Chapter 3: Population, Participation Rates, and Hours of Work
It is necessary to evaluate or compute the amount of labor organizations. The cumulative supply of labor is influenced by the size of the population, the participating labor force, and the summation of each weekly and annual hour worked. The size of the population describes the total number of employable people in the industry; the participating labor force describes the total number of employed individuals and the summation of the weekly and annual hours worked refers to the sum amount of the amount of hours worked altogether by the participating labor force.
Becker’s model of time allocation is also used to illustrate the participation rates. The model perceives families as creating value- yielding products by merging time and goods. From this perspective, family members distribute their time to participating in the labor market, producing family utilities, and product consumption based on a comparative advantage. That is, the time allocation model rates the participation rate of the family based on the occurrence of these distributions in other families. The participation rate of the labor refers to the actual labor force in terms of the percentage of the employable population.
There has been an increase in the cumulative participation rate from 59% to 66% since after the Second World War. This increase is owing to the increased rate of participation of females, which resultantly offsets the diminishing rates of participation in their male counterparts. Older males constitute a major portion of the declining rates of participation in males. The diminishing rates of participation in older males are a result of: the increasing earnings; the accessibility of private and public annuities; increased access to disability allowances, and; age. These wage profiles indicate a continuous declination in the leisure costs for older employees. The increase in the rate of participation for females has been attributed to: increasing relative earning rates for females; increased labor market work preferences in females; increasing family productivity,; deteriorating birthrates; increased matrimonial instability; increased job accessibility; efforts to sustain family living standards. There is almost an identical rate of participation in African-American and white females. Initially African-American women participation rates exceeded the rates in white women.
There has been a reduction in the participation rate of African-American males compared to white males. Analysts insist that demand influences such as discrimination, poorer academic opportunities, and the geographical inaccessibility of job opportunities are responsible for lower participation rates in African– American. Supply factors such as accessibility of welfare and illegal deeds contribute lower the participation rates of African-American men.
Recurring variations in the rates of participation show the overall influence of the added- worker as well as discouraged- worker properties. The effect of added- worker explains that when the major breadwinner of the family becomes unemployed, the remaining household members become participants to maintain the household. The discouraged-worker factors show that in the course of a recession, newly unemployed individuals become pessimistic regarding the possibility of being reemployed and thus, withdraw from the labor market. Empirical research studies indicate that the discouraged- worker effect is felt more owing to the inverse relationship it creates between the rates of participation and unemployment.
There was a reduction in aggregate work time between 1910– 1940 however, since the post WWII era workweek and work-year have shown stability. The initial declinations are related to the effect’s control over the effect of substitution due to increase in real earning rates. Increase in academic standards and other factors are credited to be responsible for the stability of work time experienced after the Second World War.
Chapter 4: Labor Quality: Investing in Human Capital
Educational expenses and training may be considered human capital if they contribute to the productivity and potential wages of individuals. Investing in education requires both direct and indirect expenses. Benefits appear as prospective incremental income. Two fundamental methods of relating costs and benefits related with investment in human capital are identified. The overall available value applies a discounting procedure to relate the current value of expenses and prospective benefits. For a positive total current value, investing is feasible. The internal return rate refers to the discount rate where the total available investment value is null. Investment is rational if the internal return rate is more than the interest rate. Majority of the experimental studies propose that the return rate on education capitalization has risen from 10% to 15%.
Schooling wage premium (which represents the percentage difference in the income received by graduates of college and high school) has significantly changed over time, with a rapid increase notable in 1979. The variations in the demand and supply graduates may be used to elucidate trends in college wage premium. Considering private education, the human investment decision omits public educational education, includes income after- tax, and excludes all social or external educational benefits. The social viewpoint comprises public grants and external educational benefits as well as income before- tax. The reason for the different levels of human capital investments may be explained using the demand and supply curves for human capital investment. Discrimination, difference in ability, and different levels of available financial resources help clarify the variations in the earnings and education derived by individuals. The financial market offers income for investment in human capital on comparatively disadvantageous terms than for physical capital investment, somewhat justifying some public reduction of investment in human capital.
It is necessary to differentiate between specific and general experiential (job-based) training. Specific training may be used only in the specific company offering training while general training creates the skills which may be used by employees in both firm and industry at large. Considering competitive markets, employees will typically sponsor their general training through a company by receiving lower earnings in the course of the training. Employers sponsor specific employee development. Working towards retaining trained employees, company leaders may share with employees the changes in overall income ensuing the training.
Some shortcomings attributed to the theory of human capital investment include: by not considering consumption as being part of academic expenses rather than capital, experimental research studies play down the return rate on academics; experimental research also fails to consider the fact that jobs are more enjoyable for individuals, thus, cutting down the return rate; the return rate of students will be overstated considering the possibility that the incremental income of graduates result from their greater aptitude; by attribute a segment of incremental returns of graduates on screening, the social return rate will be overestimated.
Chapter 5: The Demand for Labor
The demand for labor and demand for the products offered by an organization are compared in this chapter. The possibility that these variables (demand for labor and demand for products or services) are related to, and influenced by each other is analyzed. The demand for labor is referred to as being a derived demand owing to its dependence on the demand for the production of goods and services offered by a company. The long-term and short-term demand levels of both goods and labor are also explained to be related. This means a higher amount of production will result in a higher need for labor. In some instances, demand for labor will be higher than demand for production however; this is usually a result of forecasted high demand in the long-run.
It is important to measure the amount of productivity of individuals so as to determine their potential capacity. This will help the management of the organization to appropriately delegate the tasks required for the achieving the organizational goals to employees who are capable of performing the tasks. It is always important to note that labor demand also falls under the derived demand category. That is to say the labor demand is influenced by the demand for the services or products which the labor is meant for. An increase in the demand of goods supplied by a particular company means an increase in the demand for labor by that company. Since labor demand is a derived form of labor it means that the rate of any form of labor demand will be influenced by the productivity of labor for the creation of services and the market value attaches to the item.
It is necessary to identify the various inputs that may be used to calculate the total demand rate as related to the required labor. An isoquant is used to indicate the different potential combinations of two inputs usable for the creation of a particular amount of physical productivity. Also, in order to maintain a constant net output with a lower amount of labor, a company must employ a higher amount of workers. This capital is inversely proportional to labor for every output level, indicating a descending isoquant curve. An isocost curve indicates the different combinations of inputs that may be bought by a company with a particular cost. The company’s cost- minimizing arrangement of investments in accomplishing a particular output is located at the “tangency point” in between the isoquant and isocost curves, at the point where marginal technical exchange between capital and labor is equal to the proportion of the input expenses.
Some factors may result in a change in the position of the isocost curve and the tangency point. For instance, if the investments expenses are changed while maintaining the cost of additional resources and maintaining the amount of productivity, a new isocost curve as well as a new point of tangency on the related isoquant curve will emerge. This result in substitution effect that applies less resource that increases in expenses and more resources which had constant prices. Any increment in the expenses of a resource results in an increase in the product’s unit cost. This leads to an output effect which tends to reduce the capital and labor employment rates. A downwardly trending demand curve may be obtained by plotting the income rate – quantity arrangements characteristic to labor and price changes. If the capital and labor are the production substitutes and a firm has less amount of capital, then the company must employ a higher amount of labor in order to sustain a specific rate of production output.
Chapter 6: Wage Determination and the Allocation of Labor
Competition is an important factor affecting the performance of all the companies operating within a particular industry. In a labor market that is highly competitive, the labor demand is a price-modified aggregation of labor demand thorough the independent acting of specific employers. Also, the labor supply is an aggregate of the people’s reactions to different income rests. Through demand and market supply, an equilibrium income rate as well as the rate of employment may be determined.
The vertical distance of the labor supply curve is an indication of the society’s opportunity cost expended in employing the last employee for some particular use (PL). The extra revenue generated is indicated also by the vertical distance of the labor demand curve (MRP) and, perfectly provides competitive industries the general value of the output. The point of demand and supply curves characteristic to the labor market is dependent on the factors influencing each of them. When there is a variation in one or more of the determinants, there is an either rightward or leftward movement in the curves, changing the equilibrium income and employee levels of employment. Individual companies functioning in labor markets which are highly competitive are wage takers. This indicates that the MWC is equal to W (wage rate); that indicates the elastic nature of the labor supply. This company optimizes its income by recruiting the amount of labor at the point when MRP = MWC.
An effective labor distribution takes place at the point the VMPs of one labor category are comparable to various functions; they are also at par with the VMPs labor opportunity cost PL. Markets that offer perfectly competitive ownership result in efficient allocation. By optimizing profits when MRP = MWC, companies also compare VMP and PL owing to MRP being equals to VMP and MWC being equals to PL
The importance of monopoly to the market is also indicated in this chapter. Owing to the influence of monopoly in marketing products, which usually results in marginal income falling faster than good price since there is a continuous increasing employment and output is broadened. Owing to the fact that there is a higher rate of product price P as well as MR, there is a high tendency for under-allocation and recruitment of labor resources related to the perfection case associated with the product market. In the presence of monopoly MWC>SL since the employer must increase its wages in order to attract a wider amount of labor and remunerate all employees on accordingly. Subsequently, fewer workers will be employed and a lower wage (based on the standard) will be provided by the labor MRP. This poor allocation of resources (VMP>PL) will lead to a reduction in the overall economic output value.
A model, referred to as the cobweb system monitors labor supply improvements to labor demand changes and income rates in industries described by long periods of training. In order to achieve the equilibrium income rate, one must experience the trends of oscillating income rate modifications resulting from recurring labor surpluses and shortages.
Chapter 7: Alternative Pay Schemes and Labor Efficiency
Total compensation comprises of the employee wages and fringe benefits. While the employee wages refer to the financial compensations employees receive for the services they offer to the employer, fringe benefits comprise of legally obliged benefits, including Social Security contributions and volunteer benefits, insurance benefits, paid leaves, and private pensions. Approximately 30% of the overall pay received by an employee comprise of fringe benefits making fringe benefits a possible consideration of employee job selection decisions.
The preferences of an employee for wages and fringe benefits may be illustrated using an indifference map as illustrated in figure 1 below. Every indifference curve illustrates the different wage and fringe benefit combinations that result in a specific utility level. The normal profit isoprofit curve of an employer shows that different wage and fringe benefits combinations that result in a normal profit (figure 2). The employee gains an optimum or utility- maximizing wage and fringe benefits combination by choosing wage– fringe combination that aids the employee’s attainment of the highest indifference curve possible.
Numerous factors are used to describe historical improvement of fringe benefits. The identified factors in this chapter include: increased tax advantages; scale economies produced based on their cumulative purchase; the ability of fringe benefits to reduce employee turnover and increase employee motivation to work; the highly significant changes in total pay are a result of from increased income; government policies mandating the application of fringe benefits and the increased significance of fringe benefit involved union contracts over time.
The existing relationship between employees and organizations is similar to agents (employees) and principals (organizations). Organizations work towards reducing the alleged agent-principal problem resulting from agents’ pursuit of their own personal goals instead of the goals and missions of the principals.
As a reaction to this, some principals apply payment methods such as commissions, piece rates, and royalties so that agents are compensated on the basis of their productivity. Employees receiving salaries on an annual basis may be motivated to work for a lower number of hours than they would have worked for where they paid on an hourly basis. One of the major problems likely to result from the relationship between employers (principal) and employees (agents) is the issue of the motivating the employee to actually be focused on optimally working towards organizational goal achievement. The possibility of increases and promotions reduces the common principal–agent problems.
There is a tendency that increased bonuses may provoke increased work efforts, thus leading to increased productivity. However bonuses based on personal performance may further shift employees’ behavior away from the actual collective goals of the company. Team or company based bonuses help resolve this issue but lead to impending free-rider issue in case of a larger team. This means that employees may simply limit their efforts owing to their understanding of the fact that each group member’s contribution is somewhat negligible; thus, making it likely that a lack of this contribution may go unnoticed.
Considering negligible free-rider issues, stock options and profit sharing plans harmonize the firm and employee interests. Current empirical researches indicate positive correlations between profit allotment and corporate productivity. Tournament pay allocates an extraordinarily high compensation to the best performer and is created improve the productivity of all employees working to achieve the peak position. Some researchers consider high CEO pay as being an effective branch of such pay methods. Critics however lay off this impression as being merely created as a justification for the excess pay received CEOs, insisting that the high pay is a result of inappropriate corporate board management of shareholders’ interests. In instances where there is a minimal level of employee supervision, a dependency between the received wage and employee productivity may be observed. The organization may discover that it may increase probability by applying an efficiency wage. A significant result of efficiency wage theories is that there may be continuous unemployment if the labor market stays at equilibrium.
Chapter 8: Chapter 8: The Wage Structure
Hypothetically, if all employees and jobs were identical with all labor markets equally competitive, then employees will move through the different jobs until there was equilibrium in the paid wages in all industries. This is because the employees will no longer base their job decisions on benefits but on personal factors. Based on the results of casual and experimental investigations of the weekly earnings and wage rates a particular sample, it is indicated that different wage structures exist and remain persistent over time. Figure 4 below is an illustration of what will occur if workers had homogenous jobs.
Based on the graph depicted above, assuming the $10 wage in submarket A is above the wage in other submarkets and assuming homogeneity between workers and jobs as well as costless mobility, then the workers will migrate from other submarkets to submarket A where there is a higher pay rate. As a result, there will be reduction in the amount of labor available in other submarkets and a resulting increase in submarket A (from S0-S1). Also, there will be a continuous decrease in submarket A’s equilibrium wage rate and a continuous increase in the other submarkets wage rates until there is an equivalent wage rate (of $8 in this case) in all the submarkets.
There are however different nonwage characteristic of jobs that determine supply decisions in mediums that create compensating wage differences. The nonwage characteristics include the following: occupational risks to injury and death; job status; earnings regularity; fringe benefits; job location; and the possibility of increment. Variations in skill and expertise requirements characteristic to a particular job or position also result in wage variations. In neglecting these characteristics, in order to attract sufficient workers to a particular occupation requiring a notable amount of initial human capital investment, it is necessary for companies to offer workers, wages that are higher than what is being offered to less skilled workers.
The efficiency wage models have been also applied to describe pay variations between and amongst industries. These models forecast that employee wages will increase when observing the employees becomes difficult or increasingly complex. This is because ability of the employer to observe the workers’ performance will enable the identification of workers’ mistakes. However, complexity in worker monitoring will increase the possibility that employers will make mistakes in worker evaluation resulting in high rates of labor turnover and significantly reducing overall organizational productivity. Another significant source of wage differences is the existence of a diversified work force. Particularly, employees have significantly diverse human capital stocks and varying preferences for different nonwage work aspects. Subsequently, the general labor market comprises of various submarkets which also comprise of employees offering negligible competition to other submarkets.
Also presented in this chapter is a review of the hedonic theory of wages. This theory proposes that employees who have varying personal wage preferences compared to nonwage job preferences work towards achieving optimum matches with workers who vary in their costs of offering the non-wage characteristics. Apart from the wide range of implicating features resulting from this model is the fundamental one which indicates that labor markets will experience continuous wage differences, even amongst individuals with similar human capital stocks.
Non-perfect and inexpensive market data is another rationale for the existence of wage disparities within the same market. Expensive, yet imperfect information encourage the creation of various wage rate ranges that are not influenced by other factors, and indicate the rational for the existence of long lasting transitional and lasting wage variations. The continuous variations in the wages of employees operating within the same labor market are further explained by the institutional, sociological and geographical, immobilities.
Chapter 9: Mobility, Migration, and Efficiency
There are various forms of mobility namely: occupational and geographic mobility. Migration decisions may be considered from the perspective of a human capital, where the current value of anticipated returns based on lifetime incomes is matched with the costs of investment into the profession. Some examples of costs of investment include: the forgone income owing to time spent in performing the tasks, the expenses incurred as a result of transportation and the psychic costs resulting from performing delegated tasks. Different factors – such as age, family status, educational achievement, mobility distance, unemployment rates, and wage variations – may drive or motivate migration decisions. The way these factors are related to employee migration decisions vary.
There is an inverse relationship between the age and the migration probability. Also, the employees’ family status also has an effect on the decision to migrate in various ways. Owing to the fact that employees continue to be affected by the conditions of the family, including social-economic conditions, the decisions of their workplace is influenced by the effects the benefits characteristic to this wage system. There is also a positive relationship between the educational attainment of individuals and their mobility as employees with higher educational qualifications are most likely to move from one firm to another until they are satisfied with the benefits they gain from a particular firm based.
Another relationship identified in this chapter is the relationship between mobility and distance. It is indicate that there is a negative relationship between migration decisions and the distance between the present firm where the employee is and the prospective firm. This means that employees will put into consideration the distance of the new firm when making migration decisions. However, this relationship is explained to be less in unemployed individuals who are not less influenced by the distance of the prospective firm and are more likely to move to firms notwithstanding distance.
One other significant relationship identified in this chapter is the relationship between the unemployed migration decision and the unemployment rate characteristic to a particular geographical location. It is indicated that unemployed individuals are less likely to decide to move to areas where there is a high rate of unemployment. This reluctance to move to such areas is indicated to be a result of the considered low possibility of finding jobs in these areas and the understanding the firms will possibly take advantage of high unemployment rates to exploit employees’ services. The possibility that individuals will return to their original destinations after making migration decisions is also analyzed in this chapter through the application of the average lifetime rate. It is estimated that an average of 10-15% of migrated individuals (of course for employment purposes) will return after migrating.
Mobility of labor is explained to have an influence on the allocative effectiveness by mobile labor resources the area where these resources are lower-valued to other areas where their values are highly acknowledged. In the presence of equal competition and costless mobility, employees of a particular will continue to move until there is a similar “value of the marginal product of labor” (VMP) is every comparable employments; this is the point at which labor is considered as being efficiently allocated.
Alongside the positive results, there is a possibility that migration will result in negative environmental dynamics capable of reducing the positive results of migration and if monetary may change the income distribution among different groups and individuals both in the place of origin as well as the target destinations. The importance of wage variations can be seen in the possibility of it resulting in the generation of capital and product flows tending to make wages equal in subsequent times.
The effect of migration decisions on the economy and work standards in the US is illustrated in this chapter as well. Between the 1960s and 1980s, the overall annual immigration to the US increased by 200,000. Even though the illegal migrants to the US do not negatively affect the amount of native employment, they contribute to reducing the wage rates characteristic to some labor markets. The general wage effect of illegal migration is considered to be negligible.
Chapter 10: Labor Unions and Collective Bargaining
Chapter ten presents an analysis of the roles of unions as related to employee working conditions. Unions are partly the result of industrialization that led to a change in the economy from one initially controlled by self- employment to the other where labor is influenced by employee management and earnings.
The demographics of unionism are illustrated in this chapter. It is approximated that 16.1 million employees (roughly one out of every nine employees) are members of a labor union. Industries that produce goods usually account for the highest amount of union members with service producing firms accounting for the least members. With a higher rate in the public sector, most union members are older African– American males. The variations in the cultural/gender characteristics in unionism are majorly a result of the occupational and industrial affiliations characteristic to the demographic group. The strength of labor unions is dependent on the location of the market as it is indicated that labor unions located in heavily urbanized regions are stronger with those in the South exhibit weaker influences. Based on labor movements’ structures, three fundamental union organizational levels may be identified. The American Federation of Labor and Congress of Industrial Organizations (AFL– CIO) is responsible for the formulation and expression of the poetical ideologies of the labor as well as the resolution of jurisdictional differences amongst the national unions. Another federation, The Change to Win, concentrates on arranging disorderly workers. It is the duties of the national unions to discuss collective bargaining treaties and also organize workers. Bargaining is basically the responsibility of the local unions through various available bargaining structures. There has been a continuous decline in unionism in the US. This declination has been attributed to changes in the domestic output structure as well in the demographic systems of labor. It has also been concluded that employers, acknowledging the negative effects of unions of profitability, have increased efforts to discourage employees from joining unions. Others also consider that government schemes and liberal labor relations by firms have usurped numerous organized traditional functions of labor, therefore reducing employees’ perceived needs for becoming union members.
It is assumed by the monopoly union model that the wage rate is set by the union, while the employer determines the amount of union involvement on the basis of its wage rate. This model leads to the settlement on the labor demand curve. This will result in a higher wage rate compared to what may be observed in nonunion workforces. The result of monopoly unionism is neither effective for the firm nor for the union since the employment and wage mix improve one aspect without deteriorating the other. Figure 5 below is an illustration of the monopoly union model.
As depicted in the figure above, point u represents utility maximizing wage the employment rate for union members, with the indifference curve for union, I3* being tangent to DL* (labor demand curve). When the union increases the wage from points W0* to WU1*, then the organization reduces employment rate from Q0 to QU while the union gains total utility (I1 to I3)
Another model, the efficient contracts, considers the bringing between the firm and the union to be related to employment and wage, instead of only the wage rate. Generally, the efficient contract result will lead to reduced wages and increased employment compared to the monopoly union outcome. Figure 6 depicts the efficient contract model.
In order to increase the wage rate of employed workers, unions may work towards achieving any of the following: increasing the labor demand; limiting labor supply, and; aiming for a wage higher than the industry average. To achieve a growth in labor demand, unions make efforts to enhance the demand for a particular product, increase productivity, affect the costs related resources, and increase employee amount. In order to limit the supply of labor supply, unions make efforts to influence the amount of suppliers that are qualified, as well as the amount of alternative wages and non-wage earnings. To influence labor supply, it is necessary for unions to inclusively organize and bargain to get union offices. In another model referred to as the accident strike model, the occurrence of strikes may be attributed to the misperception one party as regards the preparedness of the next party to accept the bargain. Some strike models are described to be dependent on asymmetric data; thus implying that strikes are a result of information variations amongst the leaders of unions and the registered members of the or between the firm and the union.
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