Workers

By the end of the lesson you should be able to

- describe factors affecting an individual’s choice of occupation
- Clearly explain reasons for differences in earnings
LABOUR MARKET

• Labourers need wages to satisfy their wants and needs.

Payments for labour:

• Time-rate wage: wage given based on the number of hours the employee has
worked. An overtime rate can be given to workers who have worked extra
number of hours, which will be usually 1.5 times or even twice the normal time
rate.

• Piece-rate wage: wage given based on the number of output produced. The
more output an employee produces, the more wage he earns. This is used in
industries where output can be easily measured and gives employees an
Payments for labour

• Salary: monthly payments made to workers, usually managers, office staff

etc in non-manual jobs (work that is done with electronic devices and uses
mental skills rather than being physically done with the use of hands).

• Performance-related payments: payments given to individual workers or

teams of workers who have performed very well. The commission given to
salespersons for selling to a targeted number of customers comes under
performance-related pay.
 What affects an individual’s choice of occupation?

Wage factors: The wage conditions of a job/firm such as the pay rate, the prospect for
performance-related pay, bonus etc will be considered by the individual before he chooses a job.

Non-wage factors: These will include:

• Hours of work
• Holiday entitlement
• Promotion prospects
• Quality of working environments
• Job security
• Fringe benefits (free medical insurance, company car, price discounts etc)
• Training opportunities
• Distance from work to home
• Pension entitlement
Labour demand

• Labour demand is the demand of labour by firms to produce goods

and services at a given wage rate. This demand is called a ‘derived
demand’, since the level of demand of a product determines that
industry’s demand for labour. That is, the higher the demand for a
product, the more labour producers will demand to increase
supply of the product.
• When the wage increases, the demand for labour contracts, and
vice versa.
Labour supply

• Labour supply is the supply of labour available and ready to work

in a industry at a given wage rate. When the wage rate increases,
the supply of labour extends, and vice versa.

• We also know that as the no.of hours worked increases, the wage
rate also increases. However, when a person gets to a very high
position and his/her wages/salary increases highly, his no. of hours
may decrease, such as that of a CEO. This can be shown in this
diagram, called a backward bending labour supply curve
Backward bending labour supply curve
 Factors that cause a shift in the labour
demand curve:
• Consumer demand for goods and services: The higher the demand of the
product, the higher the demand for labour.
• Productivity of labour: the more productive the labour is, the more the demand
for labour.
• Price and productivity of capital: Capital is a substitute resource for labour. If
the price of capital were to lower and its productivity to rise, firms will demand
more of capital and labour demand will fall- shift to the left.
• Non-wage employment costs: Wages are not the only cost to a firm of employing
workers. Sometimes, employment tax, welfare insurance for each employee etc
will have to be paid. If these costs increase, firms will demand less labour.
 Factors that cause a shift in the labour supply
curve:
• Advantages of an occupation: The different advantages a job can offer to
employees will affect the supply of labour- the people willing to do that job.
Example: If the no. of hours worked in the airline industry increases, the labour
supply there will shift to the left.
• Availability and quality of education and training: if quality training and
education for a particular job, say pilots, is lacking, then the labour supply for it
will be low. When new education and training institutes open, the labour supply
will rise- shift to the right.
• Demographic changes: the size and age structure of the population in an
economy can affect the labour supply. The labour supply curve will shift to the
right when more people come into a country from outside (immigration) and the
birth rate increases (more young people available for work).
Why would a person’s wage rate change
overtime?

• As a beginner, the individual would have a low wage rate

since he/she is new to the job and has no experience.
Overtime, as his/her experience increases and skills
develop, he/she will earn a higher wage rate. If he/she
gets promoted and has more responsibilities, his/her
wage rate will further increase. When he/she nears
retirement age, the wage rate is likely to decrease as
their productivity and skills are likely to weaken.
Why do different jobs have different wages?

• Different abilities and qualifications: when the job requires more skills and
qualifications, it will have a higher wage rate.
• Risk involved in the job: risky jobs such as rescue operation teams will gain a
higher wage rate for the risks they undertake.
• Unsociable hours: people who have night shifts and work at other unsociable
hours are paid more than other workers.
• Lack of information about other jobs and wages: Sometimes people work for
less wage rates simply because they do not know about other jobs with higher
wage rates.
Why do different jobs have different wages?

• Labour immobility: the ease with which workers can move between
different occupations and areas of an economy is called labour mobility. If
labour mobility is high, workers can move to jobs with a higher pay.
Labour immobility causes people to work at a low wage rate because they
can’t move to the jobs with a higher wage.

• Fringe benefits: jobs which offer a lot of fringe benefits have low wages.
But sometimes, the highest-paid jobs are also given a lot of fringe
benefits, to attract skilled labour.
Why do wages differ between people doing
the same job?

• Regional differences in labour demand and supply: for example, if the

demand in an area for accountants is very high, the wage rate for
accountants will be high; whereas, in an area of low demand for
accountants, the wage rate for accountants will be low. Similarly, a high
supply of accountants will cause their wages to be low while a low supply
(scarcity) of accountants will cause their wages to be high. It’s the law of
demand and supply!
• Fringe benefits: some firms which pay a lot of fringe benefits, will pay less
wages, while firms (in the same industry) which pay less fringe benefits will
have higher wages.
• Discrimination: workers doing the same work may be discriminated by
gender, race, religion or age.
Why do wages differ between people doing
the same job?

• Length of service: some firms provide extra pay for workers who have
worked in the firm for a long long time, while other firms may not. There is a
wage differential.
• Local pay agreements: some trade unions may agree a national wage rate for
all their members- therefore all their members (labourers) will get a higher
wage rate than those who do the same job but are not in the trade union.
This depends on the relative bargaining power of the trade union. More on
this in this in the next topic
• Government labour policies: wages will be fairer in an economy where its
government has set a minimum wage policy. The government’s corporate tax
policies can also influence the amount of wage firms will be willing to pay
out.
Other wage differentials:

• Public-private sector pay gap: public sector jobs usually have a high wage
rate. But sometimes public sector wages are lower than that of private
sector’s because low wages can be compensated by the public sector’s high
job security and pension prospects.
• Economic sector: workers in primary activities such as agriculture receive
very low wages in comparison to those in the other sectors because the value
of output they produce is lower. Further still, workers in the manufacturing
sector may earn lesser than those in the services sector. But it comes down
to the nature of the job itself. A computer engineer in the manufacturing
sector does earn more than a waiter at a restaurant after all.
Other wage differentials:

• Skilled and unskilled workers: Skilled workers have a higher pay than unskilled
workers, because they are more productive and efficient and make lesser mistakes.
• Gender pay gap: Men are usually given a higher pay than women. This is because
women tend to go for jobs that don’t require as much skills as that required by
men’s jobs (teaching, nursing, retailing); they take career breaks to raise children,
which will cause less experience and career progress (making way for low wages);
more women work part-time than full-time. Sometimes, even if both men and
women are working equally hard and effectively, discrimination can occur against
women.
• International wage differentials: developed countries usually have a high wage
rates due to high incomes, large supply of skilled workers, high demand for goods
and services etc; while in a less-developed economy, wage rated will be low due to a
large supply unskilled labourers.