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1.2 Introduction to Labour Economics and Personnel Economics.

1.2 Introduction to Labour Economics and Personnel Economics.

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Published by: Foisal Mahmud Rownak on Aug 01, 2011
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Labour economics can be simply defined as the economic analysis of labour market, whereas, business dictionary
illustrates ‘labour market’ as “(usually) an informal market whereworkers find paying work, employers find willing workers, and where wage rates aredetermined”.
Definition and coverage of Labor Economics:
Labor economics encompasses many of the most important issues in economics. Mostpeople earn most of their income by selling their labor time. So labor economics deals withthe major source of personal income, what determines it, and why it may differ for differentindividuals. It also deals with the allocation of the most important (in value terms) inputinto the production process.From a formal context,
Labor economics is the field of economics, which examinesthe organization, functioning, and outcomes of labor markets; the decisions of prospective and present labor market participants; and the public policies, whichrelate to the employment and payment of labor resources
.Labor economics, as one of the major sub division of economics focuses its attention uponthe economics aspects of the problems, insecurities and institutional developmentassociated with labor.Labor economics involves analyzing the determinants of the various dimensions of laborsupply and demand, which interact to determine wages, employment, and unemployment.There are many dimensions to labor supply, including demographics (the effects of birth anddate rate), immigration and emigration policies (perhaps a brain drain), the labor forceparticipation decision, the hours of work decision (including overtime and moonlighting),education and training (human capital decisions), and the disincentive effects of incomemaintenance and unemployment insurance policies.Labor demand focuses on how firms vary their demand for labor in response to changes inthe wage rate and other costs, including fringe benefits, legislatively imposed costs, and thequasi-fixed costs associated with hiring and training workers.Since labor demand is a derived demand (derived from the demand for the firm's output), itis also influenced by factors such as free trade, global competition, and technologicalchange.Labor market outcomes are also influenced by the type of market structure (the degree of competition), union collective bargaining and various government laws (such as minimumwage laws).In recent time, labor economics has become increasingly empirical, with less emphasis ontheory. Among the areas growing or receiving the greatest attention are changes in thewage structures (including occupational, industrial and regional wage differentials,union/non-union wage differentials, and male/female wage differentials, the issue of sex
Campbell R. McConnell, Stanley L. Brue, David MacPherson (2005), Contemporary Labor Economics
discrimination in the labor market), the economics of education, social interactions andpersonnel economics. The range of topics studied by labor economists today has broadenedfar beyond those of traditional labor economics.
An overview of Labor Economics:
At first, it is valuable to have a brief overview of our field of study. The overview yieldsinsights as to how the subject matter of various issues of labor market relate to eachothers. The most aspects of labor economics can be fitted under the headings of  ‘microeconomics’ and ‘macroeconomics’. As we know, microeconomics is concerned with thedecisions of individual economic units and functioning of specific markets. On the otherhand, macroeconomics is concerned with the economy as a whole or with basic aggregateswhich constitute the economy. Hence, the determination of wage rate and the level of employment in a particular market – carpenters in Sylhet or retail clerk in Dhaka- areclearly microeconomic matters. In contrast, the consideration of the average level of realwages, the aggregate levels of employment and unemployment, and the overall price levelare issues of in macroeconomics. But some of the subject matters sometimes pertain toboth aspects of economics.Labor economics has both microeconomic and macroeconomic dimensions of analysis.Microeconomics focuses upon the determinations of labor supply and demand and the waysin which supply and demand interact to determine wage rates and employment in variouslabor markets. Labor unions, government, and discrimination all affect labor marketsthrough either supply or demand. Labor market determine the wage structure and thepersonal distribution of earnings.
They also generate incentives for labor mobility and migration. Macroeconomics stresses theaggregative aspects of labor markets and , in particular, labor productivity, labor share of national income, the overall level of employment, and the impact of wage upon the pricelevel. The above diagram
shows the relationship among various contents of laboreconomics.
Distinction of labor and scope of labor economics
Labor possess some distinguishable characteristics than those of other goods or services.Labor services are rented, not sold
Suppliers of labor care about the way in which the labor is used
Labor productivity is affected by pay and working conditions
labor supply is affected by Non-monetary aspects (i.e., leisure time)
Distinction of Labor from other Goods and Services-Aspect of Labor Explanations & ExamplesConsequences
1. Labor is a
factorof production
, not afinal product.Unlike most goods whichhouseholds buy, labor is one of thefew goods they sell.-income effects work in different waysfor labor than other goods; “perverse” responses like “backward-bending” labor supply are more likely-the demand for labor is a deriveddemand, from the demand firms facefor their products2. Like capital,labor is a
flow of services
attachedto a
stock of “equipment”.
The “stock” in this case is theworker and the skills he/shepossesses. The “flow” is the rightto use it for a period of time.-the stock must be produced andmaintained: education, training areneeded.-in most cases, delivery of the “flow” requires physical presence: quality of the work environment matters3. Unlike capital, the “stock” cannot bebought and sold.-Slavery is prohibited-For various reasons, people can’tsell “shares” inthemselves, for example tofinance education-borrowing constraints may matter forhuman capital investment (education)-human capital investment is riskierthan physical capital investmentbecause it is
4. Labor is a very
commodity-Workers are differentiated by typeof skill, amount of skill,demographic characteristics.-a wide variety of prices and marketconditions for different labor servicescan coexist. This gives rise to a
distribution of earnings.
5. The quality of laborservices beingsupplied is often
hardto measure
.-workers may simply “shirk” -poor management decisions maynot be apparent for years-compensation and incentive systemsneed to be designed appropriately6. Sometimes thedemanders
 /orsuppliers of laborhave considerable
monopoly power.
-employers’ associations,company towns, other
-unions-search costs, relationship-specificskills and bilateral monopoly.-use monopoly/monopsony and searchtheory to study these markets
Campbell R. McConnell, Stanley L. Brue, David MacPherson (2005),Contemporary Labor Economics

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