RED SEA University Labor Economics.pptx

RED SEA University Labor Economics.pptx

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  RED SEA UNIVERSITY Course: Labor Economics Abdimalik dahir Abdi
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  LABOR ECONOMICS Labor economicsis the study of the workings of the market for labor, which is primarily concerned with the behavior of employers and employees in response to the general incentives of wages, prices, profits, and aspects of the employment relationship. Labor economics will be conducted on two levels: • Positive economics – “what is” • Normative economics – “what should be.”
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  1.1 THE LABORMARKET  Labor is unique in several ways: • Labor services can only be rented because workers cannot be bought and sold. • Labor services cannot be separated from workers, therefore, the conditions (nonpecuniary factors: environment, risk of injury, personalities of managers, perceptions of fair treatment, and flexibility of work hours) under which such services are rented are often as important as the price. The circumstances under which employers and employees rent labor services clearly constitute a market, e.g. the labor market (placement of people in jobs). • Institutions – want ads and employment agencies facilitate contact between buyers and sellers of services. • Information about price and quality is exchanged in employment applications and interviews. • Contract between both parties spells out: compensation for time, conditions of work, job security, and duration of the job.
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  1.2 LABOR ECONOMICS •Several important things about the assertions of utility maximization and profit maximization:  Employees and employers are both mindful of their scarce resources and are therefore on the lookout for chances to improve their wellbeing.  There is a negative relationship between wages and voluntary turnover by holding other things equal – this relationship is supported by statistical studies or evidence.  The assumptionsof the theory concern individual behavior of employers and employees.
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  2.2 HOW THELABOR MARKET WORKS  Firms must successfully operate in the labor market, the capital market, and the product market if they are to survive  Firms purchase inputs – labor (L) and capital (K) used in the production of goods and services – from the labor market and the capital market, respectively  The study of the labor market begins and ends with an analysis of the demand for and the supply of labor • Employers/Firms demand for labor from different labor markets • Employees/Workers supply their labor services  Remember that the major labor market outcomes are related to: (a) the terms of employment (wages, compensation levels, working conditions) and (b) the levels of employment.
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  1.2 LABOR ECONOMICS PositiveEconomics  Positive economics is a theory of behavior in which people are typically assumed to respond favorably to benefits and negatively to costs, and underlying this theory of behavior are the basic assumptions of scarcity and rationality. Scarcity: demand for labor is greater than the availability of the labor scarcity – and choices must be made. Rationality The basic assumption that people are rational – that means they have an objective, which they pursue in a reasonably consistent. • For persons: the objective is utility maximization. • For firms: the objective is profit maximization. • The assumption of rationality implies a consistency of response to general economic incentives and an adaptability of behavior when those incentives change.
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  The Models andPredictions of Positive Economics Behavioral predictions in economics flow more or less directly from the two fundamental assumptions of scarcity and rationality • Due to scarcity, workers continually make choices such as: look for other jobs, accept overtime, move to another area, or acquire more education • Employers also make choices: level of output, input mix in production Economists assume that the choices and decisions made by employees and employers are guided by their desire to maximize utility or to maximize profit, respectively
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  The Models andPredictions of Positive Economics An Economic Model – To really grasp the assumptions and predictions of economic models with respect to scarcity and rationality, we consider the following examples: • From the employee side of the market, we can assert that being subject to resource scarcity, workers will prefer high-paying jobs to low-paying ones if all other job characteristics are the same in each job – a highlight of the utility maximizing behavior of workers • From the employer side of the market, we can also assert that firms need to make profit to survive, and if they have high turnover, their costs will be higher than otherwise because of the need to hire and train replacements – a highlight of the profit maximizing behavior of firms.
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  Markets and Values Policiesor transactions from which all affected parties gain can be said to be Pareto-improving because they promote Pareto efficiency – unambiguously enhance social welfare and they can be unanimously supported because: • All parties who are affected by the transaction gain. • Some parties gain and no one loses. • Some parties gain and some lose from the transaction, but the gainers fully compensate the losers. Market Failure: Ignorance – People may be ignorant of some important facts and are thus led to make decisions that are not in their self-interest – for example, a smoker who takes a job at an asbestos plant may not know that inhaling asbestos dust and smoking substantially increased the risk of disease. Market Failure: Transactions Barriers – There may be some barriers to the completion of mutually beneficial transactions:
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  Industries and Occupations:Adapting to Change  The labor-market changes occurring in a dynamic economy are sizable: • There are sectoral changes in jobs – some jobs have expanded over the years while some have contracted. • Workers and employers have adapted to these changes through the acquisitions of new skills and technology.
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  Market, Industry, andFirm Demand • The demand for labor can be analyzed on three levels  Firm level – to analyze the demand for labor by a particular firm, we see how an increase in the wage rate of machinists affects their level of employment by a particular aircraft manufacturer.  Industry level – to analyze the effect of this wage increase on the employment of machinists in the entire aircraft industry, we utilize an industry demand curve.  Market – to see how the wage increase affects the entire labor market for machinists in all industries in which they are used, we use a market demand curve.
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  LABOUR MARKET • LabourMarket: - It is the market in which wages and conditions of employment are determined. Remember that in the market system the forces of demand and supply determine commodity prices while in the labourmarket. • Note: Labour services are not homogenous, they are classified based on thequality of skills requirement.
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  Nature of LabourProblem in Developing Economies Or Countries: Nature of Labour Problem in Developing Economies Or Countries: Labour Problem can be defined as the problem of improving the conditions of employment of the wage-earning classes. It encompasses the difficulties faced by wage-earners and employers who began to cut wages for various reasons including increased technology, desire for lower costs or to stay in business at all cost. The wage-earning classes responded with strikes, by unionizing and by committing acts of outright violence.
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  DEVELOPING ECONOMIES HAVELABOUR RELATED PROBLEMS 2. Government is the chief employer of labour. While the employment by the organize private sector is minimal in such economy. 2. Labour force problem is a characteristic of many self- employed artisans who are not organized nor have anything to do with government, government institutions or the organized private sector.
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  DEVELOPING ECONOMIES HAVELABOUR RELATED PROBLEMS 1. Shortage of labour – many developing countries lack skilled labour. The reasons are because majority of the population are not skilled or semi- skilled labour. For that reason they use expertise (foreigner) in productions that need high level skilled manpower. Most people who are working receive low wage payments which are common among employees who have no skills or are semi-skilled. That is those who have little or no education. Labour is abundant for agriculture, while there is less labour for industries, commerce, and services
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  LABOUR PROBLEMS INSOMALIA.  The problem of inflation has serious negative influence in the labour market. Inflation gives rise to the prices of the factors of production. Similarly, it has influence in the commodity price; it leads to low production because of its effect on the factors price. Inflation is most times heightened by low production, money laundering or structural defects which are very peculiar to the Somalian economy
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  LABOUR PROBLEMS INSOMALIA.  Consistent failure of imported ideas or strategies: In the past years most imported ideas, approaches and strategies have failed to work in somalia. Non workability of the ideas is attributed to differences in collective and historical background. Attempt to emulate foreign ideas or policies would end up aggravating the problems already facedin the Somalian labor market rather than solving them.  Violation of Institutional Arrangements: Wages are supposed to be negotiated and not rewarded. Basically, there is always an institutional arrangement for wage determination which could either be by collective bargaining, labor courts. Unfortunately, the institutional arrangements are completely violated and flawed by the state which of course distorts the flow or functioning of the labor market. A very good example is the award of wages to workers by the state.
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  LABOUR PROBLEMS INSOMALIA. 1.The problem of informalization of the economy: It is one of the labour problems faced by Somalia. It has caused labour issues and has affected the demand of labour in the labour market. 2.Mismatch of skills: This is one of the major problems in the Somalia labour market and it is greatly affecting the demand for labour in the market. 3.Geographical mismatch, political and regional interference and regional differences or crisis are some of labour problems in Somalia.
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  LABOUR FORCE PARTICIPATIONRATE: The labor force participation rate is the percentage of working-age persons in an economy who:  Are employed  Are unemployed but looking for a job. The labor force participation rate is the percent of the population ages 15 and older that is economically active. That includes the employed and the unemployed individuals. All people who supply labor for the production of goods and services during a specified period. Typically "working-age persons" in Somalia is defined as people between the ages of 15-60. People in those age groups who are not counted as participating in the labor force are typically students, homemakers, non-civilians, institutionalized people, and persons under the age of 64 who are retired.
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  THE CONCEPT OFUNEMPLOYMENT Unemployment is a phenomenon that occurs when a person who is actively searching for employment is unable to find work. Unemployment is often used as a measure of the health of the economy of a nation. The Bureau of Labor Statistics (BLS) defines unemployment as people who are jobless and have actively looked in the past four weeks. If they don't keep looking, the BLS doesn't count them in the labor force. The most frequent measure of unemployment is the unemployment rate, which is the number of unemployed people divided by the number of people in the labour force. Economists divide unemployment into many different categories.
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  THE CONCEPT OFUNEMPLOYMENT The two broadest categories of unemployment are voluntary and involuntary unemployment. When the unemployment is voluntary it means that a person has left his job willingly in search of other employment. It is involuntary, when a person has been fired or laid off and now must look for another job. Both voluntary and involuntary unemployment are broken down into three major types. Structural, Frictional and Cyclical unemployment.
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  TYPES OF UN-EMPLOYMENT Structuralunemployment comes about through technological advances, when people lose their jobs because their skills are outdated. Structural unemployment is due to changes in demand. This unemployment is cause by changes in the country’s industrial structure through the switching of production from one kind of work to another. Such a change produces unemployment only because of the immobility of factor of production.
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  FEATURES OF STRUCTURALUN-EMPLOYMENT Features of Structural Unemployment: I. It results from a mismatch between skills needed for available jobs and the skills possessed by those seeking job. II. It may occur because of geographical mismatch between the location of job openers and job seekers.
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  FRICTIONAL UN-EMPLOYMENT 2. Frictionalunemployment: Frictional unemployment arises when a person is in-between jobs. After a person leaves a company, it naturally takes time to find another job, making this type of unemployment short-lived. It is also the least problematic from an economic standpoint. This is a type of the unemployment problem in Somalia. The feature of this unemployment involves a short-term unemployment which follows workers strikes, natural disasters, layoff or the conscious action of workers who quit their job that are low paying in search of high paying ones.
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  FRICTIONAL UN-EMPLOYMENT Frictional unemploymentoccurs because not all active job seekers would have found job or accepted employment and not all employers would have filled their job vacancies in this case. Unemployment rate always remains positive for the following reasons; 1. People continually quit their present job to search for new jobs. 2. People enter the labour force to seek work or job for the first time. 3. People re-enter the labour force after periods of absence 4. People move from one job to another within the 30 days
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  DEMAND DEFICIENT ORCYCLICALUNEMPLOYMENT: Cyclical unemployment comes around due to the business cycle itself. Cyclical unemployment rises during recessionary periods and declines during periods of economic growth. It is as a result of decline in the aggregate demand when the aggregate demand for a product fall. For example, if sales are low, which leads to low profit as demand falls, there would be unsold inventories as a result, profits will drop and as a result, workers will be laid off their jobs which will lead to unemployment.
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  CAUSES OF UN-EMPLOYMENT Thereare seven causes of unemployment. Four cause frictional unemployment. That occurs whenever employees leave their job to find a better one. There are two causes of structural unemployment. That's when workers' skills, or income requirements, no longer match the jobs available. These occur even in a healthy economy. The natural rate of unemployment is between 4.7 percent and 5.8 percent according to the Federal Reserve
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  CAUSES OF UN-EMPLOYMENT 1.One reason for unemployment is voluntary. Some of the unemployed have saved enough money so they can quit unfulfilling jobs. They have the luxury to search until they find just the right opportunity. 1. The second cause is when workers must move for unrelated reasons. They are unemployed until they find a position in the new town. 1. The third reason is when new workers enter the workforce. That includes students who graduate from high school, college, or any higher degree program. They have more skills than if they didn't go to school. That's a big primary reason for youth unemployment. 1. The fourth reason is when job seekers re-enter the workforce. They went through a period in their lives when they stopped looking for work.
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  CAUSES OF UN-EMPLOYMENT 1.The fifth cause is technology advances. That's when computers or robots replace worker tasks. Most of these workers need retraining before they can get a new job in their field. 1. The sixth cause is job outsourcing. That's when a company moves its manufacturing or call centers to another country. Labor costs are cheaper in countries with a lower cost of living. That occurred in many states in 1994. Many manufacturing jobs moved to Mexico from USA. It also occurred once when workers in China and India gained the skills needed by American companies. 1. The seventh reason for unemployment is when there are fewer jobs than applicants. The technical term is demand-deficient unemployment. When it happens during the recession phase of the business cycle, it's called cyclical unemployment.