Labor Markets

Human Capital Theory

A theory of pay determination that says a worker’s wage will be proportional to his or her stock of human capital.

Human capital an amalgam of factors such as education, training, experience, intelligence, energy, work habits, trustworthiness, initiative, and others that affect the value of a worker’s marginal product.

Some who compared the salaries of managers with MBAs to those of managers without MBAs might be tempted to conclude that the MBAs had reaped an enormous windfall. But their advantage appears less dramatic once we include the cost of acquiring the additional human capital.

Trade/Labour Unions

A trade union is an association of work-people formed to safe guard and improve the wage rates and working conditions of its members and more generally, to raise their status and promote their vocational interests. It substitutes collective bargaining, thus strengthening the position of workers. Historically, the unionized hope that the union will provide a basis for confronting the monopsy power of employers with the collective power of workers.

The main objectives of trade unions vary from country to country and from time to time. They normally include improvements in the wage rates and working conditions such as shorter hour, easier work rules, better fringe benefits, and better protection of workers against unfair practices, dismissal and victimization, and provision of their security. Raising the vocational status of workers through greater participation in the formulation of the policy of the firm and the co-operation with the government in the furtherance of overall national economic policy are also some of their aims.

Trade unions are monopolies of labor. However the actual power of a union depends on various factors such as the prevailing economic situation, whether there is full employment or massive employment.

Wage Differentials

Wages may be defined as a sum of money paid under contract by an employer to workers for services rendered. A single wage rate does not predominate in the labor market. Workers are paid different wages because labor itself is not a homogenous but is characterized by differences in efficiency and skill.

Wage rates are different in different occupations. They tend to be higher in occupations where the marginal revenue product of labor is high. Differences in the innate ability lead to wage differentials in relation to the demand for a particular ability. Therefore, workers who are in great demand because of their acquired potentials can command high wages.

Wage differentials in different occupations serve economic purposes. A rise in the price of a factor in certain occupation should attract it from alternative uses or localities. This may take time taking into consideration the mobility of factors. Thus, wage differentials attract labor to expanding industries. For instance, a declining textile industry may evoke feelings of insecurity among the people who will look for jobs in the expanding industry.

There are differences in wages between different localities. Labour productivity is generally higher in the urban areas and hence wages are higher. Urban wage incomes are usually higher because the cost of livings is relatively higher in urban areas.

Other causes of wage differentials include the relative powers of trade union in collective bargaining, and discrimination.

Compensating Wage Differentials

Other things being equal, jobs with attractive working conditions will pay less than jobs with less attractive conditions. Wage differences associated with differences in working conditions are known as compensating wage differentials. Economists have identified compensating differentials for a host of different specific working conditions. Studies have found, for example, that safe jobs tend to pay less than otherwise similar jobs that entail greater risks to health and safety. Studies have also found that wages vary in accord with the attractiveness of the work schedule.

Discrimination in the Labour market

Employer Discrimination

It is the term used to describe wage differentials that arise from an arbitrary preference by the employer for one group of workers over another. An example occurs if two labor force groups, such as males and females, are equally productive, on average, yet some employers (“discriminators”) prefer hiring males and are willing to pay higher wages to do so.

Most consumers are not willing to pay more for a product produced by males than for an identical one produced by females (if indeed they even know which type of worker produced the product). If product price is unaffected by the composition of the workforce that produces he product, a firm’s profit will be smaller the more males it employs because males cost more yet are no more productive. Thus the most profitable firms will be ones that employ only females.

But as the profit seeking firms continue to pursue this strategy, the supply of females at the lower wage rate will run out. The short-run solution is to offer females a slightly higher wage. But this strategy works only if other firms do not pursue it. Once they too start offering a higher wage, females will again be in short supply. The only stable outcome will occur when the wage of females reaches parity with the wage of males. The wage for both males and females will thus settle at the common value of their VMP.

Any employer who wants to voice a preference for hiring males must now do so by paying males a wage in excess of their VMP. Employers can discriminate against females if they wish, but only if they r willing to pay premium wages to male out of their own profits. Not even the harshest critics of the competitive model seem willing to impute such behavior to the owners of capitalist enterprises.

Customer Discrimination

The willingness of consumers to pay more for a product produced by members of a favored group, even if the quality of the product is unaffected.

In some instances, discrimination by customers may provide a plausible explanation. For example, if people believe that juries and clients are less likely to take female or minority attorneys seriously, members of these groups will face a reduced incentive to attend law school, and law firms will face a reduced incentive to hire those who do.

Another possible source of persistent wage gaps is discrimination and socialization within the family. For example, families may provide less education for their female children, or they may socialize them to believe that lofty career ambitions are not appropriate.

Redundancies

Redundancies occur when an employee leaves a job because the position no longer exists or it ceases to exist in the place where the employee worked. This may be the result of a fall in an organization’s employment requirements, a restructuring of the organization, or a combination of both. Redundancies can be either voluntary or involuntary. Employees take voluntary redundancy when they agree to leave a post that is being removed from the workforce. In contrast, involuntary redundancy is when the job loss is forced upon an employee. Both types of redundancy may include some form of payment or time off in lieu as compensation.

The level and rate of redundancies are important measures of changes in labour demand. When coupled with changes in total employment, they provide an indication of the overall health of the labour market. However, redundancies may be concentrated in particular sectors of the economy, suggesting that economic restructuring is taking place. For example, the decline in manufacturing has been accompanied by relatively high redundancy rates in that sector of industry.

Unemployment

Unemployment refers to people who are not employed and are actively searching for a job. Keynes distinguished between two kinds of unemployment. Voluntary unemployment occurs where the unemployed person is not willing to accept a job at the going wage rate. Involuntary unemployment occurs where a person is willing to accept a job at the going wage rate but no such job can be found. Policy makers are more concerned with involuntary unemployment because it causes economic waste measured in terms of lost output and is a form of human suffering. Wages are payments made for the use of labor services.

The Office for National Statistics (ONS) produces official estimates of unemployment using the International Labour Organization (ILO) definition. Under this definition people aged 16 and over are unemployed if they are:

•        out of work, want a job, have actively sought work in the last four weeks and are available to start work in the next two weeks

•        Out of work, have found a job and are waiting to start it in the next two weeks

Within the context of the supply and demand model of the labour market framework, unemployment is seen as potential labour supply. The unemployed want to supply their labour and are both seeking and are available for work. As such, they are seen as having greater labour market attachment than those, for example, who do not have a job and are not looking for one.

Unemployment data are useful for a variety of reasons. The government use unemployment along with other labour market indicators for macro-economic and labour market management. Data are also supplied to a range of international organizations such as the European Central Bank. In the social policy domain, unemployment is used as an indicator of relative hardship.

Termination

Under the Employment Standards Act, 2000 (ESA) a person's employment is terminated if the employer:

•        dismisses or stops employing an employee, including an employee who is no longer employed due to the bankruptcy or insolvency of the employer;

•        "constructively" dismisses an employee and the employee resigns, in response, within a reasonable time;

•        lays an employee off for a period that is longer than a "temporary layoff".

In most cases, when an employer ends the employment of an employee who has been continuously employed for three months, the employer must provide the employee with either written notice of termination, termination pay or a combination (as long as the notice and the termination pay together equal the length of notice the employee is entitled to receive).

An employer is not required to give an employee a reason why his or her employment is being terminated. There are, however, some situations where an employer cannot terminate an employee's employment even if the employer is prepared to give proper written notice or termination pay. For example, an employer cannot end someone's employment, or penalize them in any way, if any part of the reason for the termination of employment is based on the employee asking questions about the ESA or exercising a right under the ESA, such as refusing to work in excess of the daily or weekly hours of work maximums, or taking a leave of absence specified in the ESA. Please see the chapter on Reprisals.

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