THE LABOUR

MARKET

DESIRED LEARNING OBJECTIVES

In this chapter, we shall learn:How wages are set in a market economy?

What are the salient fundamentals of wage
determination?
How demand and supply of labour in a market
economy determine the wages of workers?
What wage differentials mean?
Why are there vast disparities in wages of
different categories of people.

FUNDAMENTALS OF WAGE
DETERMINATION The General Wage Level
In order to analyse labour earnings, economists
look at the average real wage.
But, what is Average Real Wage?
Quantity of goods and services a worker can
obtain with nominal wages.

Hourly Pay in U.S. Dollars

0

12

16

20

24

28

32

Germany
Switzerland
Denmark
Sweden
To examine
general wage level, we look at the
Japan
factors underlying
the demand for labour.
United States
France
Which factor
Italy displays an overriding impact on
Kingdom
the United
demand
for labour?
Australia
Canada
Yes, it is the
Marginal Productivity.
Korea
Taiwan
Portugal
Source: U.S. Bureau of Labor Statistics

MARGINAL PRODUCTIVITY DIFFERENCES

Holding technology and other inputs constant, there
exists a relationship between the quantity of inputs
and the amount of output.
By the Law of Diminishing Marginal Returns, each
additional unit of labour will add a smaller and
smaller slab of output.
In the Figure 13.2, at 10 units of labour, the
competitively determined wage level is $20/- per unit.

The labor demand curve shifts up and out over time

with :
capital accumulation
technological advancements
and improvements in labor quality.

MARGINAL PRODUCTIVITY DIFFERENCES

Investigate deeper and following questions arise:

What happens to labour productivity if they have
better capital goods to work with?
What happens to labour productivity if they are
better educated and trained for the job?
What happens to labour productivity if they use
advanced technology and innovation at their work
places?
Thus, todays investment in human resources leads
to accumulation of human capital, which is valued
much higher in most of the jobs.

THE SUPPLY OF LABOUR

Labour supply refers to the number of
hours that people desire to work in gainful
activities.
Here, three key factors affect the supply of
labour, such as: Hours per worker.
Labour force Participation.
Immigration.

THE SUPPLY OF LABOURHours Per Worker

How many hours a worker wants to work, will
determine the supply of labour.
Assume that wages rise, and you have option to
either work more or less .
What would be your response?
It will be determined by two effects: Substitution Effect.
Income Effect.
Why higher wages may first increase and then
decrease the quantity of labor supplied?

THE SUPPLY OF LABOUR Participation Rate

Women participation in job market has almost
been a global phenomenon.
Rising wages and favourable working conditions
have contributed towards this trend.
But, there is another aspect of women
participation in work, which has not received
much attention of economists.
And that is the contribution of women in their
own homes, looking after their families, rearing
and educating children, cooking, washing,
dusting, decorating homes, etc.

THE SUPPLY OF LABOUR Immigration

Legal and illegal immigration of workers from
neighbouring countries is another important
source of labour supply.
Pakistan has accommodated millions of people
from Afghanistan, Sri Lanka and Bangladesh in
its job market.
Though most of these refugees and immigrants
take up the low paid jobs/occupations, this
phenomenon affects the supply of labour, and
ultimately the wages.

WAGE DIFFERENTIALS

Wage rates differ enormously everywhere.

A doctor may earn 20 times more than a lifeguard
How can we explain such wage differentials?
Lets consider a Perfectly Competitive Market
If all jobs and people are identical in a perfectly
competitive labour market, the wage rate will be...
Thus, to understand the pervasive wage
differences, we must look at: Differences in jobs.
Differences in people (Labour Quality and Unique
People).