INTRODUCTION TO LABOUR ECONOMICS & 1.

2 PERSONNEL ECONOMICS
Labour economics can be simply defined as the economic analysis of labour market, where as, business dictionary1 illustrates ‘labour market’ as “(usually) an informal market where workers find paying work, employers find willing workers, and where wage rates are determined”.

Definition and coverage of Labor Economics:
Labor economics encompasses many of the most important issues in economics. Most people earn most of their income by selling their labor time. So labor economics deals with the major source of personal income, what determines it, and why it may differ for different individuals. It also deals with the allocation of the most important (in value terms) input into the production process. From a formal context, Labor economics is the field of economics, which examines the organization, functioning, and outcomes of labor markets; the decisions of prospective and present labor market participants; and the public policies, which relate to the employment and payment of labor resources 2. Labor economics, as one of the major sub division of economics focuses its attention upon the economics aspects of the problems, insecurities and institutional development associated with labor. Labor economics involves analyzing the determinants of the various dimensions of labor supply and demand, which interact to determine wages, employment, and unemployment. There are many dimensions to labor supply, including demographics (the effects of birth and date rate), immigration and emigration policies (perhaps a brain drain), the labor force participation decision, the hours of work decision (including overtime and moonlighting), education and training (human capital decisions), and the disincentive effects of income maintenance and unemployment insurance policies. Labor demand focuses on how firms vary their demand for labor in response to changes in the wage rate and other costs, including fringe benefits, legislatively imposed costs, and the quasi-fixed costs associated with hiring and training workers. Since labor demand is a derived demand (derived from the demand for the firm's output), it is also influenced by factors such as free trade, global competition, and technological change. 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 minimum wage laws). In recent time, labor economics has become increasingly empirical, with less emphasis on theory. Among the areas growing or receiving the greatest attention are changes in the wage structures (including occupational, industrial and regional wage differentials, union/non-union wage differentials, and male/female wage differentials, the issue of sex
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www.businessdictionary.com Campbell R. McConnell, Stanley L. Brue, David MacPherson (2005), Contemporary Labor Economics

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macroeconomics is concerned with the economy as a whole or with basic aggregates which constitute the economy.2 PERSONNEL ECONOMICS discrimination in the labor market). Hence. microeconomics is concerned with the decisions of individual economic units and functioning of specific markets. it is valuable to have a brief overview of our field of study. As we know. The most aspects of labor economics can be fitted under the headings of ‘microeconomics’ and ‘macroeconomics’. The overview yields insights as to how the subject matter of various issues of labor market relate to each others. social interactions and personnel economics. the economics of education.are clearly microeconomic matters. Microeconomics focuses upon the determinations of labor supply and demand and the ways in which supply and demand interact to determine wage rates and employment in various labor markets. the determination of wage rate and the level of employment in a particular market – carpenters in Sylhet or retail clerk in Dhaka. In contrast. and discrimination all affect labor markets through either supply or demand. and the overall price level are issues of in macroeconomics. An overview of Labor Economics: At first. But some of the subject matters sometimes pertain to both aspects of economics. Labor market determine the wage structure and the personal distribution of earnings. the aggregate levels of employment and unemployment.INTRODUCTION TO LABOUR ECONOMICS & 1. government. Labor economics has both microeconomic and macroeconomic dimensions of analysis. On the other hand. 2 . the consideration of the average level of real wages. The range of topics studied by labor economists today has broadened far beyond those of traditional labor economics. Labor unions.

-workers may simply “shirk” -poor management decisions may not be apparent for years -employers’ associations. Sometimes the demanders and/or suppliers of labor have considerable monopoly power. Like capital. The quality of labor services being supplied is often hard to measure. -in most cases. 4. The “flow” is the right to use it for a period of time. relationship-specific skills and bilateral monopoly. Unlike capital.2 PERSONNEL ECONOMICS They also generate incentives for labor mobility and migration. David MacPherson (2005). This gives rise to a distribution of earnings. 6. the overall level of employment. Stanley L..e. labor is a flow of services attached to a stock of “equipment”. labor productivity. Distinction of labor and scope of labor economics Labor possess some distinguishable characteristics than those of other goods or services. and the impact of wage upon the price level. other monopsonists -unions -search costs. for example to finance education -Workers are differentiated by type of skill. labor is one of the few goods they sell. leisure time) Distinction of Labor from other Goods and ServicesAspect of Labor 1. Brue. “perverse” responses like “backward-bending” labor supply are more likely -the demand for labor is a derived demand. delivery of the “flow” requires physical presence: quality of the work environment matters -borrowing constraints may matter for human capital investment (education) -human capital investment is riskier than physical capital investment because it is non-diversifiable -a wide variety of prices and market conditions for different labor services can coexist. Labor is a very heterogeneous commodity 5. in particular. Labor is a factor of production. from the demand firms face for their products -the stock must be produced and maintained: education. Explanations & Examples Unlike most goods which households buy. not a final product. 3 The “stock” in this case is the worker and the skills he/she possesses. demographic characteristics. -compensation and incentive systems need to be designed appropriately -use monopoly/monopsony and search theory to study these markets 2. -Slavery is prohibited -For various reasons. Contemporary Labor Economics 3 . Macroeconomics stresses the aggregative aspects of labor markets and . 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. the “stock” cannot be bought and sold.INTRODUCTION TO LABOUR ECONOMICS & 1. labor share of national income. company towns. amount of skill. Campbell R. Labor services are rented. 3. people can’t sell “shares” in themselves. McConnell. Consequences -income effects work in different ways for labor than other goods. training are needed. The above diagram3 shows the relationship among various contents of labor economics.

for we will make use of the idea that people invest in their own skills. occupation. Labor markets are highly regulated. Much housework and child care labor. We are studying the economics of the labor market. Obviously this is very broadly defined. Introduction to personnel economics Personnel economics (PE) is a relatively new but very active branch of labor economics. comparable worth -government policy has important effects on labor markets All these distinguishable characteristics of labor and enormous importance of labor market create the scope of accommodating the labor related economic discussion into a separate sub-discipline of economics i. and skill.INTRODUCTION TO LABOUR ECONOMICS & 1. In this sense executives of Dhaka Bank and Dutch-Bangla Bank are probably in the same labor market. is performed by family members without pay. but it may have important implications for people’s behavior in markets for paid labor. but bankers and heart surgeons are not really in the same labor market at all. The labor market is one of the most important mechanisms for transmitting the benefits of economic growth to different groups in society. Labor services are distinct from the other major types of inputs. which we will think of as human capital. the exchange of labor is both highly taxed and subsidized -income and payroll taxes -income support programs -workplace safety legislation -immigration policy -industrial relations legislation -affirmative action. Importance of labor economics Traditionally. such as raw materials or capital services. Such work is not paid for in a market. Labor economics is an important subject because unemployment is a problem that affects the public most directly and severely.e. The field has developed many ideas about workforce management and optimal personnel 4 . labor economics. But what are labor services? Labor services are the direct input of human muscle and brainpower into production. because it constitutes an alternative use of a person’s time. labor economics is linked to the central core of economics by the theories of labor market and wage determination. In fact the labor market consists of many markets. So the full employment (or reduced unemployment) is one of the major goal of many modern governments. Most of the grown up population allocate a substantial fraction of their time to the labor market. A labor market tends to be more like a single market to the extent that there is a high degree of mobility within it. and the institutions those facilitate that buying and selling. Labor markets differ in terms of location. and includes many occupations and tasks. But we’ll see that this distinction is not so clear. but what exactly is “the labor market”? We can define it simply as all the buyers and sellers of labor services.2 PERSONNEL ECONOMICS 7. for example. Keep in mind that not all work is bought and sold in labor markets.

organizational structure. Empirical work in this area often uses personnel records from a single firm or collects information on the design of personnel policies across a set of firms. PE. who is generally credited as the primary founder of the field of PE. and decision making. a personnel economist might think about how to design a firm's salary system. or incentives. A leader in this development was Edward Lazear. precisely because the interest is in how to design those policies. As the theoretical ideas advanced. or public policies. retention. individual workers embedded in those markets (not just in a single firm at a point in the career).2 PERSONNEL ECONOMICS policies. The typical objective in PE is to understand the optimal design and effects of personnel policies. Instead of analyzing wage levels for the whole economy. the field is highly empirical.INTRODUCTION TO LABOUR ECONOMICS & 1. Both provided empirically testable predictions and practically implementable prescriptions. signaling. Much of that research is intended to shed light on optimal employment policies for an organization. A broader definition would recognize the strong complementation of PE with the economics of organizations. The first was the adaptation of the economics of information and other ideas from economic theory to applications inside organizations. Personnel economists explore how the tools of sorting. The economics of organizations emphasizes the boundaries of the firm. economists (especially those employed in business schools) began applying the ideas to understand the policies that a firm uses for its internal design and management of personnel. Much of this early work was highly theoretical. with two developments. PE has developed to such an extent that it has become recognized as an 5 . While labor economics tends to focus on labor markets--what happens across firms--PE focuses on what happens within firms. Traditional labor economics focuses on overall labor markets. This focus is one of the primary reasons why the field of PE holds promise as an important tool for research on organizational workforce policies. by contrast. In addition. more often than not takes the perspective of the employer. somewhat separate from labor economics. PE became a strong subfield in its own right. This field has grown greatly in importance in the past 20 years. Economists have studied the effects of various kinds of promotion systems on the incentives for workers to invest in firm-specific human capital (skills that are valuable to the current employer) or general human capital (skills that are valuable to many employers). training. Moreover. Application of economic ideas of sorting can be used to model how to structure a firm's promotion system. the focus gradually evolved to a more practical focus. They have used the idea of signaling to analyze how a firm can improve recruiting quality by structuring the job offer so that workers who believe themselves to be a good fit are more likely to accept the offer. and whether that system enables the firm to meet its personnel objectives of recruitment. they are all of relevance to an executive responsible for setting or overseeing organizational policies. What is PE? A typical definition would describe it as the subfield of labor economics that analyzes the design and effects of personnel policies. PE developed as a subfield of labor economics over the last 20 years. However. while those who do not are more likely to reject the offer. and investments in human capital might be used by a firm to improve the quality of its workforce. These are closely related to personnel policies and involve similar economic tradeoffs. Two excellent examples of his applied theoretical approach are his articles on salaries versus piece rate compensation plans and tournaments.

While public sector organizations have different objectives and constraints than those of private sector organizations.INTRODUCTION TO LABOUR ECONOMICS & 1. The PE approach is complementary to other approaches but brings many new insights to the study of human resources. it does provide a systematic framework for studying many issues using a consisted and tested toolbox. However. This way of thinking does not replace traditional ways of studying organizations. PE holds great promise for contributing to research on organizational workforces. Emphasis has usually been on practical theory that lends itself to empirics. This foundation has enabled PE to develop a relatively comprehensive and rigorous way of thinking about organizational design.2 PERSONNEL ECONOMICS important subfield distinct from labor economics. It is based on the very strong foundation of classical microeconomic theory. This approach is ideal for studying personnel records or similar data from organizations and for helping such organizations figure out more effective methods of managing their workforces. This line of study has many practical applications for how firms structure themselves and manage their workforces. PE has a large group of researchers and has been very successful in theoretical and empirical research. 6 . The focus of PE is generally on the firm's perspective and on the design and effects of personnel policies. most of the trade-offs that they face are largely the same.

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