Labour is a derived demand because the demand for labour is a result of the demand for goods and services.
Economics Essay 2 By Debbie Guo
Mr Millward
Labour is a derived demand because the demand for labour is a result of the demand for goods and services. What consumers are directly demanding are actually goods and services, and labour is necessary to produce these goods and services. There are many factors that determine how much labour a firm or industry will demand at any particular price, and how it responds to changing economic conditions. These include the type of production a firm is involved in, the level of economic activity, the pattern of consumer demand and the productivity of labour.
The type of production refers to the types of goods or services produced in the firm or industry. Some types of production are capital intensive while others are labour intensive. Demand for labour tends to be very low when productions are capital intensive, as labour is not such an important factor of production in these industries. An example is the printing industry, where machines and computers are the main factors of production. In labour intensive types of production, demand for labour is very high since labour is a very important factor of production in these industries. An example of a labour intensive industry would be the clothing industry in Asia, where factories of large clothing companies such as Nike are based. Production of clothes is essentially labour oriented in these companies, and therefore have high demand for labour.
The level of economic activity is important to the demand for labour because it is a very important determinant of goods and services. A firm is more likely to enjoy higher sales and in turn require more employees when economic conditions for the whole economy are buoyant. That is- falling employment levels are associated with higher rates of economic growth and vice versa. In periods of high economic activity, when consumers tend to spend more and there is an increase in demand for goods and services, demand for labour also tends to be high. Alternatively, in a recession, when consumers are saving as opposed to spending, demand for goods and services will fall. As a result, the demand for labour also tends to be low.
The pattern of consumer demand refers to the demand for the type of production a firm is involved in. It directly affects any changes in the pattern of demand for labour, as labour is a derived demand. A change in consumer tastes and preferences for another good or service will lead to a change in the allocation of labour between different industries. If the demand for production of a firm increases, the demand for labour will also increase, as the firm will need more labour to cope with the rising demand.
Labour productivity refers to the amount of output produced by per unit of labour per unit of time. Intense labour productivity can increase the demand for labour, as firms tend to use more labour than capital for production. In industries that are already labour intensive, low productivity can lead to higher demand for labour, and will encourage firms to consider using more capital and less labour in production. Labour productivity ultimately depends on the quality of the workforce, and how efficiently labour can be combined with other factors of production. Investment in technology (capital) can result in the ...
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Labour productivity refers to the amount of output produced by per unit of labour per unit of time. Intense labour productivity can increase the demand for labour, as firms tend to use more labour than capital for production. In industries that are already labour intensive, low productivity can lead to higher demand for labour, and will encourage firms to consider using more capital and less labour in production. Labour productivity ultimately depends on the quality of the workforce, and how efficiently labour can be combined with other factors of production. Investment in technology (capital) can result in the workforce becoming more productive without any improvement in the work patterns or skills of employees. Production and demand for labour will also increase if a firm is experiencing high sales. The level of output of a firm is influenced by many factors, the most important being the general economic conditions, the pattern of consumer demand and the demand for the individual firm's output.
Pay levels, that is- the wage or salary paid to employees for their labour- is an important determinant of the supply of labour for any individual firm or industry. Other factors that affect supply of labour include incentives offered by employers in that industry and the number of people with the necessary skills and experience in the workforce. The wage rates are very important in attracting supply of labour to a particular firm or industry, as the higher the wage rate of a profession, the higher the supply of labour will be to that specific profession. People are more prepared to sacrifice their leisure time and supply their services with regards to how high the wage or salary offered is. Also, professions with strong trade unions or associations, which restrict supply the labour to that industry, tend to have high wage rates. A rise in the wage rates and the improvement of working conditions in other industries would mean a decline of the supply of labour to that firm.
Firms offering employees more flexible working hours, generous holiday leave entitlements and a pleasant working environment are more likely to attract labourers to their industry. The opportunity of travel and experiencing a different culture is offered by some jobs, whilst others provide excellent training opportunities, and jobs in these industries attract a greater supply of labour. The use of a company car and employer sponsored superannuation also influences the willingness of labour one is prepared to supply to a particular firm or industry.
Another important determinant of supply of labour is the number of people with the necessary skills, experience and education required to work in an industry. To acquire these skills, workers have to undertake training over a long period of time, and used up considerable effort. This limits the amount of people qualified for any specific job, and restricts the number of applicants. The more training and difficulty a worker undergoes, the more likely he or she will receive higher wages in the long run.
Government policy decisions or the collective action of those providing labour within an industry also restricts the supply of labour. Even though Commonwealth and State laws are intended to prohibit restrictions on employers hiring non-union labour, trade unions are still exerting pressure on firms and industries to employ only union members. Supply of labour is restricted on the continuation of training and professional conduct in certain occupations, where professional associations such as the Law Society, the Australian Medical Association and the Institute of Engineers of Australia have imposed certain standards.
The interaction of the demand and supply in labour markets in an industry or field is referred to by labour market outcomes. The most important labour market outcome is the wage rate. The wage, when used in the labour market, largely determines the size of a person's income and consequently, the standard of living and well being of that person.
The Interaction of Demand and Supply to Determine Wage Rates
In the above diagram, S represents the supply of labour to a particular firm or industry, D represents the demand for labour in a particular firm or industry and Q and W represent the quantity and levels of pay of the labour respectively. It can be seen from the diagram that a wage rate is established when the supply and demand curves of labour meet. S1 and S2 are the supply to the managerial and labourer occupational groups respectively and D2 is the demand for workers in these two fields. It can be seen that D2 meets S1 higher along the vertical axis than S2, suggesting a higher equilibrium price, which is the wage rate.
The actual skill composition of employment is dictated by the interaction of demand and supply, both of which are affected by a range of factors. Any change in the demand for skilled labour relative to unskilled labour, which is not matched by change in relative supply, will translate into a combination of either relative wage movement or relative unemployment movement. The wage setting mechanism for each skill group- that is, how wages respond to excess demand or supply in each of the labour markets- determines the particular combination of relative wage and unemployment movements.
Labour market outcomes involve wages, non-wage benefits and employment outcomes. The major source of income for most Australian households is wages and salaries, which provide 57% of household incomes in Australia. How income is distributed throughout the Australian community is substantially influenced by the wage outcomes produced by the labour markets. Non-wage outcomes are additional benefits apart from ordinary and overtime payments, such as sick leave, holiday leave, or superannuation, and are often referred to as over-award wages or fringe benefits. These are payments to employees exceeding the award wage, which is the standard rate of pay. Non-wage outcomes can take many forms, some of which are provisions of a company house or car, a laptop, and payment of private education fees for children. Non-wage payments vary widely between occupations, much in the same way as award wages do. High-skilled workers in more demand receive over-award wages that are more valuable than workers with lower levels of skills.
Australia has developed an unique labour market framework over the years, in which a combination of the market as well as a number of institutions has determined wage rates. The major labour market institutions in Australia are unions, employer associations and the federal Industrial Relations Tribunal (IRC). The IRC is the central federal body that determines wage rates, and various other state tribunals. The IRC determined wage rates until the early 1990's, as a result of union-employer negotiations. This approach did not allow for negotiations between workers and employers on the determination of an individual's wage. The role of unions was to maximise the benefits flowing to its members and to represent workers in dispute resolutions. This was achieved largely through collective action. Any benefits a union acquired was shared around by all workers in a union, and thus the conditions and wage rates a union negotiated with its employer would be applicable to all its employees, regardless of their skills and productivity. Similarly, many employer associations had experts who negotiated with unions on matters of wage rates and working conditions. If a dispute between a union and an employer arose, both parties would meet with the IRC or state tribunals, depending on whether the dispute was confined to workers in a particular state or across the country.
Enterprise bargaining was introduced as a means of determining wages in the mid 1990s. This basically ensured that workers and employers from one workplace were able to negotiate wages and conditions that were only applicable to that one enterprise. There has been a marked change in the Australian industrial relations landscape since the mid 1990s, which has essentially meant large changes in the system by which wages and working conditions are determined. This has mainly consisted of marked reductions on behalf of unions in determining wages, which has led to the primary responsibility for determining workplace matters with the employer and employee at the workplace level.
Today, enterprise bargaining has become standard for the determination of wages. This move away from unionistic methods of wage determination has enjoyed both positive and negative outcomes. It has seen a move away from an equitable distribution of income within the Australian economy, as every worker in a union was guaranteed a minimum wage rate and, with it, a minimum standard of living. Restricted union influence has meant that workers with little industrial talent have seen their wages decline, while high-skilled workers have managed to negotiate very large increases in their pay. Over time, this has led to greater social inequality as the main outcome of the labour market. However, it has also rewarded individuals who have been productive, and taken its toll on unproductive workers who have relied on their unions and the productivity of other individuals within that union for their incomes.
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