon has been documented in several studies of India by Professor Bhagwati.
• Nutrition decificiency is a real problem for most developing countries.
• I once had an encounter at a construction site where I requested that a young man be given a job.
• The supervisor looked at the young man and said “He can’t do it”. I asked, “Why?”
• The supervisor said “Look at him, if you give him a bag of cement to carry upstairs, he would collapse”, and “this would jeopardize the entire work.”
• Such individuals may have to fall back on petty trading or on jobs that are less physically demanding.

Underemployment 4

• Disability-related underemployment is a phenomenon faced by those who are disabled physically and cannot perform certain task or cannot work for more than a few hours due to their condition.
• Physically challenged people often nd it difficult to secure full time employment because of their condition so that they have to be offered jobs that matches their condition.

Labour Force Participation Rate (LFPR) 1

• This indicates the level of labour market activity. It reflects the extent to which a country’s working age population is economically active. It is defined as the ratio of the labour force to the working age population expressed in percentage term as follows:

\[ \begin{equation} LFPR = \frac{labour − force}{Working − age − population}.100 \end{equation} \]

Labour Force Participation Rate 2

• The labour force participation rate is useful for several reasons.
• It can be used to:
• determine the size and composition of the labour force;
• make projections of future supply of labour;
• aid in the formulation of employment policy;
• determine training needs of the nation;
• determine working lives of male and females
• determine the rate of entry and the rate of retirement from economic activity men than for women.

Population Outside the Labour Force

• This segment of the population comprises those who are neither employed nor unemployed.
• Those group of the population that are neither employed nor unemployed are excluded from the labour force.
• This category consists of those who are 1) retired, 2) those who carried out unpaid household work, 3) attending educational institutions, 4) permanently unable to work due to physical or mental disabilities, 5) temporarily unavailable for work during the survey period, and 6) not seeking for work.
• This group comprises:
• those attending educational institutions,
• those performing household duties such as housewives,
• those who are retired or too old and are living on pensions or capital income,
• institutionalized individuals (those in prisons, military service, etc.)

WORKING HOURS

• Working hours hours refer to the number of hours worked by an employee.
• In modern economies, working hours are regulated by law. - Worldwide the aver-age working hour per day is \(8\) hours, which translates to a \(40-hour\) workweek.
• But there are variations across countries.
• In countries such as Denmark, the Netherlands, and Norway, the average workweek is \(36\) hours, the shortest workweek in the world.
• By contrast, in some countries such as Chile, Turkey, and South Korea, the average workweek can be up to \(50\) hours or more.

Working hours 2

• Working hours can however vary even within a single country depending on the industry or occupation.
• Jobs in healthcare, retail, and restaurants for example, may require longer working hours than those in the civil service.
• The working day is a fraction of the total waking and sleeping hours.
• Each working day, work starts in the morning signified by points A, B, C, and D.
• These points represent zero hours of work.
• On the average, work starts at \(8.00 am\) in the morning and ends by \(5.00 pm\) in the evening.

Working hours 3

• As the diagram shows, the hours of work rises and reaches its peak, at P.
• It then jumped to zero.
• Thus if a nation knows its actual labour force, it can easily work out the quantum of hours its workers are contributing on a daily, weekly, and monthly basis.
• Figure 2.2 shows an hypothetical quantum jump in working days.
• In some industries, however, workers may work overtime—a period of work exceeding the normal working hours for which they will be remunerated.

Wage and Wage Rate

Wage refers to payment received by a worker for work done. - The worker can receive this payment either on hourly, daily, weekly, or monthly basis. - It is the amount a worker receives per unit of time worked.

Type of wages

• Piece-rate: Here a worker is paid based on per unit he or she produced.
• For example, a worker may be paid based on the number of pieces building bricks he produced per unit of time, which could be, say, $2 per 100 bricks produced.
• Wage based on commission: This often occur in a sales job where the worker receives a certain percentage of the amount sold.
• A 2% commission would mean for selling \(N50, 000\) worth of goods, the worker (salesman) will receive \(N1000\).

Type of wages 2

• Hourly wage: A worker here is paid a specific amount for every hour worked.
• For example, the hourly wage in some occupations in the United States is \(\$15\) per hour.
• Daily wage: Daily wage refers to the wage paid to the worker daily.
• For example, a worker may be paid \(N1500\) per day for work done that day.

Type of wages 3

• Weekly wage: In some countries such as the U.K., wages are paid weekly in some occupations.
• This means every Friday, the last day of the week, the worker will receive his pay.
• Monthly wage: The worker here receives his wage every month.
• If the amount is fixed regardless of the hours worked then it is called salary.
• All these types of wage will depend on the type of employment contract the worker entered into or the industry or occupation he or she works in. ## Types of wage 5
• Gross Wages: Gross wages refer to gross earnings or remuneration payable in cash and in kind to employees before any deductions are made by the employer for taxes, employees contributions to social security and pension schemes, health insurance, national housing scheme, union dues and other obligations such as deductions for purchases made from a cooperative society.
• Net Wages: When the aforementioned deductions are made from gross wages, what remains is referred to as net wages.
• Net wages are often referred to as take-home pay or disposable income.
• The wage rate a worker receives across the world differs, higher in the developed countries and lower in the developing countries.
• Several factors determine the wage rate. These factors include the level of development, the occupation, the industry, and the type of job.

Monthly wage rate across the world

• The International Labour Organization (ILO) shows that countries with the highest average monthly wage are Australia, Denmark, Norway, and Switzerland.
• The average monthly wage rates in these countries range between \(US\$5000\) and \(US\$6000\).
• Contrast this with the monthly wage rates in countries such as Bangladesh, Ethiopia, and Madagascar, where the average monthly wage rate is less than US$200. = In Nigeria, the average monthly wage of a Professor is \(US\$300\)
• Wage rates are also affected by minimum wage laws that prescribe the minimum wage below which an employer cannot pay its workers.

Nominal and Real Wages 1

• The type of wage payments and its frequency discussed above did not differentiate nominal from real wages.
• Economists generally assume that workers are more likely to respond to changes in the real wage as they are more concerned about the purchasing power of the wage they receive over time. - This led to a distinction between nominal wage and real wage. - This distinction is important because infation erodes the purchasing power of money and workers receive their wages in terms of money wages (that is in nominal terms).
• Wages however do not keep up with changes in the rate of infation so that a distinction needs to be made between nominal and real wage.

Nominal and Real Wages 2

• Nominal wage: Wages that have not been adjusted for inflation are known as nominal wages.
• They are expressed in terms of current naira; that is, they are expressed in terms of the amount the worker received as wage.
• A worker that receives \(N100,000\), for example, as wage, actually receives a nominal wage, as this amount does not factor into account the existing inflation rate.
• Real wage: When the amount of the wage is adjusted for inflation, we have what is called a real wage.
• The real wage represents the purchasing power of the nominal wage received by the worker.
• Real wages are expressed in terms of constant naira. That is a base year is chosen and the changes in the real wage is now compared with the base year wage.
• This is achieved by constructing what is called index numbers.

Nominal and Real Wages 3

• In this case a price index can be constructed by taking a given basket of goods in the current year and compare this basket with a given basket of goods in the base year.
• The base year is given \(100\%\) so that any change below the index suggests an improvement in the price index, and any change above the base period is considered a deterioration of the price index.
• The price index is used to convert the nominal wage into a real wage and can be calculated as follows:

\[ \begin{equation} Priceindex = \frac{current\hspace{1pt}year\hspace{1pt}cost\hspace{1pt}of\hspace{1pt} a\hspace{1pt}given\hspace{1pt}basket\hspace{1pt}of\hspace{1pt} goods}{base\hspace{1pt}year\hspace{1pt}cost\hspace{1pt}of\hspace{1pt} a\hspace{1pt}given\hspace{1pt}basket\hspace{1pt}of\hspace{1pt} goods}.100 \end{equation} \]

Consumer Price Index 1

• When this is multiplied by \(100\), we have what is called Consumer Price Index (CPI), which is the price index that is commonly reported by statistical agencies such as the National Bureau of Statistics (NBS).
• Consumer Price Index CPI) is the one often used to show changes in price index.
• The CPI is actually determined by a mix of goods that a typical household consumes.
• The National Bureau of Statistics in Nigeria carry out a National Household Survey through which it determines the mix of goods consumed by a typical household.

Consumer Price Index 2

• The base year is the year of reference, it is always equal to \(1\) or \(100\%\) when expressed as a percentage.
• For example, assume that the current year mix of a basket of goods which will be used to calculate the CPI is three times what it was in the vase year.
• The CPI will be equal to \(3\) or when expressed as percentage it will be equal to \(300\). How can this change affect the real wage?

Real Price 1

• The real price can be expressed as nominal price divided by the price index.
• That is,

\[ \begin{equation} Real\hspace{1pt}price = \frac{Nominal\hspace{1pt}price}{Price\hspace{1pt}index} \end{equation} \]

• Since wage is the price of labour, then the real wage becomes

\[ \begin{equation} Real\hspace{1pt}wage = \frac{Nominal\hspace{1pt}wage} {Price\hspace{1pt}index} \end{equation} \]

• If, for instance, the nominal wage of a worker is \(N1000\) per hour, when prices, on the average have risen three times as they were in the base year, then the real wage will be

\[ Real\hspace{1pt}wage = \frac{1000}{3} = N333.30 \]

• Notice that the price index used here was not expressed as a percentage.

Real Price 2

• Thus the real wage can substantially differ from the nominal wage; while the nominal wage is \(N1000\), the real wage is \(N333.30\).
• This is why economists are more concerned about the real wage.
• In addition, individuals and even firms are more likely to be concerned by changes in the real wage as workers care very much about the purchasing power of their nominal wage—the amount of naira they receive over a certain period of time.
• The wage received by a worker per hour alone does not determine the earnings of a worker; the number of hours worked will have to be multiplied by the wage per unit time to arrive at his or her earnings.

Earnings

• The earnings of a worker then can be calculated as follows: \[ \begin{equation} Earnings = wage\hspace{1pt}per\hspace{1pt}unit\hspace{1pt}x\hspace{1pt}number\hspace{1pt}of\hspace{1pt}hours\hspace{1pt}worked \end{equation} \]

• If wage per hour is \(N1000\) and a worker works for \(8\) hours in a day, his earnings for that day equals \(1000x8 = 8000\).

• Workers in many cases also received what is called fringe benefits.

Fringe benefits

• Fringe benefits are payments in kind made by a firm which are provided in the form of goods or services.
• Examples include the provision of uniforms, company provided canteens, use of company cars, use of company house, health insurance, and deferred payments in the form of pensions.

Total Compensation

• Total compensation When the earnings of a worker and the fringe benefits he receives are added together we have what is called total compensation.
• This means the income received by a worker consists of two parts: earned and unearned income.
• Income as noted above will consist of total earned income and unearned income.
• A measure of income must thus take into account income not related to work received by a worker.