presentation 21

labor contribution

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

The demand for labor by firms, which is derived since it is not wanted for

itself but for the profits it can generate, is determined by:

• the demand for the product it helps to produce

• the portion of costs it represents

• the availability of substitutes

• the supply of investment capital

Demand for labor

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

Overall, an increase in these factors brings about an increase in the

labor hours the firm makes available. However, this does not mean that

the wages will increase.

The reason is that the demand for labor is dependent on how the firm

uses labor in its productive processes to maximize profits.

Two aspects

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

Aspect 1:

Firms are eager to

generate additional

revenue from using

additional labor

each time the firm

decides to increase

its output.

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

Aspect 2:

The utilization of

labor entails a cost.

To maximize its

profits, the business

will pay total wages

lower than the

revenue generated

by sales.

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

Any additional revenue will entail additional wages W to be paid out

since more labor is used. But in this case the firm may not be

maximizing its profits. To do so, it needs to lower the wages.

There follows that an increase in the factors affecting the demand for

labor bringing about an increase in the labor hours is met with falling

wages. Consequently the demand for labor is downward sloping

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

The supply for labor by workers depends on

1. Attitudes towards the workers in any given economy.

2. The number of hours workers are prepared to work.

3. The environment at home.

4. Remuneration they are offered.

5. Desired income or wage level.

6. The size of the population.

7. Self-worth and qualifications.

8. Labor division in society and in the firms.

9. Working conditions and the inherent risks in any type of job.

Supply for labor

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

The supply for labor is upward sloping since an increase in the above

factors brings about the increase in the labor hours made available by

the workers while pushing for higher wages.

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

There are two ways to approach the labor markets depending on the

industries and business markets of an economy

Where industries are passively competitive (e.g. hospitality)

• Workers can change jobs freely and easily

• There is predominance of low-skilled jobs and low wages

Where industries are dynamically competitive (e.g. pharma)

• Workers do not change jobs easily

• There is predominance of high-skilled jobs and high wages

Labor markets

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

Where industries are non-competitive by virtue of their size (e.g. Coca)

or their number (e.g. cement business) or topographical situation (e.g.

Volkswagen factories):

• Workers cannot change jobs easily

• There is predominance of low-skilled jobs and low wages (shop-floor)

and high-skilled jobs and high wages (engineers, management)

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

A non-competitor: Ford 1930s

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

If the wages of the non-competitor are deemed too low

• Either the state may intervene with min wage legislations

• Or unions may resort to industrial action

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

Labor market intervention

a/ state

But not knowing where the market wage is, the state may impose a

wage the firm will not accept, thus seek other ways so as to reduce

costs: the delocalization of production – unless the state is willing to

subsidize the difference (e.g. Renault’s 1970’s & 1980’s history).

Overall, wage differentials persist because workers and states lack the

economic power the firms have with a monopsonist leverage.

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

And which economic actor has the highest monopsonist leverage?

The state!

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

b / Unions

Typically, labor unions

seek to improve wages,

working conditions, and

worker productivity and

to maintain full

employment.

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

But labor unions are not without their critics: trade unions are seen to

contribute to unemployment and slow down innovation and productivity.

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

Worker participation in trade unions has decreased – why?

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

Overall, what is the labor contribution to growth?

A qualified answer must take into account the state of the labor market

of the various industries present in an economy, and the proportion of

unskilled to skilled labor.

Generally speaking dynamic industries where labor must be skilled,

despite the monopsony drawbacks, are the main drivers of economic

growth. Yet a condition must be met: that the education system is highly

efficient and effective to yield skilled labor – in a non-discriminatory

manner.

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

Contribution to growth

Education radically affects wages

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

… even globally

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

But education is market-based: high wages of skilled labor are inversely

proportionate to the supply of such labor

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros

If education commands higher salaries for the concerned individuals,

does it contribute to economic growth? If education is all about

improved productivity the answer is … NO! Why?

Economics, 6th ed., 2016, Prof. Dr. P. Zamaros