UNIT 19:

CHANGES IN EARNINGS
LEARNING OBJECTIVES

o Learners should be able to describe likely changes in earnings

over time for an individual.
What factors could make an individual’s earnings
to change?
CHANGES IN EARNINGS

 The main reason for a rise or, less commonly, a fall in earnings between occupations and
sectors is a change in demand and/or supply of labour.
CHANGES IN THE DEMAND FOR LABOUR

 If demand for labour increases, earnings are likely to increase (like shows Fig.1):
 Wage rate may be pushed up
 Bonuses increased
 More overtime may become available (and paid at higher rate)

 If demand for labour decreases, earnings are likely to decrease (like shows Fig.2).
WHAT CAN CAUSE DEMAND FOR LABOUR TO INCREASE?

1. An increase demand for the product:

 Demand for labour it is derived demand. That means, the higher the demand for a good or service, the higher will be the number of workers
needed in the production of such good or service.
E.g.: Increase in air travel

2. A rise in labour productivity

 Higher productivity increases the return from hiring workers. The longer people work the more skilled and productive they tend to become.
 Becoming more skilled increases worker’s chances of being promoted and achieve a higher pay

E.g.: Junior accountants vs Senior Accountants

3. A rise in price of capital

 In some occupations, it is possible to substitute labour for capital in the production process. In this case, if price of capital increase, employers
might find it cheaper to higher more workers than buying more machines.
E.g.: A harbor
CHANGES IN THE SUPPLY FOR LABOUR

 A decrease in the supply of labour for a particular occupation or sector would be expected to raise the wage rate
(like shows Fig. 3).
Changes in Earnings (Continuation)
CHANGES IN THE SUPPLY OF LABOUR

1. A fall in the labour force.

 If in general there are fewer workers in the labour force, it is likely that businesses will find it more difficult to recruit
workers.

2. A rise in the qualifications or length of training required to do the job.

 This would reduce the number of people eligible for the job, since not many individuals would be willing to undertake more
training.
E.g.: Accountants

3. A reduction in the non-wage benefits of a job.

 If, for instance, the working hours or risks involved in doing a job increase, fewer people are likely to be willing to do it.
4. A rise in wage or non-wage benefits in other jobs.
 Such a change would encourage some workers to switch from one occupation to another.
E.g: A teacher quitting in order to become a
EXERCISE

India Air Travel Market

India has one of the fastest growing air travel markets in the world. It started to expand in the mid 1990s when the
monopoly of state run Indian Airlines ended and Jet Airways and Air Sahara were launched. Its rate of expansion
accelerated in 2003 with the founding of Air Deccan, a ‘no-frills’ carrier. In 2005 Spice Jet, Go Air and Kingfisher
Airlines were launched.
This expansion has resulted in an increase in the number of pilots and air cabin crew employed in India.
a. Explain what is likely to have happened to the wages of air cabin crew in India in recent years.
b. Explain two reasons for pilots receiving a higher remuneration than the air cabin crew.
OTHER INFLUENCING FACTORS

1. Changes in union’s bargaining power or willingness to take industrial action.

 The greater willingness of workers to take industrial action, the more employers will find themselves forced to rise wage
rates.
E.g.:

2. Advances in technology.
 In some cases it can put a downward pressure on wage rates by reducing demand for workers.

E.g.: Bakery staff.

 In other cases, however, new technology can increase wages.
CONT…

3. Changes in government policies.

 Government can change wage rate in a number of ways:
 Raising the national minimum wage.
 Improving education.
 This may increase wage of skilled workers, since labour productivity may increase and so the return from hiring workers.

 Changes on immigration policies:

 Making it easier for foreign people to live and work in the country should increase the supply of labour

 The introduction of anti-discrimination laws.

 This may help to increase the career prospects and wages of disadvantages groups.
THE EXTENT TO WHICH EARNINGS CHANGE

 The magnitude of the change in the wage rate due to a change in demand for, or supply of labour is influenced not
only by the size of the change but also by the elasticity of demand for labour and elasticity of supply of labour.
Elasticity of demand for labour
 A measure of responsiveness of demand for labour to a change in the wage rate.

Elasticity of supply of labour

 A measure of the responsiveness of the supply of labour to a change in the wage rate.

 The impact on the wage rate due to a change in demand for, or supply of labour, is much greater in the case where
both demand for and supply of labour are inelastic (Like shows Fig. (a) and Fig. (b)).
MAIN DETERMINANTS OF ELASTICITY OF DEMAND FOR
LABOUR

1. The proportion of labour costs in total costs

 If labour costs form a large proportion of total costs, a change in wages would have a significant impact on costs and hence demand
would be elastic.

2. The ease with which labour can be substituted by capital

 If it is easy to replace workers with machines, demand would again be elastic.

3. The elasticity of demand for the product produced

 The more elastic the demand for a good or service is, the greater the fall in demand for it and hence for workers – making demand for
labour elastic.
Note: Demand for labour is a derived demand.

4. The time period

 Demand for labour tend to be more elastic in the long run, as there is more time for firms to change their methods of production.
MAIN DETERMINANTS OF ELASTICITY OF SUPPLY OF LABOUR

1. The qualification and skills required

 The more qualifications and skills needed, the more inelastic supply will be. Specially in the short run, as it take years to
gain the requisite qualifications and experience.

2. The lengh of training period

 A long period of training may put some individuals off the occupation. There will be a delay before they are ready to join the
working force. Hence, supply is likely to be inelastic.

3. The level of employment

 If most workers are employed already, the supply of labour to any particular occupation is likely to be inelastic.
4. The mobility of labour
 The easier workers find to change jobs or to move from one area to another, the easier it will be for an employer to recruit
more labour by raising the wage rate. Thus, higher mobility makes supply elastic.

5. The degree of vocation

 The stronger the attachment of workers to their jobs, the more inelastic the supply tend to be.

6. The time period

 Supply of labour tends to become more elastic over time. Because workers will have more time to notice wage changes and
gain the needed qualifications.