BoEC 3030 LABOUR ECONOMICS

UNIT 1.0: NATURE OF LABOUR ECONOMICS

1.0.1: Introduction to labour economics

 Labour is one of the primary factors of production. Other factors include: Land,
capital and entrepreneurs. Note that labour is the collective name given to the
productive service, embodied in human physical efforts, skill, intellectual power. etc.
There are different types of effort and skill content. This means that labour input is
not homogeneous.
Resources are relatively scarce or limited, this means that the desire of consumer,
business and governmental unit for goods and services exceed our productive capacity.
Since resources are scarce and the wants are unlimited, society is obliged to manage
this resource efficiently.
 Labour economics therefore looks at ways labour, as a resource could be utilized
efficiently.
1.1: Labour Economics Basic Concepts

Labour economics is the branch of economics, which studies the

workings, and outcomes of the market for labour services.
Labour economics deals with the behaviour of employers and
employees to the pecuniary (wages, prices, profits) and non-
pecuniary (working conditions, work environmental) conditions of
service.
Firms operate in three markets as they pursue their objectives of
profit maximization. Thus, the labour market, the capital market and
the product market.
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Labour Economics is the study of the labour force as an element in the
process of production. Labour force comprises a part of the population,
which is employed or available for work.
The labour force is made up of all those who work for gain whether as
employees, employers or as self-employed. It also includes the
unemployed who are seeking for employment.
Labour economics is therefore the study of the factors affecting
efficiency of workers, their development between different industries
and occupations and the determination of their pay.
Labour Economics involves an application of economic analysing
behaviour, in a relationship between employers and employees.
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Employer and employee relationship is a fundamental relationship in life. It
attracts a great to labour Policy Markers.
Knowing the fundamentals of labour economics is essential to an understanding
of huge array of social problems in the labour market.
Labor economics is the study of the workings and outcomes of the market for
labour.
More specifically, labor economics is primarily concerned with the behavior of
employers and employees in response to the general incentives of wages,
prices, profits, and non-pecuniary aspects of the employment relationship,
such as working conditions. These incentives serve both to motivate and to
limit individual choice. The focus in economics is on inducements for
behaviour that are impersonal and apply to a wide range of people.
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 Labor is unique in several ways from other factors of production. Labor
services can only be rented; workers themselves cannot be bought and
sold.
Further, because labor services cannot be separated from workers, the
conditions under which such services are rented are often as important as
the price.
Indeed, non-pecuniary factors such as work environment, risk of injury,
personalities of managers, perceptions of fair treatment, and flexibility of
work hours loom larger in employment transactions than they do in markets
for commodities. Finally, a host of institutions and pieces of legislation that
influence the employment relationship that do not exist in other markets.
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There exist a host of institutions and a piece of legislation that
influence employment relationship that do not exist in other markets
such as employment acts, industrial labour court, trade unions and
their laws and so on. Never the less the conditions under which
employers and employees rent labour services constitute the labour
market.
Nevertheless, the circumstances under which employers and
employees rent labor services clearly constitute a market, for several
reasons as follows:
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First, several institutions such as Labour Department and employment
agencies and so on, have been developed to facilitate contract between
buyers and sellers of labor services.
Second, once contract is arranged, information about price and quality is
exchanged in employment applications and interviews.
Third, when agreement is reached, some kind of contract, whether formal or
informal, is executed, covering compensation, conditions of work, job
security, and even the duration of the job. These contracts typically call for
employers to compensate employees for their time and not for what they
produce. This form of compensation requires that employers give careful
attention to worker motivation and dependability in the selection and
employment process.
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Labour markets involve advertising, employment agents that establish
contract between would be employees and employers. Information about
price and quality are exchanged. When agreement is reached some kind of
contract is executed either formally or informally. The final result of
employer and employee relationship in the labour market is placement of
people in jobs at certain rates of pay.
The result of employer–employee transactions in the labor market is, of
course, the placement of people in jobs at certain rates of pay. This
allocation of labour serves not only the personal needs of individuals but the
needs of the larger society as well. Through the labor market, our most
important national resource, labour is allocated to firms, industries,
occupations, and regions.
1.1.1: Labour Economics

Labour Economics is one of the branches of Economics. The focus of

it is on the behaviour of individuals in their role as suppliers of
labour service and employers as demanders or users of labour
service.
Labour Economics not only describes the organization and behaviour
of labour markets but also concerns itself with problems faced by
labour such as unemployment, inflation, wage differences etc. It
studies the various institutions and their roles in the labour market.
Thus, the study of labour economics is relevant in the human
resource management.
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Labour Economics is a special branch of economics because labour is
one of the factors of production.
 No production can take place without labour’s assistance. Labour is
the major source of income. Labour sells its service to the employer
who uses the service to transform raw material and other inputs into
finished product, which are sold to the households.
 The employers/firms pay wages to the labour for utilizing their
services in the process of production of goods and services.
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We can divide the economy into two sectors, i.e., Business sector and
Household sector.
The production of goods and services takes place in Business Sector and
Household sector consumes them. The Business sector produces the goods
and services to sell in the market and to get profit.
Whereas, the Household sector sells labour to the Business sector to get
income to purchase the goods and services to satisfy their wants.
Our study of labour economics will be conducted on two levels. Most of the
time, we shall use economic theory to analyse “what is”; that is we shall
explain behaviour using a mode of analysis called Positive Economics. Less
commonly, we shall use Normative Economic Analysis to judge “what should
be.”
1.1.2: Positive Economics
Positive Economics is a theory in which people are typically assumed to
respond positively to benefits and negatively to costs. In this regard,
positive economics resembles closely to Skinnerian Psychology, which
views behaviour as shaped by rewards and punishments.
The rewards are pecuniary and non-pecuniary conditions benefits, while
the punishments are the forgone opportunity costs.
1.1.2.1: Scarcity
The pervasive assumption underlying economic theory is that of resource
scarcity. Thus, any resource devoted to satisfying one set of desires, could
have been used to satisfy another set of desires. Which means that there is
a cost to any decision or action known as opportunity cost.
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1.1.2.2: Rationality
A second basic assumption of positive economics is that people are
rational-they have objectives and pursue them in a reasonably
consistent fashion. These objectives in the labour market are Profit
Maximisation (employer) and Utility Maximisation (employees). Profit
maximisation is just a special case of Utility Maximisation.
Holding other things constant, workers will prefer high paying jobs to
low paying ones. On the other hand, firms need to make profit to
survive. Thus, firms cannot afford to have high labour turnover, as it is
a cost in terms of hiring and train replacements. Hence, the need to
pay competitive market wages to reduce labour turnover.
1.1.3: Normative Economics
To understand normative economics in the context of labour economics, we have to
realise that we have two types of transactions that take place in the labour market.
One kind is entered into voluntarily because all parties to the transaction gain.
The role of the labour market is to facilitate these voluntarily mutually
advantageous transactions.
If the market is successful in facilitating all possible mutually beneficial transactions,
it can be said to have produced a condition economists call Pareto (or “economic”)
Efficiency.
The word efficiency is used to denote a condition in which all mutually beneficial
transactions have been concluded. If Pareto Efficiency is attained, no more
transactions would be undertaken voluntarily because they would not be
mutually advantageous.
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In conclusion, Pareto Efficiency transactions in the labour market is
a kind of transactions that are entered into voluntarily because all
parties to the transactions gain. Example, if NIPA is recruiting a
worker and NIPA is prepared to pay that Worker K3000 per month,
but when the worker is asked to state how much s/he would like to be
paid and the worker says K2000. If NIPA offers to pay the worker
K2,500 it means both parties gain K500.
1.1.4: Importance of Labour
Economics
The labour economics plays very important role in human resource management.
It helps to provide information to the human resource manager regarding the
labour market policies, such as, wages, health insurance, labour welfare, etc.
Labour economics is useful to the electorate to choose intelligently among the
various candidates, depending on the labour welfare programmes they want to
introduce. Labour policies are the rules and regulations that affect labour as a
factor of production.
The labour economics deals with demand and supply of labour, determination of
wages in different types of markets, decision of the firm/employer regarding the
number of labour to be employed, the concept of minimum wage, labour welfare
measures, factors determining the labour force participation rate, labour
productivity, employment elasticities etc., which are very useful to the human
resource manager.
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The study of labour economics is important for the following reasons:
It helps economists to understand labour related problems e.g. Issues on
fair wage or salaries for workers, welfare of workers, labour productivity,
workers’ safety, gender related matters, job security and Job satisfaction.
The study is important in providing data for economic planning and
policy e.g. It helps economists to know the contribution of labour
services to peoples income (wages and salaries). There is evidence that
in most economy, labour input is the most important of economic
resources.
The study of labour economics helps us to understand the nature of the
market in which labour services are bought and sold.
1.2: Definition of Labour
In Economics, labour is defined as the human effort exerted by human beings in
the process of production. It is the service rendered by individuals in producing
goods and services. In economics the term ‘labour’ includes both physical and
mental labour.
The functions of labour can be divided into four types.
 Firstly, to produce raw materials, transform those materials into finished product.
Secondly, to distribute the semi-finished products, the finished products to those
requiring them.
Thirdly, to perform services including organizing and supervising. Lastly, to adopt
to new needs or inventions. It means the labour is always ready and adaptable to
the change in needs and technologies.
1.2.1: Distinction of labour from other
factors of production
Labour is different from other factors of production in many respects.
P.S. Sisson has rightly pointed out that the industry not only hires the
labour but also the whole personality of the employee as a human
being.
The distinguishing features of labour from other factors of production
are:
The worker sells his labor but not himself
Labor is perishable.
1.2.2: Meaning and importance of Labour force

The labour force is the sum/total of economically active people with varying skills and
production capacities in the country, at any given time. The definition of economically
active people is different from country to country. In some countries they are between the
age group of 15 years and 60 years. In some other countries, they are between the age
group of 18 years and 55 years. For example, in Zambia, the Ministry of labour has set the
age range of 16- 55 years as qualification to the labour force.
Economically active persons are those who are able and willing to supply their labour
services for productive purposes. It excludes the young persons who are below certain
age, very old persons, full time housewives, students and handicapped persons etc.,
The labour force of a country is the source of its strength and wealth. The education
attainments and skills of the people compose labour force and its adaptability to the
needs of an ever changing technology. The size, structure and quality of the labour force is
very important to the planners, administrators and policy makers as they determine the
level of development of an economy.
 CONTINUATION

The structure of labour force and trends are determined by the age of
population, the age structure and the labour force participation rate.
The labour force depends on the birth and death rate. If the birth rate is
higher than the death rate, the labour force will be higher, and vice
versa.
 The labour force of a country depends on the age at which people get
married. If the marriages are at an early age, then the population
growth and the labour force will be higher and vice versa.
The labour force also depends on the age structure of the population. It
also determines the proportion of dependent and working population.
It shows the output potential of the economy.
 CONTINUATION

The labour force participation rate is a measure of the proportion of a

country’s working-age population that engages actively in the labour market,
either by working or looking for work. It provides an indication of the relative
size of the supply of labour available to engage in the production of goods
and services.
The quality of labour means the ability of labour to achieve greater output in
a shorter time without falling off in the standard of work. It is also known as
efficiency of labour. The quality of labour depends on the following factors:
Capacity of the workers to accept responsibilities, respond to risks,
uncertainties etc.,
Family background of workers
 CONTINUATION

Level of academic qualification which helps in the development of

organizational and other abilities to improve performance.
Training of the workers.
The improvement of labor quality depends upon education and
training. There are three forms of education and training. Firstly,
formal education, which improves understanding and develop
intelligence. Secondly, vocational or technical training which aims to
develop ability and skills. Thirdly, on job training, where an
experienced employee coaches a newly employed or promoted
worker to a given job.
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Besides education and training, improvement in health facilities or
accessibility to these facilities improves efficiency of labor. The Trade
Unionists argued that improving the condition of service increases the
efficiency. Conditions of service includes subsidized housing,
transport, good working environment and provision of sports and
canteen facilities. Some economists argued for higher wages to
increase the efficiency of labor.
The efficiency of labor in the under developed countries is lower than
the developed countries because of lower level of education and
training and lower wages.
1.2.3: Labour Force Status
'Labour force status' refers to whether a person was employed,
unemployed or not in the labour force during the reference period.
The labour force consists of persons who contribute or are available
to contribute to the production of goods and services falling within
the System of National Accounts production boundary. Hence, we
have the following: (See diagram in your module on page 20/21 )
LABOUR FORCE STSTUS (DIAGRAM)
1.2.3.1: Labour Force Status Definitions
The labour force refers to all those 16 years of age and above who are either
employed or actively seeking work or expecting to be recalled.
Those in the labour force who are not employed for pay are unemployed.
Those employed are those who are working for pay, profit, doing unpaid family
work or are on leave.
Those who are not employed and are neither looking for work nor waiting to be
recalled are not in the labour force.
These labour market categories are always changing. They continually flow from
one category to another. For example, those in “labour force” may enter in the
category of “not in labour force” and vice-versa. Also the employed may become
unemployed by either being fired or quitting. Also we have flows from
unemployed to employed.
1.2.5: Labour force participation
rates
This is simply labour force divided by the population. This may be expressed in
percentage terms.
Unemployment rate is the ratio of those unemployed to those in the labour force.
i.e. un employed × 100
Labour Force
However, this is a crude calculation, and it has imperfections, but it is a widely cited
measure of the labour market conditions.
The labour market is “Tight”, when jobs in general are plentiful. It is hard for employers
to fill the vacancies and most of those who are unemployed will find work easily.
When the labour market is Tight, the unemployment rate is low.
The labour market is Loose when the workers are abundant and jobs are relatively easy
for employers to fill. In this case, the unemployment rate is high.
1.2.6: Earnings of Labour

The interaction between buyers and sellers in the labour market save both to allocate and set
prices for various kinds of labour. Prices act as incentives in the allocation of labour. From the
workers point of view, the price of labour is important in determining the income and the
purchasing power for goods and services.
 Wage rate: Price of labour per working hour or per unit.
 Nominal wage: This is what workers are paid in current kwacha. Nominal wages are useful in
comparing the pay of various workers at a given time.
 Real wages: This is nominal wage divided by some measure of prices. Real wages suggest how
much can be purchased with workers’ nominal wages.
 Calculations of real wages are useful in comparing purchasing power of workers’ earnings over a
period when both nominal wages and product prices are changing. Thus, you are accounting for
price inflation.
 Real wage= Nominal wage X 100.
C. P. I
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 C.P.I is calculated over a basket of commodities.
Real wages looks at purchasing power.
1.2.7: Wages, Earnings, Compensation, and Income
The term wage is often applied to workers who are paid on salary basis e.g.
monthly basis rather than hourly.
Wage rate x units of time worked will give you Earnings or Wages.
If you add earnings to employees’ benefits (in kind or deferred payments), you
get total compensation.
Total compensation add unearned income (e.g. interest, dividends, or
government transfer payments such as welfare payments) you get the income.