The Labour Market Demand and Supply

The Indian labor market can be categorized into three sectors

Rural workers , who constitute about 60% of the workforce Organized of the formal sector, that constitutes about 8% of the workforce; and

Urban unorganized or informal structure which represents the

32% of the workforce

Labour market structure

Organized and Unorganized Labor

In India, a major chunk of labor force is employed in the unorganized sector. The unorganized / informal employment consists of causal and contributing family workers; self employed persons in un-organized sector and private households; and other employed in organized and unorganized enterprises that are not eligible either for paid, sick or annual leave or for any social security benefits given by the employer. About 7 % of the total work force is employed in the formal or organized sector (all public sector establishments and all nonagricultural establishments in private sector with 10 or more workers) while remaining 93% work in the informal or unorganized sector.

Organized and Unorganized Labor

The largest numbers of informal workers are in agriculture. In fact, 98.84 percent of the employment in agriculture is informal. In the non-agricultural sector, the highest numbers of informal employees are in retail trade, construction, land transport, textiles etc. Thus, the unorganized sector plays a vital role in terms of providing employment opportunity to a large segment of the working force in the country and contributes to the national product significantly. The contribution of the unorganized sector to the net domestic product and its share in the total NDP at current prices has been over 60%. In the matter of savings the share of household sector in the total gross domestic saving mainly unorganized sector is about three fourth. Thus unorganized sector has a crucial role in our economy in terms of employment and its contribution to the National Domestic Product, savings and capital formation.

Demand for labour

Demand for labour is a derived demand Factors of production are not wanted as an end product but rather for what they can produce The number of workers a firm wishes to employ depends mainly on the demand for the output they produce Aggregate (total) demand for labour depends principally on the level of economic activity If the economy is growing and firms are confident that it will continue to grow employment levels will tend to increase
Derived demand - occurs when the demand for a factor of production arises from the demand for the output it produces

Demand for labour

The individual firms demand for labour (in addition to levels of demand) is determined by the following factors The price of labour a rise in wage rates which exceeds any rise in labour productivity will raise unit labour costs and will lead to a contraction in demand for labour Productivity as output per worker per hour increase the more attractive labour becomes The price of other factors of production if capital becomes cheaper firms may seek to substitute some of their workers with machines Supplementary labour costs e.g. if National Insurance contributions increase this will lead to a fall in demand for labour The first will cause a movement along the demand curve The last three will cause a shift in the demand curve

Marginal productivity theory This is the key theory underpinning the demand for labour The theory states that demand for workers depends on their marginal revenue product MRP is the value of the physical addition to output arising from hiring one extra unit of a factor of production Where the marginal cost of taking on an additional unit of labour equals its marginal revenue product the equilibrium quantity of labour employed will be established

Examiners tip exam questions on the demand for labour are very likely to require an understanding of the theory of marginal revenue productivity. However, this needs to be combined with knowledge of labour supply theory to explain different wage rates

Marginal productivity theory

In the short run as a firm takes on more workers output rises at first - because there is division of labour This leads to an increase in marginal product At a certain point the marginal product will start to fall due to diminishing marginal returns The marginal revenue product is calculated
MRP = MP x MR
Marginal product of labour the change in total output arising from hiring one worker

MRP = MP x MR (Marginal Product x Marginal Revenue)

With perfect competition the firm is a price taker so the MR will be equal to the price The firm will be able to sell all of its output at the market price If there is perfect competition in the labour market firms can recruit workers at a constant labour rate

Marginal productivity theory

the table below assumes that there is a constant market price of 5 per unit and a constant wage rate of 100 per worker per week After the employment of the second worker right up until the 9th worker each one adds more revenue than cost After the 9th this is reversed Profit is maximised when 9 people are employed At this point the gap between total revenue and total cost is greatest (1700 - 900 = 800)

Insert table 7.1 P77

Marginal productivity theory

The marginal revenue product of labour curve shown below shows the quantity of labour demanded at each wage rate The MRP of labour curve is the demand curve for labour A firm will demand labour at the point where MRP equals marginal cost (the wage rate) When the wage rate is W1 the firm will thus demand Q1 units of labour If the wage rate rises to W2 the firm will demand Q2 units of labour (less)

Insert figure 7.1 P77

Marginal productivity theory assumptions

All factors of production other than labour are fixed in quantity Workers are homogeneous and have the same level of aptitude for a job The labour market is perfectly competitive There may be a perfectly competitive product market In reality most of these assumptions dont hold but it does not alter the fact that the MRP curve as drawn below does broadly describe what happens in the real world when increasing quantities of labour are added to fixed stock of capital

Insert figure 7.1 P77

The elasticity of demand for labour

The elasticity of demand for labour is a measure of the responsiveness of the quantity demanded of labour to changes in wage rate The formula is % change in quantity of labour demanded % change in wage rate If elasticity of demand were 5 and wage rates increased by 10% the demand for labour would have changed (fallen) by 50% Remember that elasticity is the proportionate change If the change in quantity demanded is higher than the change in wage rate it is elastic If the change in quantity demanded is lower than the change in wage rate it is inelastic

The supply of labour

The labour supply consists of those that are economically active those who are either in work or who are searching for work (unemployed) The labour supply is known as the labour force or the working population Those that are economically inactive are not part of the labour supply

E.g. those that are not old enough to work; Students in full time education; Housewives; Those who have retired early; Prisoners; Disabled The participation rate or activity rate is the percentage of the population of working age that is economically active UK is around 75%

The supply of labour to a particular occupation

The number of people willing and able to work in a particular occupation is influenced by monetary and non-monetary factors Monetary wages/salary, commission, bonus Non-monetary non financial rewards e.g. job satisfaction (see later) The higher the wage rate the more people are likely to want to do the job e.g. a large number of people seek to be a lawyer because of the potential for earning high wages Non-monetary factors Convenience and flexibility long or unsociable hours will deter potential workers. Choosing what hours to work will attract people to that occupation Status people are attracted to high status occupations such as barristers

The supply of labour to a particular occupation

Promotion prospects people may be willing to work for relatively low wages when they start knowing that may be the opportunity for promotion into high paid jobs Working conditions ceteris paribus more workers will be attracted to jobs with good working conditions. You would think the supply for refuse collectors would be low but this if offset by the low level qualifications required Holidays/Leisure time teachers and civil servants Perks and Fringe benefits company cars, expense accounts, private health care etc Job satisfaction a combination of all of the above plus other intangible features such as making a difference, enjoying colleagues company etc

The supply of labour to a particular firm

In addition to the factors influencing the supply of labour to a particular occupation some additional factors influence the supply of labour to particular firms Availability of training high quality and quantity of training will attract workers Location firms in cities (with good transport links) will have a higher supply of labour Level of unemployment when the level of unemployment is low there may be skills shortages making it difficult for firms to fill vacancies Opportunities for overtime overtime is paid at higher rates - this may attract workers

The industry labour supply curve

A change in the wage level in an industry causes a movement along its labour supply curve An industry labour supply curve is generally upward sloping like the diagram below This is even though the labour supply curves of individuals may be backward bending (you will see later) This is because a higher wage is likely to attract new workers into the industry

The elasticity of supply of labour

This measures the responsiveness of the quantity of labour supplied to a change in the real wage rate and will vary from industry to industry The formula is
% change in quantity of labour supplied % change in wage rate

The elasticity depends on The skills and qualifications required firms that require highly qualified workers will find it more difficult to attract workers with wage rises since the supply is low. Elasticity is higher for lower skilled jobs

The elasticity of supply of labour

The length of the training period jobs with long training periods will have low elasticities. Workers may be put off by the time to train and even if they are attracted it will take them a long time to become qualified. Sense of vocation e.g. teachers or nurses the reward is not wholly financial therefore changes in wages may not affect supply significantly Time period in the long run supply of labour tends to be more elastic due to notice periods and training etc

Unemployment
India as a nation is faced with massive problem of unemployment. Unemployment can be defined as a state of worklessness for a man fit and willing to work. It is a condition of involuntary and not voluntary idleness. Some features of unemployment have been identified as follows: The incidence of unemployment is much higher in urban areas than in rural areas. Unemployment rates for women are higher than those for men. The incidence of unemployment among the educated is much higher than the overall unemployment. There is greater unemployment in agricultural sector than in industrial and other major sectors.
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India Unemployment Rate

The unemployment rate in India was last reported at 9.4 percent in 2009/10 fiscal year. From 1983 until 2000, India's Unemployment Rate averaged 7.20 percent reaching an historical high of 8.30 percent in December of 1983 and a

record low of 5.99 percent in December of 1994. The labour

force is defined as the number of people employed plus the number unemployed but seeking work. The nonlabour force

includes those who are not looking for work, those who are
institutionalised and those serving in the military.
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Rising Rate Of Unemployment in India

Financial experts have implemented different measures for bringing stability in the inflationary condition of the country. They have also designed programs for boosting the overall economy of the country. As per the reports, the Indian unemployment rate 2011 has also remained a cause of concern among the people. The latest reports indicate that the unemployment rate of the country is at 9.4 percent this year which is quite high. According to the reports, forty million people are still unemployed in the country and more employment opportunities are required for balancing the condition.
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Types of unemployment
(1) Voluntary unemployment In this type of unemployment a person is out of job of his own desire doesn't work on the prevalent or prescribed wages. Either he wants higher wages or doesn't want to work at all. (2) In voluntary unemployment In this type of situation the person who is unemployed has no say in the matter. It means that a person is separated from remunerative work and devoid of wages although he is capable of earning his wages and is also anxious to earn them.

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In voluntary unemployment
Cyclical unemployment - This is the result of the trade cycle which is a part of the capitalist system. In such a system, there is greater unemployment and when there is depression a large number of people are rendered unemployed. Since such an economic crisis is the result of trade cycle, the unemployment is a part of it. Sudden unemployment - When at the place where workers have been employed there is some change, a large number of persons are unemployed. It all happens in the industries, trades and business where people are employed for a job and suddenly when the job has ended they are asked to go.
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In voluntary unemployment
Unemployment caused by failure of Industries - In many cases, a business a factory or an industry has to close down. There may be various factors responsible for it there may be dispute amongst the partners, the business may give huge loss or the business may not turn out to be useful and so on. Unemployment caused by deterioration in Industry and business - In various industries, trades or business, sometimes, there is deterioration. This deterioration may be due to various factors. In efficiency of the employers, keen competitions less profit etc. are some of the factors responsible for deterioration in the industry and the business.
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In voluntary unemployment
Seasonal unemployment - Certain industries and traders engage workers for a particular season. When the season has ended the workers are rendered unemployed. Sugar industry is an example of this type of seasonal unemployment.

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Reasons for unemployment in India

1. Lack of Self Awareness: People are not clear about their own talents, skills and passion. Hence they try things which don't fit them - imitate and fail. 2. High Risk Aversion: People don't want to fail. Hence they do not try new things. If software is demanded; we find IT Engineers; if Electrical Electronic Sector seems to have a growth we find EEEs. 3. There are lot of people working on one single field and there is over production from one field. Therefore the field gets quickly saturated and will be unable to support additional people. 4. Limited demand for unskilled and semi skilled labour 5. Problems in maintaining the continued employability of labor force 6. Demand for multi skilling 7. Increase in demand for skilled labor on account of technological development and up gradation and changes in the organization of work

 Measures taken to eliminate unemployment in India: 1. Employment planning in India 2. Poverty alleviation and employment generation program