Labour Economics FOR ALL BUSINESS ACROSS AFRICA 2023.pptx

THIS BOOKLET GIVES A LUCID ILLUSTRATION OF HOW LABOUR CAN BE DEMANDED AND SUPPLIED.

1. Labour Economics MAS 457 Lecturer : JOHN OSEI OBIRI YEBOAH

2. introduction to labour economics

3. introduction to labour economics Labour economics seeks to understand the complex workings of the labour market by studying the dynamics between employers, employees, under the assumption that workers strive to maximize their wellbeing and firms strive to maximize profits. Purpose of the Course to understand how workers and firms make decisions in the labour market To understand how the government can alter the economic opportunities to workers and firms through social policies

4. THE LABOUR MARKET The labour market is where human creativity and sweat is bought and sold. Actors of Labour Market Workers or employees: W orkers try to get the best possible job thus looking for the highest bidder for their services. Firms: Firm continuously search for better means to utilise labour thus looking to pay the lowest price in the form of wages and salaries. Government: Government set ground rules to regulate transactions in the labour market and limit the types of economic changes that occur between workers and firms.

5. Basics of the Labor Market Participants are assigned motives: Workers look for the “best” job. Firms look for profits. Government uses regulation to achieve goals of public policy. Minimum wages Occupational safety

6. Three “ Actors ” Workers The most important actor; without workers, there is no “ labor ” . Desire to maximize utility (i.e., to optimize by selecting the best option from available choices). Supplies more time and effort for higher payoffs, causing an upward sloping labor supply curve.

7. Three “ Actors ” Firms Decide who to hire and fire. Motivated to maximize profits. Relationship between price of labor and the number of workers a firm is willing to hire generates the labor demand curve.

8. Three “ Actors ” Government Imposes taxes, regulations. Provides ground rules that guide exchanges made in labor markets.

9. Supply and Demand in the Labor Market Equilibrium 50,000 40,000 30,000 20,000 10,000 30,000 Labor Supply Curve Labor Demand Curve Earnings ($) Employment

10. Workers and the Labour Supply Curve Workers choose whether to work or not, how many hours to work, how much effort to allocate to the job, which skills and abilities to acquire, when to quit a job, which occupations to enter, and whether to join a labour union. Workers will always act in ways that maximize their well-being either individually or through the union. The labour supply curve , therefore, is often upward sloping. The labour supply curve reflects the number of person-hours supplied to the wage that is being provided. The higher the wage that is being provided, the higher the labour supplied.

11. Firms and the Labour Demand Curve Firms have motives to maximize profits. The firm will maximize its profits by making the production decisions - the hiring and firing decisions that best serve the consumers' needs. This means that the demand of firms are derived demand as it is dependent on the demand of consumers. The assumption that firms want to maximize profits implies that firms will prefer to employ numerous employees when labour is cheap but will desist from hiring when labour is costly. The relation between the price of labour and how many workers firms are willing to hire is summarized by the downward-sloping labour demand curve.

12. The Government The government produces goods and services, including roads and national defence. The government collects taxes, and that alters economic behaviour. The government regulates economic activities for a number of reasons, including workplace safety, who can work and consumer protection.

13. Normative vs. Positive Economics Normative economics Addresses “values” Focus on “ what should be ” Requires judgments about economic fairness Positive economics Addresses the facts and cause and effect Focus on “ what is ” and testing of economic theories Questions answered with the tools of economics

14. Normative Economics The normative economics answer questions on “what should be” . Answers to this type of economics involves individual’s value judgments which leads to different views irrespective of the theories or facts. Eg . D rugs (narcotics) lead to a total revenue of $20 million each month in G hana. It also cost Ghana $12 million dollars to effectively deal with the narcotics trade in Ghana. The question is should the Government stop the trade and lose $32 million a month or decide not to act so that the total gain is now $32 million.

15. The Role of Positive Economics in Labour Economics   Positive economics is about descriptive, factual statements about the world. It uses scientific principles to arrive at objective, testable conclusions. It attempts to describe how the economy operates using the scientific method. It usually addresses question on “what is”

16. Fundamental concepts of positive economics Scarcity: Economists assume that resources are scarce relative to society's wants and needs. Scarcity is a basic economic problem that arises because people have unlimited wants but resources are limited. The scarce resources have alternative uses hence prudent economic decisions for efficient allocation of resources. Due to scarcity, individuals make rational choices based on their selfish interest. These choices are made despite the constraints on information and time.

17. MARKET FAILURES

18. Market Failure and its Inability to Achieve Pareto Efficiency in Labour Markets    A market failure is a situation where free markets fail to allocate resources efficiently. Pareto efficiency or Pareto optimality ( Vilfredo Pareto) T he allocation (or re-allocation) of goods, either input or output goods, such that more of something (utility or output) can be produced without producing less of something else – pareto improvement When no further pareto improvements can be made, the allocation of resources is said to be pareto efficient. That is there is efficiency in consumption. This efficiency is reached when; Firms produce at the lowest cost per unit possible ( productive efficiency ) The economy's resources are allocated between firms and industries in the most efficient way ( allocative efficiency ). NB: This is better explained with the production possibility frontier (PPF)

19. The Production Possibility Frontier (PPF)

20. Opportunity Cost Opportunity cost is the loss of other alternatives when one alternative is chosen. Thus it is the cost of the forgone alternative as a result of choosing a particular option. Nobel Laureate Milton Friedman was fond of saying, “There is no such thing as a free lunch.” The reason there is no free lunch is that your choice to go on a paid date or perhaps spend your evening whatsapping , tweeting and texting at home was an evening not spent with other friends at a football game.

21. Law of increasing cost The law of increasing cost proposes that an economy running at peak efficiency and fully utilizing its fixed-cost resources will experience a higher opportunity cost with an increase in the quantity produced of a good. The law of increasing costs takes place when society uses more resources to produce any specific good. To maximize profits and reduce inefficiency, business owners and managers try to use all  factors of production  at full capacity. At a certain productivity level, the company achieves maximum efficiency of output with a fixed amount of overhead and expense.

22. Causes of market failure Externalities: An  externality  is a by-product of a production process that affects a third party  externally. It can be negative or positive When a trade (or the goods being traded) imposes substantial costs (negative) on individuals not participating in the trade (e.g. pollution) or alternately, individuals not participating in the trade realize significant benefits from (positive) it, it is referred to as externality.

23. Negative Externality Positive externality

24. Causes of market failure cont’d Imperfect Information Free market trading between individuals will result in Pareto improvements as long as there is perfect information for individuals about the existence of the trade, and what they will be getting from the trade. It is however the case that most economies have imperfect information. Public Good A pure public good is one whose consumption by one person does not reduce its availability for others. When a person consumes a good such as national defence, fire service, bridges, and roads, or a radio broadcast, however, the amount of the good available for consumption by others is not diminished.

25. Causes of market failure cont’d Price distortion In a free market without any externalities, there will not be any distortions in price when the market is in equilibrium where the price equals the marginal cost of the firm. There could be distortions in the market that will cause the marginal cost of production not to be equal to the price being charged consumers. Eg Government intervenes on the prices of goods (of price ceiling, price floors, taxes or subsidies) Equity vs. Efficiency Policymakers are most of the time faced with a trade-off between equity and efficiency. In attempt to make market outcomes more equitable often results in the loss of economic efficiency.

26. Summary Labor economics studies how labor markets work. Models in labor economics typically contain three actors: workers, firms, and governments. A good theory should have realistic assumptions and can be tested with real-world data. The tools of economics are helpful in answering positive questions.

27. LABOUR SUPPLY

28. Learning Objectives Explain the model of labour supply Measure the labour force Explain the effect of change in wage on hours of work Explain the concept of reservation wage Explain labour supply over a lifetime

29. Measuring the Labour Force Employed: a worker must have been at a job with pay for at least 1 hour or working in a family business. Unemployed: an individual either on a temporary layoff from a job or without a job but actively looking for work in the four-week period prior to the reference week. Labour Force: A person participates in the labour force if he or she is either employed or unemployed Let E = persons employed Let U = persons unemployed Let LF = size of the labour force Let P = population The size of the Labour Force is shown as LF=E+U The labour force participation rate (LFPR) LFPR=LF/P × 100 The employment rate (ER) is given as ER=E/P × 100 The Unemployment rate (UR) is given as UR=U/LF

30. The decision to work model of labour (neoclassical model OF LABOUR LEISURE CHOICE) Economists use the neoclassical model of labour – leisure choice to analyse labour supply behaviour. The model also helps to predict how changes in economic conditions or in government policies affect work incentives. The first assumption is that there are two goods, labour and leisure and that individuals seek to maximize their well-being by consuming goods and leisure. people have to earn the money required to buy their desired goods (nice cars, houses etc. Thus the amount of labour determines your consumption of these goods. There is an economic trade off: If we work, we will be able to afford many of these goods and services, but we must give up some of our valuable leisure time (vice versa).

31. Utility and Indifference curves Utility measures the level of satisfaction of consuming goods. The indifference curve (as shown in the diagram) is a graph shows alternative combinations of goods that provide a given level of satisfaction (utility). Assumption: Utility is based on real income (Y), and leisure time (L) . U = f ( C , L ) It is assumed that the same satisfaction is achieved at each point of the indifference curve. Point Z on the outside lies on a higher indifference curve and provides a higher utility level.

32. Properties of the indifference curves Indifference curves are downward sloping We assumed that individuals prefer more of both C and L. It is downward slopping because individuals are willing to give up some income (Y) to receive additional leisure (L) and vice versa. Higher indifference curves indicate higher levels of utility The consumption bundles lying on the indifference curve that yields 40,000 utils are preferred to the bundles lying on the curve that yields 25,000 utils . Indifference curves do not intersect If two indifference curves intersect, it implies that the individual can be on two different indifferent curves at the same time. Indifference curves are convex to the origin The convexity (bowed inward) of indifference curves reflects an additional assumption about the shape of the utility function. It is as a result of the increased opportunity cost.

33. The Budget Constraint It defines all the combinations of goods and services that a consumer can purchase with his given income (at the given current prices) and her time. Utility is maximised at the point of tangency between an indifference curve and the budget constraint i.e. where the indifference curve makes contact at a single point on the budget line.

34. The Effect of a Change in the Wage Rate on Hours of Work A change in the wage rate rotates the budget line around the endowment point E. A wage increase moves the worker from point P to point R, and can either decrease (fig a) or increase (fig b) hours of work. The wage increase also makes leisure more expensive. When the worker earns $20 an hour, she gives up $20 every time she decides to take an hour off. As a result, leisure time is a very expensive commodity for high-wage workers and a relatively cheap commodity for low-wage workers. High-wage workers should then have strong incentives to cut back on their consumption of leisure activities. A wage increase thus reduces the demand for leisure and increases hours of work. A high-wage worker wants to enjoy the rewards of her high income, and hence would like to consume more leisure. The same worker, however, finds that leisure is very expensive and that she simply cannot afford to take time off from work.

35. Decomposing the Impact of a Wage Change into Income and Substitution Effects An increase in the wage rate generates both income and substitution effects. In the case of income effect, as the wage rate of an individual increases, her real income rises and she is able to consume more of all normal goods. If leisure is a normal good, the individual will increase her consumption of leisure leading to a decrease in the hours of work. The income effect isolates the change in the consumption bundle induced by the additional income generated by the wage increase (movement from point P to R in the fig below)

36. Cont. The second-stage move from Q to R is called the substitution effect . The substitution effect is the opportunity cost of forgoing leisure time as wage rate increases. It illustrates what happens to the worker's consumption bundle as the wage increases, holding utility constant. The substitution effect implies that an increase in the wage rate, holding real income constant, increases hours of work.

37. Cont.

38. The Reservation Wage The definition of the reservation wage implies that the person will not work at all if the market wage is less than the reservation wage; and the person will enter the labour market if the market wage exceeds the reservation wage. Therefore, the decision to work is influenced by how the employers are able to meet a person’s reservation wage. It gives the minimum increase in income that would make a person indifferent between remaining at the endowment point E and working that first hour. At a low wage ( W low ), the person is better off not working. At a high wage ( W high ), she is better off working. The reservation wage is given by the slope of the indifference curve at the endowment point.

39. THE LABOUR SUPPLY CURVE The predicted relation between hours of work and the wage rate is called the labour supply curve. The labour supply curve traces out the relationship between the wage rate and hours of work. The diagram on the left shows the number of alternative wage levels whilst the right one shows the relationship between the wage rate and optimal hours worked

40. Evidence suggests that there is a predictable path in a workers’ age-earnings profile (i.e. the worker's wages over her life cycle): wages tend to be low when the worker is young; they rise as the worker ages, peaking at about age 50; and the wage rate tends to remain stable or decline slightly after age 50, all things being equal. For a young worker who expects his income to increase at the late thirties will opt for more pleasure in his early years and then more hours when leisure becomes more expensive. NB: In all the wage model implies that over the life cycle of a worker, the hours of work move with the wage rate. Labour Supply over the Life Cycle

41. Labour Supply with Household Production The basic static model of a trade-off between consumption and leisure neglects numerous elements such as household activities The classical household production model predicts that individuals allocate their time between work, housework and leisure based on the shadow price of their time spent in the labour market. The assumptions include: Output that is produced by the household is consumed directly and not sold in the market. The production of household output requires an input of human time of one or more household members and an input/good purchased in the market. Time devoted to household tasks is always unavoidable

42. Cont. T = h M + h D + L Where: h M = paid working time h D = household working time The individual’s consumption pattern will be to choose the quantities C M , C D , h D , h M , and L that maximize his or her utility under the budget constraint

43. summary Summary The reservation wage is the wage that makes a person indifferent between working and not working. A person enters the labour market when the market wage rate exceeds the reservation wage. Utility-maximizing workers allocate their time so that the last money (cedi) spent on leisure activities yields the same utility as the last money (cedi) spent on goods. An increase in wage generates both an income and a substitution effect among persons who work. The income effect reduces hours of work; the substitution effect increases hours of work. The labour supply curve, therefore, is upward sloping if substitution effects dominate and downward sloping if income effects dominate.

44. The end

45. LABOUR DEMAND

46. Learning Objectives After this lesson you should be able to: Understand the demand of labour by firms Explain the factors that affect labour demand Understand the production function and law of diminishing marginal returns and how they affect labour demand Understand how the labour demand works in many markets

47. Introduction Firms hire workers because consumers want to purchase a variety of goods and services. Demand for workers is derived from the wants and desires of consumers. Interest of Economist The interest of economist is to examine how labour demand is affected by; Technological shocks Unionization Business cycle fluctuations Minimum wages

48. Interest of the Human Resource Department lies in the hiring decisions for organisational productivity. Central questions: how many workers are hired and what are they paid? Implications: Socially Politically Hired labour is pay wages and salaries. These are cost to the firm which directly affects the productivity of the firm. The study of labour demand can be looked at from the production function of a firm Intro cont.

49. The Production Function of organisations The production function specifies the technology that the firm uses to produce its goods and services. Technology is the body of know-how, skills, methods and procedures that are applied to create goods and services. Assuming that the firm uses only two factors of production (inputs): the number of employee-hours hired ( E ) and capital ( K ), the output ( q ) of the firm will be: q= f (E,K). Let q= output Let E = total hours Let K = capital

50. assumptions in the production function The number of labour hours is made up of two components: the workers and the average hours worked per worker. By focusing on E and not its components, it is assumed that the firm gets the same output when it hires 20 workers for an eight-hour day as when it hires 40 workers for a four-hour shift. The second assumption is that the production function considers all workers as ‘labour’ without any distinctions.

51. Marginal Product and Average Product The most important concept associated with the production function is the marginal product. The marginal product is a change in output as a result of an additional input Marginal product of labour ( MP E ) is defined as the change in output resulting from hiring an extra worker, holding the quantities of other inputs (including capital) constant. Marginal product of capital (MP K ) is the change in output from hiring one added unit of capital, holding the quantities of other inputs (including labour) constant. It is assumed that the MP E and the MP K are both positive such that an increase in one unit leads to an increase in output (q).

52. From table 3.1, as more workers are hired, the output initially increases at an increasing rate and later at a decreasing rate. Law of Diminishing Returns : Law of diminishing marginal product states that as more and more units of an input (labour) are added to a set amount of an additional input (capital), a stage of total production is achieved ahead of which the marginal product of labour declines.

53. Total, Marginal and the Average Product Curves The total product curve shows the relation between output and the total number of employees employed by a firm (keeping capital fixed). The marginal product curve shows how productive an added worker is. The average product curve shows the output per worker

54. Profit Maximization Objective of the firm is to maximize profits. The profit function is: Profits = TR – TC Where TC= ( wE + rk ) This clearly puts labour in the category of cost. An addition of an extra worker will increase productivity which will in turn increase revenue reflecting in high profits, ceteris paribus but the addition of the extra worker would mean an increase in cost which will reduce the level of profits. As such, before labour is employed in every organisation, it is prudent to check whether this demand would be profitable to the organization.

55. organizations will hire workers when they are certain that the profits gain from the additional workers is high the cost incurring. Economists rely on two measures in examining this issue: the marginal revenue product (MRP) of labour, and The marginal factor cost (MFC) of labour. MRP of Labour is the additional revenue made from an additional use of labour is. MFC of labour is the additional cost (in wages and salaries) associated with the use of an additional unit of labour

56. A profit-maximizing firm will: increase the use of labour if MRP > MFC, and Reduce the use of labour if MRP < MFC. A profit-maximizing firm hires workers up to the point where the wage rate equals the value of marginal product of labour.

57. The demand curve

58. The demand curve for labour is a downward sloping from left to right. This indicates that firms will be willing to demand more labour when wages are low than when wages are high.

59. Labour Demand Elasticity Labour demand elasticity is a measure of the responsiveness of labour demand to a change in factor prices. The Marshall’s Rules of Derived Demand is used as the determinants of elasticity. Substitute Inputs Availability: demand will be more elastic when there are larger number of substitutes. Elasticity of Supply of Substitute Inputs: demand will be more elastic if supply of substitute inputs is also more elastic. Demand for Output’s Elasticity: If demand for output is inelastic, the demand for labor would also be inelastic. The converse is true.

60. TYPES: Own-wage elasticity of labour demand The own-wage elasticity of labour demand is a measure of how sensitive the demand for a particular category of labour to a change in the wage rate in that specific labour market. The mathematical representation is the own-wage elasticity of labour demand will always be negative as a result of the negative slope of labour demand curves. Demand is elastic if n ii >1 (1% increase in wage, more than 1% fall in employment) Inelastic if n ii <1 (1% increase in wage, less than 1% fall in employment) Unit elastic if n ii =1 (1% increase in wage, 1% fall in employment)

61. Cross-wage (cross-price) elasticity of demand The cross-wage elasticity of labour demand (also known more generally as the cross-price elasticity of demand) is a measure of the effect of the change in the price of one factor of production on the demand for another factor of production. n ij = A positive cross-price elasticity of demand between two inputs indicates that the two inputs are gross substitutes A negative cross-price elasticity means the two are gross complements  

62. Union Behaviour and elasticity of labour demand A union’s warfare is normally for the increase in collective wages through the use of collective bargaining The higher the wages above the equilibrium level, the higher the level of unemployed labour. When an industry under consideration faces an inelastic demand for labour, union would then be most effective if it opts for higher wages. If unions are able to lower the firm’s elasticity of demand for labour it would then be of much interest to the unions That is why unions naturally oppose technological advances that increase the potential of substituting between labour and capital.

63. Factors that Shift the Labour Demand Curve The labour demand curve shifts due to certain factors that change the number of labour that organisations want to employ at particular level of the real wage Union The unions provide higher wages and better job benefit. Additionally this brings about a cost. The costs are: Less jobs, an exclusion of workers from the market Minimum wage Minimum wage is a good option for those near the minimum wage area but this does increase unemployment rate and job search.

64. Labour Market Equilibrium

65. Learning objectives After reading this unit you should be able to: Explain equilibrium Explain shortages and Surplus labour Identify the impact of payroll taxes on equilibrium

66. Introduction Equilibrium is reached when the labour demanded by firms is equal to the labour supplied by workers This section focuses on the unique policy applications and how they shift the market equilibrium which ultimately influences the various prospects which are made available to employers and employees at each stage of disequilibrium.

67. Labour Market Equilibrium Labour market equilibrium equates the different needs of employees and employers and ascertains the wage rates and employment levels witnessed in the labour market.

68. Out of equilibrium At various times within the labour market, it is very common to find it out of equilibrium. In this states various situations can occur in the labour market including: Labour surplus Labour shortages

69. Labour Surplus

70. Labour Shortage

71. Competitive Equilibrium in Two Labour Markets Linked by Migration In this scenario we consider employment to be differentiated by regions that is southern (Western, Central, Eastern, Volta and Greater Accra regions) and Northern (Ashanti, Brong Ahafo , Northern, Upper west, and Upper east ). It is assumed that workers in a the north earn higher wages compared to their colleagues in the south . It is also assumed that the workers have the same skills and are perfect substitutes.

72. The end

73. Compensating Wage Differentials

74. Learning Objectives After reading this unit you should be able to: Understand various theories on wage differences Understand the use of wage differentials on employer-employee matching

75. Introduction Compensating wage differential is a theory that seeks to explain why there are differences in the wage level of various jobs. Adam Smith was the first to express this theory in his book Wealth of Nations in 1776. It can be simply expressed as the payment made to employees because of their job being dirty, dangerous, and difficult.

76. Cont’d Compensating wage differentials operates on these basic assumptions: First, we assume that employees maximize utility, not income. Second, we assume they have perfect information about the wages and risk involved with each job. Third, we assume that workers are mobile and can change jobs without cost.

77. Hedonic Wage Theory Hedonic price theory connotes that differences in wage rates may not strictly be based on human capital differences but the working conditions, the structure of the work and working environment. According to this theory, a wage differential or higher pay are given to those whose work are deemed as less desirable as compared with other jobs on offer.

78. Isoprofit curves “ Iso ” is a Greek word which stands for “equal”. This simply explains isoprofit curves as “equal-profit curves”. An isoprofit curve is a graph of all combinations of wage rates and levels of risk that result in a given level of economic profits. Isoprofit curves help us understand the relationship between wages and risks that firms face.

79. Assumptions: Isoprofit Curves First, we assume that safety costs money. Second, we assume that firms will earn zero economic profits (along their zero economic profit isoprofit curve) in a long-run equilibrium. Third, we assume that other job characteristics are the same – the only things that varies across jobs are wages and safety.

80. Cont’d

81. Using Compensating Differentials (Employer-employee matching) Employees will always choose a high paying job for every level of risk should all the other job characteristics held constant. It must be noted that people who are more risk averse will accept high paying job while.

82. Cont’d

83. HUMAN CAPITAL INVESTMENT

84. Learning objectives After reading this unit you should be able to: Understand Human Capital Investment as an economic theory Understand the factors that affect Human Capital Investment Understand education as a human capital tool

85. Introduction Human capital can be thought of as a measure of an individual's productive capacity. Under the human capital model, we assume that the level of a person's human capital is proportionate to his earnings. An individual can increase his or her human capital by investments in: education, training. Mathur (1999) defines Human Capital as the accumulated stock of skills and talents, which manifest itself in the educated and skilled workforce in a region.

86. THE CONCEPT OF ‘HUMAN CAPITAL There are three main aspects of human capital, namely early ability (skills you had before training: whether acquired or innate); qualifications and knowledge acquired through formal education ; and skills, competencies and expertise acquired through training on the job . Human capital investments involve an initial cost which the individual or firm hopes to gain a return on in the future

87. THE BASIC THEORY OF HUMAN CAPITAL General Issues The basic notion behind human capital investment is that workers have a set of marketable skills that need to be improved upon. Improving upon these “skills” can be likened to investing in any other commodity in a firm. The extreme version of this assumption is that, wage differentials is due to the differences in human capital. This explains why a lecturer would be paid more than the teaching assistant. It can be assumed that the skills of a person directly reflects his/her level of education which translate into their level of earnings.

88. Cont’d Here it is useful to mention three: Compensating differentials: Labour market imperfections: Taste-based discrimination:.

89. Factors affecting human capital investments interest rates, the age of the individual, the costs of education, and the wage differential between highly educated and less educated and non-educated workers

90. Education as a tool for human capital development Estimates of the rate of return to education are determined by comparing the expected lifetime earnings streams that an individual could receive under alternative levels of educational attainment. The following are two possible biases that are made: ability bias, selectivity bias

91. Costs of education Three main cost associated with a University education: direct costs such as tuition, books, and supplies, forgone earnings (the opportunity cost of time), and psychic costs.

92. Benefits of education The benefits associated with acquiring a University degree include: higher expected earnings, more pleasant jobs, lower expected unemployment rates, and psychic benefits (This include better working environment, job security less energy consuming work)

93. Returns to individual In the standard economic model, the accumulation of human capital is seen as an investment decision, where the individual gives up some proportion of income during the period of education and training in return for increased future earnings. Individuals will only undergo additional schooling or training if the costs are compensated by sufficiently higher future earnings. In a competitive labour market where wages reflect the marginal product of workers, to be able to command higher earnings, the better-educated or more-trained workers must be sufficiently more productive in employment than their less-skilled counterparts. Note, however, that in the presence of imperfect competition or of barriers to entry into different occupations, wage differentials between the qualified and the unqualified may not necessarily be related to productivity differentials

94. Returns to employer Employers fully or partially fund the training of workers in the hope of gaining a return on this investment in terms of being a more productive, more competitive and consequently being a more profitable firm in the future. In practice, however, it is very difficult to measure this return. We saw in the previous section that training results in workers receiving higher real wages. These real wage increases have to be paid out of productivity gains and therefore should provide a lower bound on the likely size of productivity increases.

95. Cobweb model of educational attainment

96. Cont’d

97. USES OF HUMAN CAPITAL The Becker view The Gardener view The Schultz/Nelson-Phelps view The Bowles-Gintis view The Spence view

98. Labour Mobility

99. Learning objectives After reading this unit you should be able to: Identify Common Labour Mobility Identify some Characteristics and effect of immigration and brain Drain. Identify the effect of labour turnover

100. introduction Mobility in labour can be described as the change in the location of a worker across jobs (Occupational Mobility) or physical space (geographic mobility). This unit reviews the relevant issues on the two sets of labour mobility. This unit reviews the determinants of labour mobility and the means by which the markets improve the allocation of workers to various firms. Mobility in various ways is critical to the development of the country. Recently Ghana had a surge in the number of Chinese immigrants and the emigration of Ghanaian Teachers to countries such as China, Malaysia and the UAE.

101. Cont’d Labour mobility on a whole brings to large extent important economic benefits. Many have argued that workers across regions (usually geographic and occupational mobility) allow the efficient use of labour across jobs and areas. Individual workers also benefits as it improves the economic situations, skills and aspirations.

102. migration Migration is defined as the movement of individuals from a location to the other or between countries. Human migration has been defined as the movement of individuals from a location to the other or between countries with the aim of assuming permanent or semi-permanent residence status. Usually migration can be involuntary (forced migration) or voluntary (moving at will). The magnitude of migration can be between continents (intercontinental), between countries on the same continent (intra-continental), between countries of a specific region (interregional). But the most common form of migration is the rural-urban migration (usually for better conditions of life)

103. Motivation for migration Labour migration occurs everywhere in the world. Some of the major reasons are as follows: The search for favourable Jobs or job opportunities (NB: this is considered the major reason for migration in the world). Moving away from wars or conflicts Moving away from political persecution(Political Asylum) Movement for the purpose of family reunification Moving for educational opportunities Moving away from adverse climate change or to favourable climates

104. Labour migration Labour migration is the movement of labour force from one location to the other. Migration of labour is usually as a result of shift in technology, relocation of plants or operational area of a business and the emergence of new industries. Looking at the world today, and the supply and demand for labour, it is expected that labour migration around the world is expected to rise. The expected movement are likely to come with benefits and losses across countries but it is sad to note that the gains and losses are not evenly spread among countries.

105. The effects of immigration on the wage of natives The immigrant share of low skilled employees has played a major role in reducing the wages of low skilled natives. In examining the effect of migration on wages of native, a simple aggregate production framework is adopted. In the framework, the relative quantities of immigration directly influence the wages. Assuming the demand curve for natives and immigrants in the skilled group is perfectly elastic. The same is also held for low skilled workers. It is also assumed that the total immigrants constitute a percentage of high skilled immigrants and low skilled immigrants. Therefore as the percentage of low skilled immigrants increases, then the wages of low skilled natives reduces. On the other way too, when the percentage of high skilled labourers increases, then the wages of high skilled workers begin to drop.

106. The determinants of worker mobility Personal characteristics of movers Age Education Family factors Other factors

107. Skills, the earnings distribution and international migration This section will look at the extent of international migration. The cost of immigration which is usually high are borne by immigrants. The gains obtained from migration are important in analysing the flows from international labour migration. Usually, earnings obtained from migration are compared with the home country of the immigrants. Some countries around the world have compressed (equal) earnings irrespective of the skills. That is the difference between the earnings of skilled employees and unskilled employees is not that wide.

108. Cont’d This means that the returns obtained from human capital investments is low. That means that in such a country, it is more likely for skilled employees from these countries to move to countries where the returns on human capital investment are high. On the other hand in countries where the wage differential between the skilled and unskilled labourers is high, the unskilled labourers have the motivation to migrate to other countries where there is a perceived higher wage.

109. Cont’d In the case of less developed countries like Ghana where there are unequal wage distributions, it is normal for unskilled labour to always want to travel to developed countries for better earnings.

110. Brian drain The movement of highly skilled and trained professionals from the various under-developed nations to the developed countries is not a new phenomenon but the degree of the situation in Africa presents a threat to the continent and its development. The International Organisation for Migration (IOM) has proclaimed that Africa alone loses one-third (1/3) of skilled personnel and it continues to rise at an alarming rate. The severe consequences of the situation threaten the overall development of the continent.

111. Cont’d Global Competitiveness Report (2013) ranked Rwanda 19th on the international scene but 1st in Africa followed by Gambia, Botswana, South Africa, Nigeria, Liberia and Ghana at 2nd, 3rd, 4th, 5th, 6th and 7th respectively. This means that currently Ghana is the 7th least affected country when it comes to brain drain.

112. Threatening nature of brain drain in africa Previously between 1980’s and late 90’s Ghana lost 60% of the total medical Doctors and it was reported that a total number of 600 to 700 Ghanaians practiced in the USA alone. At that time the number represented 50% of the total number of doctors in Ghana. Around the same period, Zambia’s public sector was only able to retain 50 out of 600 doctors that were trained by the country’s medical schools.

113. Factors that push labour from africa Eroding wages due to inflation as well as low income levels compared to counterparts in other parts of the world Poor living conditions and lack of basic facilities such as housing, transport and health services Low levels of prospects for development coupled with unsatisfactory working conditions and underutilization of the skilled labour Inadequacy of support staff, research facilities, tools and equipment and research funds. Political and social unrest The educational quality is declining Unfair promotions and appointments Restricted freedom

114. Factors that pull labour to Africa Higher income and wages Better standards and conditions of living There are better working conditions such as career opportunities and professional development. Better support staff, research facilities, tools and equipment and research funds. Political and social stability Modern educational system; prestige of ‘foreign training’ Meritocracy, transparency Intellectual freedom

115. Negative impact of brain drain Reduces the already low quantity of skilled manpower available in African countries and needed for their development Reduces numbers of dynamic and innovative people, whether entrepreneurs or academics Increases dependence on foreign technical assistance Slows the transfer of technology and widens the gap between African and industrialized countries Negatively affects the continent’s scientific output Money lost in income tax revenues and in potential contributions to gross domestic product

116. Positive impact of brain drain Contribution of new skills when migrants return A remittance from skilled migrants boosts household welfare Remittances support the balance of payments

117. Other patterns of job mobility Wage effects Effects of employer size Gender differences Cyclical effects Employer location

118. Advantages of mobility Mobility has been generally seen as a good adventure as it promotes quality of employee well-being as well as efficient job match. Job mobility or the threat of mobility is essential for the creation of compensating wage differentials It enables the job matches that best suit changing work environment.

119. Disadvantages of mobility Lower mobility cost serves as a disincentive to invest in specific training on the part of the employer and employee. Mobility cost can also bring about monopsony which is seen as a market failure.

120. Labour Discrimination

121. Learning objectives After this section, you should: under the dimensions of discrimination in the labour market of ghana . recognize the distinction between premarket and market discrimination, and how each of them affects labour -market outcomes. understand the various theories of market discrimination

122. Introduction The previous chapters have sufficiently enumerated how wage variations in a competitive labour market is as a result of disparities in the characteristics of jobs or the skills required on the job. In simple human resource management terms, wage differentials among people should be as a result of the differences in job descriptions and specifications. However and most surprisingly, due to some failures in the labour market, equally skilled workers employed on the same job are often treated unequally by virtue of the workers’ gender, race, place of origin, political opinion, colour, religion or personal characteristics.

123. Cont’d The chapter vividly demonstrates how economists measure discrimination in the labour market, specifically focusing on the commonest forms of discrimination: racial and gender discrimination. It further explains the gender and race-earnings differences backing it with evidence from data. Finally, the chapter provides insights into the impact of government policies in ensuring equal economic well-being of minorities and women across the globe, particularly examining what the Labour Act of Ghana says about this issue. Labour market discrimination is defined as a situation in which persons who offer labour market services and who are equally productive in a physical or material sense are treated unequally in a way that is related to some observable personal characteristics ( Altoji and Blank, 1999).

124. Cont’d As defined by economists, labour-market discrimination is a situation in which equally materially productive persons are treated unequally on the basis of an observable characteristic (Laing, 2011). According to Nobel-prize winning economist Kenneth Arrow, labour market discrimination occurs as a result of placing high value on the personal characteristics of the worker that is unconnected to the worker productivity. When members of a minority are treated less favorably than members of a majority group with the same productive characteristics, it results in discrimination. The minority refers to the group that is subject to discrimination, the majority refers to the group that discriminates (Laing, 2011) .

125. Dimensions of labour discrimination Wage discrimination Gender discrimination Employment discrimination

126. Why discrimination arise in labour markets The 'Taste' Model ( Gary Becker ) Employer ignorance Occupational crowding effects

127. Discrimination and the law The chapter 5 of the 1992 constitution of Ghana Labour Act 651, (2003), Section 14, 63 and 87 Part XVII, section 127

128. Types of discrimination There are two main types of discrimination: mainly Premarket discrimination Market discrimination Earnings discrimination Occupational discrimination The effects of premarket and market discrimination are intertwined, especially since the anticipation of future discrimination affects current actions (Liang, 2011).

129. Theories of Market Discrimination     Neo-Classical Models of Discrimination     Becker's 'Employer Taste' Model     Winners and losers in Becker's 'Employer Taste' Model Statistical Discrimination Other theories of labour discrimination Employee discrimination Customer discrimination

130. unemployment

131. Learning objectives After reading this unit you should be able to: Define unemployment. Understand the various types of unemployment. Explain unemployment effects on the economy. Distinguish between unemployment and underemployment. Understand the labour market and its trends.

132. introduction When an individual do not have a job and is actively searching for work this state is called unemployment. In a society where most people earn a living by working for others, not being able to find a job is a serious problem. Unemployment, the failure or in ability to obtain employment can also be associated with social and economic costs for society as a whole.

133. Types of unemployment STRUCTURAL UNEMPLOYMENT: IT comes about when a labour market is not capable to offer jobs for everyone who wants one because there is a difference between the skills of the unemployed workers and the skills needed for the jobs available. FRICTIONAL UNEMPLOYMENT : It can be defined as the time where a worker is moving from one job to the other or is in a position of looking for a job. CYCLINCAL UNEMPLOYMENT: This type of unemployment is also known as Keynesian unemployment or the deviant demand. It is related to the demand for goods and services (BUSINESS CYCLE).

134. NATURAL RATE OF UNEMPLOYMENT

135. UNDEREMPLOYMENT Underemployment refers to the situation where the employees capabilities is being underutilised in his employment. Examples include holding a part-time job despite desiring full-time work, and over qualification , where the employee has education, experience, or skills beyond the requirements of the job. In this type of employment, the absence of the individual do not or less likely affect the company in which the person finds himself in. IT CAN BE AS A RESULT FROM OVER QUALIFICATION INVOLUNTARY PART-TIME OVERSTAFFING

136. LABOUR UNIONS

137. Introduction This chapter argues that unions, like employees attempting to maximize utility and firms, in their quest to make maximum profits, choose among various alternatives so that the welfare of their members can be maximized. Labour unions are formed to represent labour interest and to ensure that the conditions of service of workers are improved. It has long been seen that unions can arise and thrive only under certain circumstances. This chapter delves into how unions influence the terms of the employment relationship between workers and firms. We will find that the employment contract is influenced in virtually every facet by unions. And these include hours of work, wages, labour turnover, job satisfaction, fringe benefits, worker productivity and the firm's profitability.

138. Unions in the public sector Much of the research on the economic impact of public-sector unions is motivated by the fact that labour demand curves for many essential public-sector workers-such as police officers, fire-fighters, and teachers-tend to be inelastic. Public-sector employees are usually a powerful political force, some politicians might be willing to grant high wage increases to public-sector unions in exchange for votes. Public-sector unions might not generate very high wage increases because governments do face constraints. A wage increase for public-sector workers has to be funded by taxpayers, and higher taxes which will encourage the outmigration of workers.

139. Monopoly unions

140. Union and Labour Market Efficiency

141. Calculating efficiency

142. The firm’s isoprofit curve An isoprofit curve gives the various wage-employment combinations that yield the same level of profits. A profit-maximizing firm is indifferent among the various wage-employment combinations that lie on a single isoprofit curve.

143. The decision to join a union

144. Strikes Is a planned action by workers to shirk their duties when presenting their glitches to management. Workplaceinfo.com defines it as a collective withdrawal of labour by employees. Under such action, employees refuse to perform all work, not just selected duties. Strikes are usually, but not always, organised by a union. The purpose of a strike is to pressure an employer (or other third party) into complying with particular demands or refraining from doing something.   Under the Labour Act 651 2003 strike action may be 'protected action' if undertaken during a bargaining period for an enterprise agreement and other formal procedures have been complied with. Protected action may also cover other types of industrial action as well as strikes. 'Protected action' means that industrial tribunals will not intervene to resolve the dispute as long as it is conducted within the rules of legitimate protected action

145. The Hicks Paradox: Strikes Are Not Pareto Optimal

146. The Optimal Duration of a Strike

147. Union wage effects Four possible reactions: Spillover effects: Suggests that wages are higher for union workers but employment level fall among union workers. Threat effect: . Threat effect is that non-union employees who are profit maximizing firms are forced to increase wage to prevent unionisation. Wait unemployment: waiting for union jobs to open up. Not everyone who loses a job in the union sector will spill over into the non union sector  moderating downward pressure on nonunion wages Shifts in labour demand: unions put effort to increase product demand

148. Threats and Spillover effects Unions have influence not only on wages of union workers but also on the wage of non-union workers. Unions also might have spillover effects on the non-union sector. As workers lose their jobs in union firms (perhaps because firms move up along the demand curve in response to the union-mandated wage increase), the supply of workers in the non-union sector increases and the competitive wage falls. This influence on no-union sectors is through threat effects. Threat effect is that non-union employees who are profit maximizing firms are forced to increase wage to prevent unionisation. The increased wages are also in the hope that non-unionized firms will not lose labour to unionised firms. Threat effect therefore implies that unions have a positive impact on non-union wages.

149. Non-wage effects of unions Unions influence many other aspects of the employment relationship, including the worker's productivity, labour turnover, and job satisfaction. One channel of union influence is through the “exit-voice hypothesis”. Unions act as the established mechanism for informing employers of workers grievances concerning the employment relationship. In the absence of such mechanisms (union), individual may face victimisation or dismissal when they complain. The only way non-union workers can register their grievance is through “exit”: where they vote with their feet by leaving the firm. Thus while unions provide workers with formal channel for voicing out their grievances, non-union workers can only grieve through exiting the organization.

150. Unions, Productivity and Profits Unions provide stability of employment to their workers. This stability or security of employment favourably impacts on the firms’ productivity. As unionized firms increase productivity, this results in increased profits for the firms. This is because firms move up the demand curve as union wage increase. This results in a fall in employment and an increase in the marginal productivity of labour. Also, the union wage increase may “shock” the firm into more diligent hiring (selection) practices. A better screened workforce will typically be more productive. A productive firm is typically a profitable firm.

151. END OF SEMESTER – THANKS FOR YOUR COOPERATION