Labour Demand in Ghana

Lecture 4

Labour Demand in Ghana

• Labour demand is technically different from

employment.

• Employment is the outcome of demand and supply of

labour.

Key among the determinants of labour demand is the

wage-rental ratio.

Different approaches exist in measuring labour demand.

Analysis of job vacancies has become more popular (ie

limited to the formal sector, particularly skilled labour).

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Trade-off between employment and hours of

work

Two types of non-wage labour costs

• Hiring and training cost

• Employee benefits

• Training costs include cost of paying trainers,

organising the training, stationary etc. Three types of

costs are incurred by the firm in training.

1. Explicit monetary cost: cost of organising the training

2. Implicit or opportunity cost of using capital equipment

and experienced employees to train

3. Implicit or opportunity cost of trainee time.

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Trade-off between employment and hours of work

• Firms have two main strategies in engaging new employees

1. High-wage strategy: used to attract high quality employees at relatively no cost of training. Also reduces labour turnover.

2. Low-wage strategy: high training cost and high labour turnover

Employee benefits

These include legally required (social security contribution) and privately provided benefits (holiday pay, vacation and sick leave, private health insurance, private pensions etc).

Most of these benefits are quasi-fixed in nature.

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Employment – hours trade-off

• If inputs are held constant, firms can produce a given

level of output with various combinations of number of

employees hired (M) and number of hours worked per

week (H).

• In the short run, output depends on labour which

consist of number of workers (M) and number of hours

worked (H)

• Q = f(M, H)

• dQ/dM > 0 or MPm > 0

• dQ/dH > 0 or MPh > 0

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Employment – hours trade-off • With diminishing marginal productivity or returns, how

does the firm determine optimal employment/hours

combination.

• MC of hiring an additional (MCm) depend on quasi-fixed

labour cost, wages and variable employee benefits.

• MC of increasing average hours worked per week of

existing workforce by one hour (MCh) is the hourly wage

plus variable employee benefit multiplied by the

number of employees.

• Cost minimisation or optimal employment-hours

combination.

• MCm/MPm = MCh/MPh or MCm/MCh = MPm/MPh

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Implications

• Many firms now give preference to overtime rather than

new employment.

• Prevalent use of contract workers

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Labour Supply

Labour is defined as the application of human effort both mental and physical to the production of goods and services.

Three main dimensions;

•Quantity of labour: number of hours an individual is prepared to work. This depends on the kind of sector the individual finds him/herself.

•Quality of labour: This refers to the degree of skills applied to a job where skills may be acquired through education or on-the-job training. At the national level, the quality level of labour is judged by the average educational attainment of the population.

•Intensity of labour: This refers to the degree of effort that is applied to the job. This is usually very difficult to measure so the quality of labour is mostly used.

Labour Supply (cont.)

•Labour supply is the number of hours or days

individuals in the labour force are prepared to work given

the prevailing wage rate.

At its most basic, the supply of labour is determined by

the following:

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Determinant of Labour Force

• Population growth – A faster growing population will lead to a larger

labour force. All things being equal.

• Regional and gender distribution of population – In Ghana women generally have over the years had a lower rate of labour force participation. Hence in a situation where women dominate the population, the labour force will be low.

• The age structure - When a greater percentage of the population falls within the dependency bracket (below 15 and above 60), the size of the labour force will be small.

• The fertility rate -The higher the fertility rate, the higher the labour force as compared to a county where the labour force depends on migration.

• Other factors such as economic, religion and social also influence the taste of work.

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Labour – Leisure Choice Model

• The basic approach to analyzing the labour force participation

and labour supply is the labour leisure choice model.

Assumptions

• It is based on individual utility maximization subject to a budget

constraint. The utility is a function of the amount of consumption

goods and leisure.

• Individuals derive utility from the consumption of goods and

leisure. They must work in order to acquire the ability to

purchase the commodities they want.

• Individuals are free to choose the number of hours they want to

work in a competitive market in which the only constraints are

those imposed by time and the prevailing market wage rate. 11

Labour – Leisure Choice Model

• The opportunity cost of working is leisure forgone and that of

leisure is the wage forgone. The rational individual will work

only when the wage rate is positive

• The decisions of individuals are not affected by the behaviour

of other people, including their own family or household

members. Thus, people work not by compulsion but by

choice.

• Work and leisure are the only possible uses of time, where

leisure is broadly defined as any type of non-market work

including studying or training.

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The indifference curve

• Indifference Curves show all the possible combination of

consumption goods and leisure between which the

individual is indifferent and when consumed by the

individual yields the same level of satisfaction.

• In the basic labour-leisure choice model, the main factors

in the utility function are the goods and leisure enjoyed.

• U = f (C, L)

• Where C = consumption goods and L= leisure

• Uc > 0 and UL > 0. This means the individual derives

positive satisfaction from consuming goods and leisure. 13

The Time - budget constraint

• The worker’s consumption of goods and leisure are constrained by his/her time and income. Thus, the budget constraint is determined by

• Available income (Y) and the price of goods (P)

• The time constraint (T) which is the total time available to the individual (24hrs) in a day.

• Let H be the number of hours the person will allocate to the labour market during the period.

• T = L+ H...................(1)

The individual allocates his time only to leisure and the labour market.

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The Time - budget constraint

• The individuals’ income consists of that from the labour

market with a wage of w and all non labour income (V).

The budget constraint is stated as;

Y= wH+ V..........................(2)

Where wH = earned income and V = unearned income/

non labour income.

From (1) and (2)

Y= w (T-L) +V (3)

Y = (wT+V) –wL (4)

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The Time - budget constraint

• The Worker’s Time-Budget Constraint

• E E

Consumption

wT+V

V

Budget

Line

0 T Hours of

Leisure

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The Time - budget constraint

• The Figure illustrates the budget line with an intercept wT +V

also known as full income and slope –w.

• Point E is called the endowment point. If the individual is

willing to give up one hour of leisure, he can then move up the

budget line and purchase an additional w cedis worth of

goods.

• If the worker eventually gives up all her leisure activities, s/he

will be at the intercept of the budget line and can devote her

full income to the consumption of goods.

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Equilibrium Leisure and Hours of Work

• The individual is in equilibrium when the budget line is

tangential to the indifference curve. The individual therefore

maximises the utility function above subject to the budget

constraint in equation (3). The hours of work function is

derived is as follows:

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Indifference Curves and Budget Constraint

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Reservation Wage

• The reservation wage is the minimum wage necessary

to induce the individual to work. At this wage, the

individual is indifferent between working and not

working. At any wage rate below this, the individual

would not work at all since the opportunity cost of

leisure is too low.

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