Labourers need wages to satisfy their wants and needs.
Payments for labour:
- Time-rate wage: wage given based on the no. of hours the employee has worked. Overtime wages are given to workers who have worked extra no. of hours, which will usually be 1.5 times or even twice the normal time rate.
- Piece-rate wage: wage given based on the amount of output produced. The more output an employee produced, the more wage he/she earns. This is used in industries where output can be easily measured and gives employees an incentive to increase their productivity.
- Salary: monthly payments made to workers, usually managers, office staff etc. usually in non-manual jobs.
- Performance-related payments: payments given to individual workers or teams of workers who have performed very well. Commissions given to salespersons for selling to a targeted no. of customers is a form of performance-related pay.
What affects an individual’s choice of occupation?
- Wage factors: the wage conditions of a job/firm such as the pay rate, the prospect for performance-related payments and bonuses etc. will be considered by the individual before he chooses a job.
- Non-wage factors: This will include:
- hours of work
- holiday entitlements
- promotion prospects
- quality of working environment
- job security
- fringe benefits (free medical insurance, company car, price discounts on company products etc.)
- training opportunities
- distance from home to workplace
- pension entitlement
Labour demand is the number of workers demanded by firms at a given wage rate. Labour demand is called ‘derived demand’, since the level of demand of a product determines that industry’s demand for labour. That is, the higher the demand for a product, the more labour producers will demand to increase supply of the product.
When the wage increases, the demand for labour contracts (and vice versa).
Labour supply is the number of workers available and ready to work in an industry at a given wage rate. When the wage rate increases, the supply of labour extends, and vice versa.
We also know that as the number of hours worked increases, the wage rate also increases. However, when a person get to a very high position and his wages/salary increases highly, the number of hours he/she works may decrease. This can be shown in this diagram, called a backward-bending labour supply curve. CEOs and executive managers at the top of the management tend to have backward-bending labour supply curves.
Just like in a demand and supply curve analysis, labour demand and supply will extend and contract due to changes in the wage rate. Other factors that cause changes in demand and supply of labour will result in a shift in the demand and supply curve of labour.
Factors that cause a shift in the labour demand curve:
- Consumer demand for goods and services: the higher the demand for products, the higher the demand for labour.
- Productivity of labour: the more productive labour is, the more the demand for labour.
- Price and productivity of capital: capital is a substitute resource for labour. If the price of capital were to lower and its productivity to rise, firms will demand more of capital and labour demand will fall (labour demand curve shifts to the left).
- Non-wage employment costs: wages are not the only cost to a firm of employing workers. Sometimes, employment tax, welfare insurance for each employee etc. will have to be paid by the firm. If these costs increase, firms will demand less labour.
Factors that cause a shift in the labour supply curve:
- Advantages of an occupation: the different advantages a job can offer to employees will affect the supply of labour- the people willing to do that job. Example: if the number of working hours in the airline industry increases, the labour supply there will shift to the left.
- Availability and quality of education and training: if quality training and education for a particular job, say pilots, is lacking, then the labour supply for it will be low. When new education and training institutes open, the labour supply will rise (labour supply curve shifts to the right).
- Demographic changes: the size and age structure of the population in an economy can affect the labour supply. The labour supply curve will shift to the right when more people come into a country from outside (immigration) and when the birth rate increases (more young people will be available for work).
Why would a person’s wage rate change overtime?
As a beginner, the individual would have a low wage rate since he/she is new to the job and has no experience. Overtime, as his/her experience increases and skills develop, he/she will earn a higher wage rate. If he/she gets promoted and has more responsibilities, his/her wage rate will further increase. When he/she nears retirement age, the wage rate is likely to decrease as their productivity and skills are likely to weaken.
Why do different jobs have different wages?
- Different abilities and qualifications: when the job requires more skills and qualifications, it will have a higher wage rate.
- Risk involved in the job: risky jobs such as rescue operation teams will gain a higher wage rate for the risks they undertake.
- Unsociable hours: jobs that require night shifts and work at other unsociable hours are paid more.
- Lack of information about other jobs and wages: Sometimes people work for less wage rates simply because they do not know about other jobs with higher wage rates.
- Labour immobility: the ease with which workers can move between different occupations and areas of an economy is called labour mobility. If labour mobility is high, workers can move to jobs with a higher pay. Labour immobility causes people to work at a low wage rate because they don’t have the skills or opportunities to move to jobs with a higher wage.
- Fringe benefits: jobs which offer a lot of fringe benefits have low wages. But sometimes the highest-paid jobs are also given a lot of fringe benefits, to attract skilled labour.
Why do wages differ between people doing the same job?
- Regional differences in labour demand and supply: for example, if the demand in an area for accountants is very high, the wage rate for accountants will be high; whereas, in an area of low demand for accountants, the wage rate for accountants will be low. Similarly, a high supply of accountants will cause their wages to be low, while a low supply (scarcity) of accountants will cause their wages to be high. It’s the law of demand and supply!
- Fringe benefits: some firms which pay a lot of fringe benefits, will pay less wages, while firms (in the same industry) which pay lesser fringe benefits will have higher wages.
- Discrimination: workers doing the same work may be discriminated by gender, race, religion or age.
- Length of service: some firms provide extra pay for workers who have worked in the firm for a long time, while other firms may not.
- Local pay agreements: some trade unions may agree a national wage rate for all their members – therefore all their members (labourers) will get a higher wage rate than those who do the same job but are not in the trade union. This depends on the relative bargaining power of the trade union.
- Government labour policies: wages will be fairer in an economy where the government has set a minimum wage policy. The government’s corporate tax policies can also influence the amount of wage firms will be willing to pay out.
Other wage differentials:
- Public-private sector pay gap: public sector jobs usually have a high wage rate. But sometimes public sector wages are lower than that of the private sector’s because low wages can be compensated by the public sector’s high job security and pension prospects.
- Economic sector: workers in primary activities such as agriculture receive very low wages in comparison to those in the other sectors because the value of output they produce is lower. Further still, workers in the manufacturing sector may earn lesser than those in the services sector. But it comes down to the nature of the job itself. A computer engineer in the manufacturing sector does earn more than a waiter at a restaurant after all.
- Skilled and unskilled workers: Skilled workers have a higher pay than unskilled workers, because they are more productive and efficient and make lesser mistakes.
- Gender pay gap: Men are usually given a higher pay than women. This is because women tend to go for jobs that don’t require as much skill as that is required by men’s jobs (teaching, nursing, retailing); they take career breaks to raise children, which will cause less experience and career progress (making way for low wages); more women work part-time than full-time. Sometimes, even if both men and women are working equally hard and effectively, discrimination can occur against women.
- International wage differentials: developed countries usually have high wage rates due to high incomes, large supply of skilled workers, high demand for goods and services etc; while in a less-developed economy, wage rates will be low due to a large supply unskilled labour.
Division of Labour/Specialisation
Division of labour is the concept of dividing the production process into different stages enabling workers to specialise in specific tasks. This will help increase efficiency and productivity. Division of labour is widely used in modern economies. From the making of iPhones (the designs, processors, screens, batteries, camera lenses, software etc. are made by different people in different parts of the world) to this very website (where notes, mindmaps, illustrations, design etc. are all managed by different people).
Advantages to workers:
- Become skilled: workers can get skilled and experienced in a specific task which will help their future job prospects
- Better future job prospects: because of the skill and training they acquire, workers will, in the future, be able to get better jobs in the same field.
- Saves time and expenses in training
Disadvantages to workers:
- Monotony: doing the same task repetitively might make it boring and lower worker’s morale.
- Margin for errors increases: as the job gets repetitive, there also arises a chance for mistakes.
- Alienation: since they’re confined to just the task they’re doing, workers will feel socially alienated from each other.
- Lower mobility of labour: division of labour can also cause a reduced mobility of labour. Since a worker is only specialised in doing one specific task(s), it will be difficult for him/her to do a different job.
- Increased chance of unemployment: when division of labour is introduced, many excess workers will have to be laid off. Additionally, if one loses the job, it will be harder for him/her to find other jobs that require the same specialisation.
Advantages to firms:
- Increased productivity: when people specialise in particular tasks, the total output will increase.
- Increased quality of products: because workers work on tasks they are best suited for, the quality of the final output will be high.
- Low costs: workers only need to be trained in the tasks they specialise in and not the entire process; and tools and equipment required for a task will only be needed for a few workers who specialise in the task, and not for everybody else.
- Faster: when everyone focuses on a particular task and there is no need for workers to shift from one task to another, the production will speed up
- Efficient movement of goods: raw materials and half-finished goods will easily move around the firm from one task to the next.
- Better selection of workers: since workers are selected to do tasks best suited for them, division of labour will help firms to choose the best set of workers for their operations.
- Aids a streamlined production process: the production process will be smooth and clearly defined, and so the firm can easily adapt to a mass production scale.
- Increased profits: lower costs and increased productivity will help boost profits.
Disadvantages o firms:
- Increased dependency: The production may come to a halt if one or more workers doing a specific task is absent. The production is dependent on all workers being present to do their jobs.
- Danger of overproduction: as division of labour facilitates mass production, the supply of the product may exceed its demand, and cause a problem of excess stocks of finished goods. Firms need to ensure that they’re not producing too much if there is not enough demand for the product in the first place.
Advantages to the economy:
- Better utilisation of human resources in the economy as workers do the job they’re best at, helping the economy achieve its maximum output.
- Establishment of efficient firms and industries, as the higher profits from division of labour will attract entrepreneurs to invest and produce.
- Inventions arise: as workers become skilled in particular areas, they can innovate and invent new methods and products in that field.
Disadvantages to the economy:
- Labour immobility: occupational immobility may arise because workers can only specialise in a specific field.
- Reduces the creative instinct of the labour force in the long-run as they are only able to do a single task repetitively and the previous skills they acquired die out.
- Creates a factory culture, which brings with it the evils of exploitation, poor working conditions, and forced monotony.
Notes submitted by Lintha
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