Chapter 12 labor and employment

Chapter 12

Labor and Employment

LABOR

refers to the exertion of human effort to acquire an income.

Human effort includes physical and mental exertion.

People use their brawn and muscles to earn a living.

No labor is one hundred physical or mental.

CHARACTERISTICS OF LABOR

1. Labor is perishable. Labor that is wasted is lost forever.This characteristic makes labor incapable of being restored. 2. Labor and the individual are inseparable. A man working for wages cannot separate his physical self from his labor if he wants to enjoy the comforts of another room. 3. Labor supply does not change quickly. The supply of labor increases steadily as population grows.

4. Most employable persons do not like to move. Even if the demand for labor is higher in some places, many people still prefer to remain unemployed. The following reasons are cited:a. They want to stay close to

their families;b. They are not aware of the

demand for their services elsewhere;

c. They lack the required skills;d. They cannot afford the cost of

moving from one place to another.

KINDS OF LABOR

1. Manual Labor – mostly involve the exertion of physical effort specially the use of brawn muscles. Examples: construction workers, dishwashers, farm workers

2. Clerical Labor – considered next higher in order than manual labor. Although most parts of this is done with physical effort, the exertion is less with that of Manual Labor. Very little mental effort is work because the job becomes routine after a while. Examples: Office clerks, Sales clerk

3. Professional Labor – requires a higher degree of intelligence. College degree is a basic requirement. Some even an advance degree. Requires sufficient training and experience. Examples: physicians, engineers, chemists, teachers, nurses, and others.

4. The Labor of Management – Managers of all kinds and types which perform functions. All of them receives high salaries in exchange for their labor. Examples: supervisors, foremen, middle managers, and top managers.

5. The Labor of the Entrepreneur – The entrepreneurs is the one who organizes the business and sees to it that the business becomes stable. He is the one responsible for the success or failure. He is rewarded with profits and penalized with losses as a consequence of decisions.

6. The Labor of Inventors – Very important ingredient of economic development. Without them, the world will be a dull place to live. Inventions like electrical lamp and the motor car are only some of the outputs of scientists which brings progress to the people. The reward of inventors is the exclusive right granted by the state to use their inventions. Most of them derive income by selling the right to another party.

SUPPLY OF LABOR

Suppliers of labor (i.e., the households) spend their time on the following activities: 1. market activity, and 2. nonmarket activity.

- Households spend their time supplying labor to the market

- If households spent time on leisure and nonmarket production activities like education and training

Households make allocation decision on how much time to spend on two activities. Their decision will be based on how they regard returns they get from each. (Table 36)

THE EFFECT OF WAGES ON THE QUANTITY OF LABOR

SUPPLIEDTable 36

Market, Nonmarket activity and returnsActivity Returns

Market Immediate return in the form of income

Nonmarket Goods and services produced in the homeHigher future incomeLeisure

Households will not just supply labor at any wage level. They are only willing to start doing it if a certain wage rate is offered by the market. This rate is call Reservation Wage. Below reservation wage, households will not supply labor.

The quantity of labor supplied by the households is modified by two offsetting effects of higher wage rate: 1. the substitution effect, and 2. the income effect.

Substitution Effect – If there is an increase in wage rates and the feel that the returns they get from doing nonmarket activities are lower, they will tend to switch over some hours for market activity.

Income Effect – When the household decides to spend its money on leisure or nonmarket activity, it reduces the time available for pursuing a market activity. This will result to a reduction of the quantity of labor supplied in the market.

The Backward-Bending Labor Supply Curve –

labor supply tends to increase as the wage rate rises

but when households begin to have sufficient income, labor supply tends to decrease

wage earners reduce the time they spend for work when they receive higher wages. This action bends the labor supply curve backwards, as shown in Figure 50.

Figure 50The Backward-Bending

Labor Supply Curve

Wage Range

Units of Labor

THE DEMAND OF LABOR

It is the total number of man hours (or man days) hired by all firms in the economy. The demand for labor will depend on the real wage rate.Real Wage RateRefers to the purchasing power of

the nominal (or money) wage. The nominal wage rate is the amount in pesos paid to a worker for a unit of work.

Even if the nominal wage rate increases yearly, its real value will be smaller if the inflation rate is higher than the yearly increases in the nominal wage rates. To illustrate, the following example is provided:

The nominal wage rate in the year 2000 was P200 per day and P210 in 2001. If prices of commodities increased by 5% from 200 to 210, the real wage rate remains unchanged if year 2000 was used as base year.

The real wage rate may be determined by using the following formula:

Real Wage Rate = nominal wageindex number of the overall price

level

Thus, if nominal wage is P210 per day and index number is 1.05 (or 1.0 plus inflation rate)

Then,

Real Wage Rate = P210/1.05=200

Labor Demand Curve- When the real wage rate

increases, the quantity demanded for labor increases and vice-versa. (Table 37) & (Figure 51)

1 1.25 1.5 1.75 2 2.250

50

100

150

200

250

300The De-

mand for Labor

Real Wage (1995 pesos per day)

Quantity of Labor Demande

d (Millions of days

per year)A 250 1B 220 1.25C 130 1.5D 160 1.75E 130 2F 100 2.25

Table 36 Figure 51

RealWage Rate (1995 pesos per day)

Labor (Millions of days per year)

PROBLEMS OF LABOR

1.Unemployment and Underemployment

2.Inadequate wages3.Industrial and labor-

management conflict4.Economic Insecurities

Unemployment – occurs when a person who is of working age (at least 15 years old), is willing and able to work but cannot find work.

When underemployment is high, the society pays a high price in the form of the following:1. Lost output and income2. Depreciation of Human Capital3. Increase in Crime4. Loss of Human Dignity

Underemployment – occurs when a person works either part-time or full-time but which in both cases receives very little pay.According to Villegas, underemployment is that the person who holds job below what he is qualified for and below the occupational level he aspires for.Example : A college graduate who works as housemaid

CAUSES OF UNEMPLOYMENTAccording to Tulao, Jr., there a

four general factors which lead to Underemployment

1.Rapid growth of population2.Slow growth of the economy3.Technology used4.Lack of skills

TYPES OF UNEMPLOYMENT

1.Seasonal Unemployment2.Frictional Unemployment3.Structural Unemployment4.Cyclical Unemployment

PROBLEMS OF LABOR




INADEQUATE WAGES

Causes:1.Inflation – rise in the price of

basic commodities and stationary level in wages

2.Lack of skills - 3.Too many dependents -

PROBLEMS OF LABOR




INDUSTRIAL AND LABOR-MANAGEMENT CONFLICT

Strikes and Lockouts that causes physical harm and death to some people when a worker is deprived of wage and the employer to profit.

PROBLEMS OF LABOR




ECONOMIC INSECURITIES

Workers are worried about future conditions like layoffs, dismissals, illnesses, accidents and even death. Then need funds that would take care of their needs incase this will happen. Advanced countries have provided solutions like free medical care and unemployment insurance.

INVESTMENTS IN HUMAN CAPITAL

To attain acceptable levels of employment, efforts are undertaken to improve human capital. This is done in two ways: Education and Training.Education takes place before working, while Training is done when the person is already working.Expected result:Higher output and income

Figure 52

AGE EARNINGS PROFILES OF WORKERS

A

B

C

18 22 26 30 34 38 42 46 50 54 60

With college degree

Without college degree

Earnings (pesos per year)

Age of workers (years)

END