EC-103Semester 2

Lectures 1 & 2

Labour as a factor of production

In the UK in 2011 the hourly wage excluding over-time was £16.16 for men and £13.15 for women.

In February 2012 the employment rate was much higher for males than females and inactivity rate lower.

Table 1  Males FemalesAll 16.16 13.15Full-time 16.44 14.00Part-time 11.85 10.77

Table 2  Males FemalesEmployment rate 75.3 65.4Unemployment rate    Inactivity rate 17.1 29.1

  UK Wales

  Hourly Weekly Annual Hourly Weekly Annual

Women 14.00 515.4 27,005 12.74 465.1 23,848

Men 16.44 635.2 36,511 13.67 529.0 28,912

Gender pay ratio (%) 85.2 81.1 74.0 93.2 87.9 82.5

Gender pay gap (%) 14.8 18.9 26.0 6.8 12.1 17.5

Notes: The gender pay ratio is women’s average earnings as a percentage of men’s: the gender pay gap is the difference between this figure and 100 per cent (which would represent gender pay equity). Annual earnings are provided only for employees who have been in the same job for at least twelve months. Hourly earnings and weekly earnings data exclude overtime payments.

Source: Annual Survey of Hours and Earnings, April 2011 (data are provisional)

Table 3: Average earnings of full-time employees, 2011

Earnings by Gender

A number of reasons account for the wider gender pay gap found in weekly rather than in hourly earnings, these include:

• males tend to work longer hours than females• females are more likely to work part-time

Even females working full-time tend to work shorter hours than males, partly due to working less over-time

• full-time females worked on average half an hour of over-time, whilst the figure for males was one and a half hours

Hourly Earnings

  Women Men % of UK average Ratio

Region     F M  

UK 14.00 16.44 100 100 85.2

North East 12.98 14.01 92.7 85.2 92.6

North West 13.08 14.67 93.4 89.2 89.2

York/Humber 12.74 14.27 91.0 86.8 89.3

East Midlands 12.47 14.45 89.1 87.9 86.3

West Midlands 12.76 14.68 91.1 89.3 86.9

East 13.22 15.47 94.4 94.1 85.4

London 18.33 23.74 130.9 144.4 77.2

South East 14.10 17.27 100.7 105.0 81.6

South West 12.62 14.75 90.1 89.7 85.6

Wales 12.74 13.67 91.0 83.2 93.2

Scotland 13.78 15.43 98.4 93.9 89.3

Northern Ireland 12.94 13.55 92.4 82.4 95.5

Table 4: Average earnings of full-time employees UK regions, 2011

Source: Annual Survey of Hours and Earnings, April 2011(data are provisional)

Earnings by Region

Large variation in earnings across UK regions.

• highest earnings in London and the South East• lowest earnings in Wales and Northern Ireland

Clearly London stands out from other regions, this may be due to industrial and occupational structure and characteristics of the workforce. Across other regions differences in earnings are relatively low.

  Hourly Earnings Employment share

  Women Men Ratio Women Men

Managers and senior officials13.66 18.27 85.7 14 17

Professional 20.31 21.40 94.9 16 14

Associate professional & technical

14.54 15.19 95.7 20 14

Administrative & secretarial10.31 10.90 94.6 21 6

Skilled trades 8.00 11.64 68.7 2 16

Personal service 8.65 9.14 94.6 15 4

Sales & customer service 7.91 8.44 93.7 6 4

Process, plant & machine operative

7.76 9.84 78.9 3 13

Other occupations 7.49 8.45 88.6 6 13

Table 5: Average hourly earnings of full-time employees by occupation, Wales, 2011

Source: Annual Survey of Hours and Earnings, April 2011 (data are provisional)

Earnings by Occupation

Large differences in hourly earnings across occupations.

Professional, managers and senior officials and those in associate professional and technical occupations have the highest hourly earnings and those in other occupations, sales and customer services and process, plant and machine operatives the lowest.

In these occupations especially for women, average hourly earnings are close to the minimum wage.

National Minimum Wage Rates 2011 and 2012

The announcements to increase the adult minimum wage by 2.5% (15 pence) to £6.08 in October 2011 and by 1.8% (11 pence) in October 2012 were both below the rates of inflation at the time. However, the latest increase was slightly above the average increase in weekly earnings, 1.4%.

  2011 2012

Adult rate £6.08 per hour (up 15p) £6.19 per hour (up 11p)

18-20 year olds £4.98 per hour (up 6p) £4.98 per hour (no change)

16-17 year olds £3.68 per hour (up 4p) £3.68 per hour (no change)

Apprentices £2.60 per hour (up 10p) £2.65 per hour (up 5p)

Business Secretary – Vince Cable commented in October 2011:

“More than 890,000 of Britain’s lowest-paid workers will gain from these changes”

On the freeze in the minimum wage for those aged under 21, from October 2012 he said the decision marked the “right balance between pay and jobs…In these tough times freezing the youth rates has been a very hard decision – but raising the youth rates would have been of little value to young people if it meant it was harder for them to get a job in the long run.”

  Hourly Earnings Employment share

  Women Men Ratio Women Men

Manufacturing 10.68 13.94 76.6 7 24

Services 12.93 13.70 94.4 91 66

Financial and insurance

13.15 16.05 81.9 34 4

Real estate 11.95 12.48 95.7 2 11

Public administration

13.91 15.87 87.6 10 11

Education 14.94 16.50 90.5 31 20

Health 13.19 18.31 72.0 28 10

Professional, Scientific and technical

12.12 15.82 76.6 4 5

Administrative and support services

9.39 9.23 101.7 3 7

Table 6: Average hourly earnings by industrial sector, Wales, 2011

Source: Annual Survey of Hours and Earnings, April 2011 (data are provisional)

Earnings by Industrial Sector

Differences in hourly earnings across industries, smaller than across occupations. Women paid more in services than manufacturing, the reverse is the case for males in Wales.

THE SUPPLY OF SKILL: INVESTMENT IN HUMAN CAPITAL

 

Individuals need to make a decision of whether to work or not. If the decision is to work then a decision has to be made on how many hours to work. This has been described as the short-run supply decision. In this simple model all units of labour are treated as if alike. In the long-run quantity of labour supplied must also reflect quality as well as hours of work. Among the factors determining the quality of the labour force are education, skills, health and location.

The long-run supply decision includes analysis of how individuals make choices about • how much schooling to obtain • whether to take a relatively low paying job that offers

training and the promise of future wage increases • whether to change place of residence to obtain a job

with higher earnings or earnings potential Long-run labour supply adjustment involve current costs and future returns, the costs are investments and the theory of long-run labour supply is therefore the theory of decisions to invest in human capital.

Traditionally economists have viewed labour as a passive agent in the production process, with the capitalist entrepreneur being the decision maker and risk taker. 

The human capital approach on the other hand conditions us to the fact that we are all entrepreneurs to varying degrees and that we all make investments under uncertainty consequently we all take risks. 

Human capital theory involves the individual - assessing the cost and benefits of any decision – the individual does a cost benefit analysis.

For example the decision on whether to leave school at 18 and get a job or go to university would involve an individual doing a cost benefit analysis 

Costs• books, fees, extra living costs, etc.• loss of income while in university

 

Benefits• higher wages

 

These higher wages, however, occur in the future and so must be discounted.

Individuals with higher discount rates tend to be present orientated and other things being equal are less likely to continue into higher education.

Human capital theory suggests that education increases productivity and hence increases earnings.

Investment in Higher Education

Source: Economics; Begg, Fischer & Dornbusch

Age

Inco

me

No formalqualifications

A-level orequivalent

University degreeor equivalent

Age-earnings profiles show how typical earnings vary with age and educational qualifications

• education induces a differential

• which tends to increase with age

Age-earnings profiles

Source: The McGraw-Hill Companies, 2002

People’s taste differ and so do their discount rates. Some people put a high value on income now and are not willing to pay the cost of postponing it. Factors influencing discount rates include the income background of an individual. Concern has been expressed that the increasing costs of attending university may put individuals off from poorer background from applying.

Using the human capital approach it is possible to calculate a rate of return to education. If the rate of return to education is positive and greater than the rate of interest the individual faces in borrowing money the individual should borrow and invest in education as discounted life time earnings will increase.

A number of criticisms have been made of human capital theory

• the possibility that education doesn’t increase productivity but just signals pre-existing talent.

• need to distinguish between social and private returns to education

• education has other benefits than just increasing earnings of an individual or the probability of being in a job

 

However, evidence has been found that education increases earnings and reduces the probability of unemployment

Education and Unemployment

• Unemployment rates much higher for the least skilled. In 2009/10 unemployment rates in the UK were (Blanchflower and Bell, 2010):

3.9% for those with a degree9.8% for those with ‘O’ levels/GCSE14.9% for those with no qualifications

• The position amongst 16 and 17 year olds who have left school is particularly bad with almost 1 in 3 being unemployed (25.5% in 2008 at the start of the recession)

• Unemployment is also high amongst those aged 18-24 at 21% (September 2012) (12.9% in 2008)

The education literature suggests it matters what we do in our education curriculum and returns to different investments differ

As a result does our education system provide sufficient business and economic skills to its pupils?

The concern that the education system may not be delivering the necessary skills required for the labour market is longstanding. Back as far as 1776 Adam Smith in the Wealth of Nations wrote, “the greater part of what is taught in schools and universities…does not seem to be a proper preparation for that of business”.

A ten-year study of 18,000 university graduates showed enormous variations in earning power, with some subjects leading to salary levels twice as high as others

Blackaby, Murphy and O’Leary (1999). Graduate Earnings in Great Britain: a matter of degree?

http://dx.doi.org/10.1080/135048599353302

Using Labour Force Survey provides evidence as to which degree courses render the greatest pecuniary benefits to graduates in the labour market

Table 1 calculates the relative mark-up of different degrees of educational attainment

Males Females

Higher degree 101 132

First degree 89 113

Other degree level qualifications 79 99

Diploma in higher education 45 80

A-level 50 49

O-level 25 25

Table 7Returns to Education LFS 1993-1995 (%mark-up)

Note: figures relative to individuals with no qualifications

Males FemalesEconomics, Accountancy, Law & Management

41 49

Engineering & Technology 29 53Maths, Physics & Computers 34 49Other Social Sciences 16 30Education & Nursing 10 44Arts 9 35Biological Sciences & Chemistry 20 43Languages 22 42Medical 67 74Earth Sciences 20 44

Table 8Returns to Degree Subjects 1993-1995 (% mark-up)

Note: figures relative to individuals with at least one ‘A’ level who didn’t go to university

Walker and Zhu (2010). Differences by Degree: Evidence of the Net Financial Rates of Return to Undergraduate Study for England and Wales.

http://www.lums.lancs.ac.uk/publications/viewpdf/006856/

They use Labour Force Survey data from 1994 to 2009. They “find very large economic returns to Economics, Management and Law but not for other subjects – we even find small negative returns in Arts, Humanities and other Social Sciences”.

“Degree class has large effects in all subjects suggesting the possibility of large returns to effort. Postgraduate study has large effects, independently of first degree class.”

“A large rise in tuition fees across all subjects has only a modest impact on relative rates of return suggesting that little substitution across subjects would occur.”

They find for those studying Economics, Management and Law the premium for getting a IIi is 25% for men and 15% for women at median earnings. The premium for gaining good degrees are much greater in Economics, Management and Law than in other areas such as STEM (Science, Technology, Engineering and Maths) subjects.

They find a strong return to effort – “although we are unable to say how much effort is required to generate such a better result.”

Strinebricker and Strinebricker (2009) also find for the US that effort has a large effect on US degree scores – Grade Point Average.

The implications are that degree subject taken and overall degree classification can have dramatic implications for life time earnings.