LABOUR ECONOMICS: COHR 2105

LECTURE NOTES
The module examines the labour market paying particular attention to the demand and
supply of labour, wage and employment determination and ways of improving labour
productivity. It is also concerned about unemployment and the influence of trade unions in
the labour market
 Introduction to Labour Economics

1.1. What is Labour Economics?

 Labour economics is a discipline which seeks to understand the functioning and

dynamics of the markets for labour.

 Labour markets function through the interaction of workers and

employers.

 Labour economics is therefore centred in the workers who happen to be

the suppliers of labour services, the demands of labour services by the
employers and attempts to understand the effects of the changes in wages,
employment, and income.

 In economics, labour is a measure of the work done by human beings. It is

conventionally contrasted with such other factors of production as land and capital.
There are theories which have developed a concept called human capital (referring to
the skills that workers possess, not necessarily their actual work).

 According to Dr Stephen, Labour Economics is concerned with many of the

important decisions facing individuals at various different points in their lives, despite
some of these decisions being made when the person is not actively involved in the
labour market.

 For example, it has helped us to gain a far better understanding of the factors
influencing how long to stay in full-time education and when is the best time to retire.

 Labour economics has been heavily influenced by micro-economic techniques

applied to not only traditional labour market issues, such as the behaviour of trade
unions and the labour demand decisions of firms, but also to areas that were not
previously thought to have an explicit economic dimension. These include

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 discrimination, migration and a range of household decisions including the allocation
of time to different activities, fertility and divorce.

 Some new research areas have also emerged in recent decades including Personnel
Economics, which uses micro-economic principles to explain the human resource
practices adopted by firms and particularly focuses on how workers should be paid
(e.g. salaries versus variable pay methods such as piece rates or bonuses) and not just
on how much they are paid. On the other hand, some ideas remain fundamental in
explaining how labour markets function. In particular, the concept of human capital
continues to be an integral feature of contemporary labour economics.

1.2. Summary of the Definition

Labour economics is:

 a discipline that focuses on the role of labour in an economy

 that branch of economics that analyses the role of labour in an economy.
 that branch of economics that looks at demand and supply of labour in an
economy.
 that aspect of economic theory that looks at the role of labour in an economy.
 The economic analysis of how workers, firms and the government interact in
shaping the outcomes in the labour market, primarily employment and
earnings.

1.3. Role of Labour

 Labour can be defined as the physical and mental effort which comes from the
human resource used to produce goods and services.
 This also includes time efforts and talents that go into production of goods and
services.
 It is therefore imperative to note that labour plays a dual role in the economy,
that is,
a) Factor of Production, produces goods and services.

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 Q = f (L,K)

Q is quantity, f is function, L is Labour, K is capital

NB: The quantity of bread is a result of labour used/employed plus equipment

used.

b) Earner of income (salaries and wages) which people then use to purchase
goods and services)

1.4. The interaction of decision makers in the Labour Market

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 Source: Professor Schuetze - Econ 370 4

1.5. Labour Market

 It is important to note that labour market is not physical, in this case, it does not have a
physical location
 The concept of labour market is an abstract concept meant to describe the relationship
between the participants in the labour market mainly the prospective employers and the
prospective employees.
 Prospective employers are looking for the prospective employees, information about their
availability, that is, those people who are available for employment and look for such
information from various sources such as the newspapers, universities, high schools and
other training institutions.
 Prospective employees are looking for the prospective employers.
 Employers want employees with pre-requisite skills
 On the other hand, employees screen the employers, thus, how much are they going to
pay.

The labour market is therefore different from other markets in the following:

 labour services are rented, not sold,

 labour productivity is affected by pay and working conditions,

1.5.1. National and local labour markets

a). National labour market

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  It is one in which most job search by employers and firms takes place at national
level.
 The markets for college professors, top management positions in large
corporations, and similar occupations are national labour markets.
 It exists only when there are few employers and employees in most geographical
regions.

b). Local Labour Market

Most job search takes place at a local level in a local labor market.
 Secretaries, carpenters, truck drivers, electricians are employed through local
labour markets.
 Local labor markets exist when there are many employers and employees in most
geographical regions.
1.5.2. Internal Labour Markets

This happens when an organization fills higher level positions in the firm by promotion from
within the organization. Most organisations will depend on internal labour markets because:
 this reduces hiring and training costs,
 it improves employee morale and motivation,

 it reduces the effect of uncertainty (since the firm has already observed worker
productivity).

1.5.3. Primary and Secondary Labor Markets

Labour markets can also be distinguished as primary and secondary. This is often used to
categorise jobs between the primary and secondary labor market.

Primary Labour Market

 Jobs in this category are characterized by high wages and stable employment
relationships.

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  Examples of jobs in the primary labor market include: accountant, lawyer, teacher,
carpenter, and plumber.

Secondary Labour Market

 Workers employed in this category receive low wages and experience unstable
employment relationships.
 Workers in fast-food restaurants, gas station attendants, dishwashers to mention a few are
employed in the secondary labor market.
 Those adults who are "stuck" in secondary labor market occupations because of limited
job skills and education, however, are not as pleased with finding their only employment
prospects in this sector.

1.6. Definition of Key Terms

There are a few basic definitions that will be used throughout the rest of this lecture. It is very
important that you use these terms precisely and not confuse them:

 Wages: Payment received by an employee in exchange for labour. It may be in goods or

services but is customarily in money. The term in a broad sense refers to what is received
in any way for labour. Wages usually refer to payments to workers who are paid on an
hourly basis, in contrast to a salary, which implies a more fixed and permanent form of
income (e.g., payment by the month rather than by the hour).

Wage = Payment per Unit of time

 Earnings: it is the payment accrued over a period of time (e.g. week, a month, or a
year). Earnings therefore depend on both wages and the length of time the employees
work. Wages and earnings are before taxation is done.

Earnings = Wage x Hours (labor payment over an interval of time, typically a

week, month, quarter, or year)

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 Compensation: the total of earnings and wages plus benefits. Usually payments are in
kind e.g medical aid, where employees get services than money, .e.g. days off. Deferred
payments are also called compensation e.g employer financed retirement, pension.

Total Compensation = Earnings + Fringe Benefits

 Fringe Benefits: Fringe benefits = payments in kind + deferred compensation

in this case, payments in kind include any payments in the form of goods and services
such as the use of a company provided car, or employer-provided meals, uniforms, health
insurance, or similar benefits; and deferred compensation involves items such as pension
plans and other programs that provide payments at some point in the future.)
 Income: total of everything a person gets over a period of time usually annually.
Earnings plus benefits and unearned income, (dividends, interest on investments, welfare
payments and unemployment compensation).

1.7. Parties in Labour Economics

There are three parties in labour economics and these are:
i. Firms (employers)
a. These demand Labour which they use in the production process. The
labour demanded is in the form of Skills (practical/abilities),
knowledge (mental capacity) and right attitude.
b. It is important to note that the objective of the firms is to maximize
profits and pay low wages
i. Profit maximization

Total Revenue - Total Cost = Profit

Π = TR - TC

ii. adding a worker increases TR and increases TC.

iii. a firm will add more labour if TR rises by more than TC.

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 iv. a firm can increase its profits by using less labor if the additional revenue
generated by the last worker is less than the additional cost of adding that
worker.

ii. Households/employees
a. These are the suppliers of labour
b. The sole objective of the employees is to maximize utility
(satisfaction). Employees need high income (Y):
 Buy basic needs (Maslow’s Hierarchy of needs)
 Save money (security and safety)
 Social needs/social interaction
 Status (self esteem)
iii. State
a. have a legislative and regulatory function (Labour instruments, minimum
wages)
b. is the manager of the economy
c. also the largest employer (public services)

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 2. Demand for Labour

1.1. Introduction to Labour Demand Theory

The labour demand theory assumes that employers seek to maximise profits and because of
this organisations are constantly having changes done in the organisation so as to maximise
profits. The organisations thus change variables that they have control over such as number
of employees, price of product whereas wages and demand are determined by the market.
This reflects the small marginal changes made by organisations everyday to increase profits.
The employer change one area and holding the other areas constant .e.g. change the labour
but capital remains the same.

Labour demand refers to the:

 number of the people an employer is prepared to engage

 number of hours of hiring that an employer is willing to do based on the various
exogenous (externally determined) variables it is faced with, such as the wage rate, the
unit cost of capital, the market-determined selling price of its output, etc. The function
specifying the quantity of labour that would be demanded at any of various possible
values of these exogenous variables is called the labour demand function.

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 1.2. Labour as a derived demand

 Derived demand refers to the demand for a resource that arises from the demand for the
product that the resource produces.
 Labour demand is therefore derived from the demand for the output of the labour. This
means that labour is not wanted for its own sake but for what it can contribute to
production. For example, demand for truck drivers derives from the demand for
transporting goods.
 When firms see increasing demand for their products, they will need to employ extra
workers and thus the demand for labour increases.
 Demand for labour is related to productivity of labour (how productive labour is?) and
the level of demand for the product.
 The more the worker adds to revenue, the higher the demand, this is linked to Marginal
Productivity Theory.

1.2.1. Effects of Wage Changes on Demand for labour

An inverse relationship exists between the demand for labour and the wage rate that a firm will
have to pay for each individual worker. The following are the effects of changes in wages:

a) High Wages
If wages increase and everything else remain constant:
 There will be higher product prices.
 If the wage rate is high, it is more costly to hire extra employees.
 If wages increase, assuming everything else remain constant employers will rather adopt
technology that relies more on capital than labour. In such a situation, employment is
reduced since the firm shifts towards capital intense mode of production. This is called
substitution effect because when the wages increase, labour is substituted by capital in the
production process.

b) Low Wages
 When wages are lower, labour becomes relatively cheaper than using capital equipment
and it becomes more profitable for the business to take on more employees.

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  It is important to note that firms are aiming at maximising profits, in this case, firms will
use the factor of production (labour or capital) that does the job as efficiently as possible
for the lowest possible cost.
 Other things remaining constant, this decline is called the scale effect which is the effect
on desired employment of a smaller scale of production.

1.3. Demand Curves

A demand curve can either be illustrated as a curve or straight line as shown in the graphs below:
W W

D D
L L

W is wages, L quantity of labour and D is the quantity of labour demanded

As depicted in the graph below, the demand for labour varies with changes in the price of labour
when other things remain constant. At a rate of $1000, the employer is willing to employ only 20
people whilst at the rate of $500, they are willing to employ up to 50 people.

A reflection of what we experienced in Zimbabwe in the past years proves this as the rise in
wages led to retrenchments, short time work, unpaid leave, downsizing, shut downs by
companies. The companies that maintained the number of employees still have challenges in the
payment of salaries of which some of them are even three months behind.

wage

$1000
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 $500

demand curve

20 40 60 Q (Labour/employees)

As already been alluded above:

 If wages increase firms will employ fewer people because higher salaries erode
profits. As a result, other employees will be laid off.

Π = TR - TC

 If salaries go down, firms will employ more people to realise more profits.

2.5. Effects of Changes in Product Demand on Labour Demand.

 An increase in product demand means that goods will be bought at whatever price.
People will continue buying the goods even if the prices escalate, for example, the
demand for mealie-meal in the 2008 era where 10kg would go for R400 and people still
bought.

 An increase in product demand without labour and capital costs increasing causes an
increase in output since organisations would want to maximise profits. This causes the
scale effect where increase in product demand also causes an increase in labour and
capital (up-scaling labour and capital) as long as their prices remain constant.

 The labour curve therefore shifts to the right meaning that at every possible wage rate the
number of employees increase. For example if an organisation was only willing to
employ 50 at the wage of $7 they are now willing to employ 100 for the same wage.

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  Demand for new products, substitution products or complementary products to the
organisations own product can cause an increase in Labour demand or a decrease.

 The introduction of new technology and the shifts in product demand can cause the demand
curve to shift to the left thus reducing employment. This is called the substitution effect were
organisations now replace labour by the new ways of doing things or the cheaper way of
increasing productivity which is in this case will be going capital intensive.

2.6. Effects of Changes in Price of Capital on Labour Demand

 If other factors remain constant and the price of capital decreases it affects demand for
labour positively. Using the scale and substitution effect. A reduction in capital prices
causes a reduction in the cost of production therefore increase in labour demand at any
wage rate which is the scale effect. If costs of production are lower any employer can
now afford more employees at that given wage rate.

 This can also cause the substitution effect since organisations can then decide to go
capital intensive so as to mass produce, thus, substituting capital for labour. Less labour
is then required at a given rate. The demand curve therefore shifts to the left.

 These show that a fall in capital prices can cause either the substitution effect or the scale
effect.

 Please note the difference between these curve with first curve of wage changes. With
wages when other things remain constant one moves along the curve whereas with other
changes its a total shift from one position to the other. Where 50 for $7 changes to 100
for the same price.

2.7. Elasticity Of Demand

 Elasticity of demand for labour is how responsive a firm is in relation to how many
workers they will employ when there is a change in the labour market.
 It is therefore the sensitivity of demand to changes in the labour market, for example,
demand for a product.
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  It measures how responsive firms are to change the number of workers they have when
the wage rate changes.
 A change in marginal productivity (i.e. the workers producing more or less of the
products due to efficiency) or marginal revenue (i.e. due to a change in the price
received for the product) will cause a shift in the demand curve.

Factors affecting the Elasticity of Demand for labour

 Proportion of labour costs to total costs – if the wages represent only a
small proportion of the total costs, then a rise in wage costs is not a particularly big deal,
and demand for workers will not change than much. But if they represent a larger
proportion of total costs, then a rise in wages will have a dramatic effect on the number of
workers the firm will employ and there will be a greater % reduction in workers
demanded, i.e. elastic demand.
 Price elasticity of demand for the product – if the product being produced
and sold is price inelastic, then any increases in wages can be passed onto the
customer with minimal effect on the demand, then a wage rise is likely to be
less of a deal, than if the product was price elastic. Therefore, if the product
is price inelastic, then the demand for labour is also likely to be inelastic. The
opposite is also true, if the product is price elastic, then demand for labour will
probably also be elastic. If wages increase at industrial level it might not cause much
effect for products that do not have close substitutes since all the organisations will push
the cost to the product. However if such wages increase at plant level then it will affect
some organisations because they will not be able to increase wages without increasing
price of product. Therefore if it is a competitive market such organisations might be
pushed out by monopolies who are sensitive to such changes

Marginal Physical Product (MPP)

 A firm's labour demand is based on its marginal physical product of labour (MPL).

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  This is defined as the additional output (or physical product) that results from an increase
of one unit of labour.

 The demand for labour is highly dependent on the productivity of the worker – the more
the worker adds to revenue, the higher the demand.

Marginal Revenue Product Theory (MRP)

 Marginal productivity theory suggests that the demand for a product depends on its
marginal revenue productivity (MRP)
 The MRP of labour is the change in a firm’s revenue resulting from employing one more
worker
o It is found by multiplying Marginal Product (MP) by MR
 The marginal product of labour (MPL) is the change in total output that results from
employing one more worker
o As more workers are employed, it is expected that MPL may increase
o However, MPL may fall when a certain level of employment is reached, as
diminishing returns sets in
 A firm will employ workers up to the point where the marginal cost of labour (MCL) =
MRP
Wage Rate

 MRP curve and MCL curve based on a constant wage

W MCL
rate (W)
 MRP is downward sloping, as if MRP = MCL at two
MRP
points, the higher output is chosen

Q
Qty of labour hours
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Marginal Revenue Productivity of labour will increase when there is

 An increase in labour productivity (MPP) e.g. arising from improvements in the quality
of the labour force through training, better capital inputs, or better management.
 A higher demand for the final product which increases the price of output so firms hire
extra workers and thus demand for labour increases, shifting the labour demand curve to
the right.
 The price of a substitute input e.g. capital rises – this makes employing labour more
attractive to the employer assuming that there has been no change in the relative
productivity of labour over capital

Assumptions of the Marginal Revenue Productivity Theory

 Workers are homogeneous in terms of their ability and productivity.

 Trade unions have no impact on the available labour supply
 The physical productivity of each worker can be accurately and objectively measured
and the market value of the output produced by the labour force can be calculated.
 The industry supply of labour is assumed to be perfectly elastic. Workers are
occupationally and geographically mobile and can be hired at a constant wage rate

Limitations of MRPL theory of labour demand

Although marginal revenue product theory is a useful aspect of labour market analysis, it is
important to be aware of some of its limitations:

Measuring productivity: In many cases it is hard to objectively measure productivity because

no physical output is produced or the output produced may not be sold at a market price. This
makes it hard to place an exact valuation on the output of each extra worker. How does one go

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about measuring the final output of people employed in teaching or the health service? It is easier
to measure physical output in industries where a tangible product is produced each day. It is also
costly to measure people’s productivity.

3. Supply of Labour

3.1 What is Labour Supply?

Labour Supply refers to:
 the number of people in the labour market who are able and willing to offer their
labour service, thus, employed and unemployed (looking for jobs but not getting
them).
 The amount of people offering their labour at different wage rates.

3.2 The Labour Supply Decision

It is imperative to note that every worker has only 24 hours a day that can either be spent on
working or leisure (eating, sleeping, reading, watching TV, etc.). An easier way to think of
leisure is: any part of the day when a worker is not getting paid by his/her employer. Thus:

Work + Leisure = 24 hours(fixed)

The following account of the economic analysis of labour supply begins a micro-economic
theory based upon the neo-classical theory. The analysis constructs a simple model of
individual’s labour supply decisions. Basically, it involves a choice between work and leisure,
subject to a budget or income constraints. We are not concerned with any particular individual,
instead we are dealing with idealized micro-economic individual who seeks rationally to
maximize his or her utility.

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Utility is the benefit or satisfaction presumably derives from the activity of ensuring goods or
services (one does not work for the sale of money, they work in order to get goods/services they
do not have.

 As one increases the hours they spend in leisure, work hours reduce and vice-versa. Most
of us would choose to spend more time in leisure and less time in work, but we need to
work in order to have income to purchase everyday needs (goods and services).
 Our income is determined by our wage rate and the number of hours we work. When we
have more income, we can buy more goods and services.
 We must also keep in mind that every hour we spend in leisure is an hour less we spend
doing work. For example, if our wage rate is $10/hour, we are giving up $10 when we
decide to spend an hour in leisure. Therefore, the price that we pay for an hour of leisure
is the wage lost from not working that hour—in this case $10.
 Time is an important factor when thinking about a worker’s supply curve for labor.

In this case,
a) The advantage associated with working more hours is consumption, that is, the more
hours you work, the more income you earn, the more goods and services you can buy.
b) The advantage associated with working fewer hours is leisure, that is, the fewer hours
you work, the more time outside work you enjoy. It is important to note that leisure
includes all non-market activity (school, childraising, etc.)

Factors That Push an Individual to Supply

 Opportunity cost of leisure – which cost is an individual willing to forego leisure or

work? Once somebody has entered the labour force how many hours will they choose to
work? Their utility function is determined by the choice between income and leisure.
However, they are constrained by the working hours available to them. For many people,
the hours they work are fixed by their employers and they have little or no flexibility in
the total number of hours they supply. But the majority of workers have an opportunity at

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 some point to work additional hours, or perhaps switch from a full-time job to a part-time
position.

 Wealth and income- how much the individual is worth therefore determining the income
they are going to gain from the actual working whether it will be worth it or not. This
causes the income effect where if income increases and preferences are constant the more
leisure hours that are demanded thus reducing the supply of labour. That is supply of
working hours and demand for leisure hours.
 An increase in the wage on offer in a job should lead to someone supplying more hours
of work over a given period of time, although there is the possibility that further increases
in the going wage rate might have little effect on an individual’s labour supply.

 Higher wages do lead to an increase in the number of extra hours supplied, although the
rate at which the individual is prepared to give up their leisure time and work longer
hours diminishes as the real wage rises. But the labour supply curve meets the standard
prediction that higher wages attract people to work longer hours. For most of the range of
real wages, the same prediction holds true, but when as real wages step upwards,
eventually an individual may choose to actually work fewer hours (ceteris paribus) giving
us what is sometimes termed a “backward bending” labour supply curve.

To understand why this might happen we consider the income and substitution effects that arise
from a change in the real wage being paid to an individual worker. We start with the income
effect.

The income effect

 As wages rise, people feel better off and therefore may not feel a need to work for many
hours
 This means that higher pay levels mean that a target real wage can be achieved with
fewer hours of labour supply.

 So this income effect might persuade people to work less hours and enjoy extended
leisure time.
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The substitution effect

 As wages rise, the opportunity cost of leisure rises (the cost of every extra hour taken in
leisure time: leisure costs)
 As wages rise, the substitution may lead to more hours being worked.

 Reduction in wage rate also reduces leisure opportunity and the incentive to work.

 It is referred to as substitution effect because as cost of leisure changes work and leisure
are substituted for each other therefore positive in terms of supply.

 With the income and substitution effects working in opposite directions, there is no hard
and fast prediction about whether people will choose to increase their labour supply as
real wages increase.

It is imperative to note the following on Labour force participation rate:

 Are the income and substitution effects different for male compared to female
workers?
 What about younger workers entering the labour market for the first time who are
looking to save to finance a deposit on a house or to fund other major items of
spending?

 How might people closer to retirement age respond to changes in real wages?

 What of workers in households where at least someone else is in paid employment

compared to a household where there is only one main “breadwinner”?

3.3. The Supply of Labour to Firms

The market labour supply curve is expected to be upward sloping because an increase in the
wage in a particular labor market will:
1. cause some workers in this market to work additional hours,
2. induce some workers to shift from other labor markets to this relatively more
remunerative alternative employment, and

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3. will cause some individuals who are not currently in the labor force to enter this market.
A possible labor supply curve is illustrated below.

Changes in the wage in this market result in changes in the quantity of labor supplied, but
do not affect labor supply. Labor supply changes only if some other factor changes and
the labor supply curve shifts. The diagram below illustrates an increase in labor supply
from S to S'.

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Market labor supply will increase when the wage rate in other labour markets falls and will
decrease when the wage rate rises in other labour markets. Changes in worker tastes and
preferences will also affect market labour supply.

3.5. Elasticity of Labour Supply

 The elasticity of labour supply to an occupation measures the extent to which labour
supply responds to a change in the wage rate in a given time period.
 In low-skilled occupations we expect labour supply to be elastic. This means that a pool
of readily available labour is employable at a fairly low market wage rate.

 Where jobs require specific skills and lengthy periods of training, the labour supply will
be more inelastic. It is hard to expand the workforce in a short period of time when
demand for workers has increased.

In many professions there are artificial barriers to the entry of workers. Examples include Law,
Accountancy and Medicine. The need for high level educational qualifications makes the supply
of newly qualified entrants to these occupations quite inelastic in the short run and is one reason
why these workers may earn a higher real wage than average salaries.

Elastic Supply of Labour

 If the supply of labour is elastic, a small rise in the wage rate is sufficient to encourage
more people to offer their labour.
 Geographic and occupational mobility are likely to be high and there is likely to be many
substitutes (leisure to work)

Elasticity of supply of labour depends on the follows:

1. Geographical mobility of labour

 the willingness of people to move

 the cost and availability of housing in different areas

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  the extent of social, cultural and family ties

 the amount of information available to workers about jobs in other areas

 the cost of re-location

2. Occupational Mobility of Labour

 Lack of information of available jobs in other occupations

 Extent and the quality of remuneration packages

 Extent of skills and qualifications to do the jobs

 Anxiety at changing jobs

3.6. Labor Market Equilibrium

An equilibrium occurs in a labor market at the combination of wages and employment at

which market demand and supply intersect (as illustrated in the diagram below). In this
example, the equilibrium wage is w* and the equilibrium level of employment is L*.

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If the wage rate is above the equilibrium, the quantity of labor supplied exceeds the quantity
demanded and a surplus occurs. In this case, the existence of unemployed workers will be
expected to result in downward pressure on the wage rate until an equilibrium is restored.

If the wage rate is below the equilibrium, a labor shortage will occur. Competition among firms
for workers is expected to result in increase in the wage until an equilibrium occurs.

Shifts in equilibrium

As it has been demonstrated above, it is important to note that:

o an increase in labor demand results in an increase in both the equilibrium wage

and the equilibrium level of employment,
o a reduction in labor demand results in a decrease in both the equilibrium wage and
the equilibrium level of employment,

o an increase in labor supply results in a lower equilibrium wage, but a higher

equilibrium level of employment, and

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 o a reduction in labor supply results in a higher equilibrium wage, but a lower
equilibrium level of employment.

3.7. Determination of Wages

Demand exceeds supply: In this situation employers compete for few workers therefore, they
encounter shortage of employees. Because of the competition, employers are forced to increase
wages to attract and retain employees and this leads to more workers entering the market
therefore increasing labour supply. However, an increase in wages forces employers to employ
few people and reduce demand.

Supply exceeds demand: Employers want fewer employees so those who want to find work
become surplus. Employers then because of surplus figure they can get more employees at lower
costs which are employees of high calibre. Most employees will be willing to accept as long as
there is a job, others will leave the market and look for work somewhere else.

Market clearing wage where employees can fill jobs and employees can get jobs thus market
will be at equilibrium

If changes however, occur in demand and supply curves the equilibrium state is disturbed again,
for example, government regulations.

4. Wage Differential (Discrimination)

4.1. What is Wage Differential?

US Legal defines wage differential as the differences in wage rates due to the location of
company, hours of work, working conditions, type of product manufactured, or other factors. It
may be the difference in wages between workers with different skills working in the same

Page | 25
industry or workers with similar skills working in different industries or regions. For example,
wage differentials may also be used to compare wages between genders, union and non-union
jobs, or wages of employees with and without college degrees.

4.2. Compensating Wage Differentials

Compensating wage differentials refers to the difference in wages offered to offset the

desirability or undesirability of a job. If the job is considered undesirable because of elements of
unpleasantness or risk, the differential is positive in the form of increased wages
to offer incentive to the employee to take the job. If the job is considered especially desirable, the
differential is negative in the form of lower wages.

Compensating wage differentials occur because jobs are not the same, they are located in
different areas and have different working conditions.

It therefore becomes apparent that wage differentials in some cases acts as a compensation for
people who have to work unsocial hours or who are exposed to different degrees of risk at work,
both in the short term and long run. Some jobs require a wage-rate that encompasses this risk
premium. For example, workers in the North Sea Oil industry expect a higher return to adjust for
the inherent dangers of their work.

Some employers may have to offer higher wages and other ''fringe benefits'' to attract workers, if
the conditions of work in their firm or industry are dirty or dangerous. Coal miners get paid high
wages because their work is dangerous, and can have health effects on the worker in future.
Some employers have to offer higher wages if their firm is in an isolated area.

4.3. Bases of wage discrimination

a). Race (Racial grounds)

In addition to blacks and whites being paid different wages for the same work, they are also
given unequal opportunities. This means that narrowing the human capital gap between the races
will not be enough to close the wage gap, as argued by human capital theorists. It is equally
important to pursue policies that provide access to higher paying jobs and industries for blacks.

Page | 26
People are discriminated by their race, thus whites are paid higher wages than blacks, why?

 Whites are experienced

 Whites have better contacts

Ethnic Minorities:

 People from ethnic minorities tend to be lower paid than white workers
 This could be due to the fact that they work in unskilled professions, such as catering or
cleaning
 Also, discrimination takes part, resulting in a contraction of demand

Perfect Competition

Perfect competition is a theoretical market structure that features no barriers to entry, an

unlimited number of producers and consumers, and a perfectly elastic demand curve. Take
clerical work, for instance.

w1 SL SL

w0

DL DL

L0 L

Page | 27
 Industry A (Clothing) Industry B (Retail)

If salaries increase in Industry A, those who are in Industry B will shift to Industry A
provided vacancies are there. If there would be an advert in the clothing Industry, those in
retail industry will move to clothing industry, thus the labour supply curve will shift.

Gender discrimination

Although big changes have occurred in the labour market in terms of the participation rates and
employment levels of females, there is little doubt that a permanent gap exists between average
pay rates for females and males in the labour market. However there is evidence that this gap is
closing albeit slowly. As cited by Lipsey and Crystal (2007), wage discrimination affects women
in two ways, i.e., women may earn less than men when doing the same job, or they may be forced
into jobs that typically pay lower wages than the jobs from which they are excluded. The
following are key factors that contribute to women earning low wages;

 Human capital differences: This includes the differences in educational levels. Historical
differences in the levels of qualifications held by men and women have contributed to pay
gap, this arise from the past academic disadvantage that women experienced. Women also
are more likely to have breaks from paid work to care for children and other dependants.
These breaks, however, impact on women’s level of work experience which in turn
impacts on their pay rates.

 Part-time working: Most women occupy part-time work. In part-time jobs, pay is
determined by the hours that one spends at work and their experience in that job. Due to
the dual role that women have (reproductive role: domestic chores, child minding and
formal employment) women are compelled to spend fewer hours at work which then
impacts on their pay.

o Part-time workers on average receive lower hourly earnings than full-time

 One reason for this could be due to the supply of people wanting to work
part-time is high relative to demand, as part-time work is convenient for
students, and people bringing up children.

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  The productivity of part-time workers tends to be lower, as they’re less
likely to receive training
 A smaller proportion of part-time workers belong to trade unions, and a
higher proportion is women.

 Occupational Segregation: This is understood as the concentration of men and women in

different:

i. kinds of jobs ( horizontal segregation) or

ii. grades ( vertical segregation)
Occupational segregation is one of the barriers which prevents women fulfilling their
potential in the labour market, and consequently contributes to the pay gap. Women tend to
be concentrated in the lower paid jobs (e.g. caring, catering, cleaning, clerical, cashiering)
and the lower grades within an organisation.

What are the causes?

1. Gender stereotyping - Social attitudes, both explicit and implicit, which stereotype the
roles women and men, girls and boys have in our society. These attitudes can influence
subject choice at school, college and university and can limit their career aspirations.
However, these attitudes can be reinforced, both consciously and unconsciously, by
teachers, parents, peers, peers' parents, children's books and the media.
2. Inflexible working - Women with children face constraints in terms of finding work that
is potentially commensurate with their skills and aspirations as well as flexible and
convenient in terms of their childcare and other caring responsibilities. A lack of options
forces many women into part-time, low-paid work.
 Travel patterns: Due to the dual role that women have, they are compelled to spend less
time commuting than men. This means that women are not prepared to take up jobs which
require a lot of travelling and as a result, they narrow options of jobs. This also result in
lots of women wanting work in the same location near to where they live which will result
in lower equilibrium wages for those jobs.

Human Capital

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Human capital refers to the skills, knowledge one posses. The gap between poorly skilled and
highly skilled workers gets wider each year. Market demand for skilled labour grows more
quickly than for semi-skilled workers and this pushes up pay levels. Jobs that require more
education, skill, and training also tend to pay higher wages. Higher wages compensate for greater
productivity and provide returns on investment in education and training.

 Those with high skills will demand high wages.

 It is more difficult to substituted skilled labour with capital and unemployed workers
than it is for unskilled

 Assertive people are paid more than submissive people

 General human capital (skills that are transferable) need to be paid well besides that
they will leave the organisation.

 Firm specific human capital (these are people trained on the job, their skills are
specific to a certain organisation and not transferable). They are paid less salary
because they cannot leave the organisation.

 Firm specific human capital tends to be more productive than general human capital,
therefore, there is need to exploit this to get more wages.

Programmers Specialists

S in short supply

In abundance w1

w0

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 D D

L0 L1

As illustrated in the graphs above:

 the specialists are in short supply, therefore, they are paid more.

 Programmers are in abundance therefore, paid low salaries.

It is therefore imperative to note that one updates their skills so that they are always relevant to
working environment. Trained people are paid more than those who are not trained.

Structure Dominated by Trade unions

 People who work in companies with strong Trade Unions will be paid more than those
employed in industries with no or weak trade unions

Location

 Jobs that are at undesirable, more distant, or hard to reach locations also pay higher
wages.

 Firms in cities that have high living costs, inhospitable climates, high crime rates, or
other disamenities find it necessary to offer higher wages to attract workers.

Government Regulation

 The government plays a role in the regulation of wages in some industries.

 In some industries, the government defines the lowest wage rates that may legally be
paid. In the regulated industry, the government sets the minimum wages.

 The minimum wage is necessary to avoid hardship and poverty of low skilled individuals.

 The minimum wage (as any minimum price) has contributed to a surplus of the labor
resource: that is, unemployment

Page | 31
Risk and Hazardous Conditions

 Jobs that are riskier, more dangerous, and have a greater likelihood of injury, typically
pay higher wages. For example, coal miners, deep sea divers, and security guards are
likely to be paid higher wages than similar jobs due to the hazardous nature of their
duties.

5. Unemployment

5.1. What is Labour force?

The labor force consists of all non-institutionalized individuals aged 16 or above who are either
working or actively seeking work. Those who choose to be full-time students, or retire, or
withdraw from the labor force for child-rearing purposes, or who give up looking for work are
not counted as part of the labor force

Page | 32
5.2. What is unemployment?

Unemployment refers to the individuals who are part of the labour force, willing and able to
work but cannot get jobs. According to ILO, unemployment is the numbers of people aged 16
and above who are frantically looking for jobs but cannot get those jobs. It is therefore
imperative to note that, individuals are unemployed only if they are not working for pay at any
job and are actively seeking work.

The unemployment rate is defined as:

The unemployment rate generally rises during recessions and falls during periods of economic
expansions. It is interesting to note, though, that when unemployed workers become discouraged
and leave the labor force (these workers are called discouraged workers), the measured
unemployment rate declines. (To see this, observe that while both the numerator and the
denominator in the equation above decline, the fraction declines because the numerator falls by a
larger percentage.) Thus, the unemployment rate may decline when the number of discouraged
workers rises. Similarly, the observed unemployment rate may increase when discouraged
workers become more optimistic about the state of the economy and start looking for work.

Thus, to measure the state of the labor market, it is important to examine movements into and out
of the labor force as well as changes in the unemployment rate. A convenient measure of this is
provided by the labor force participation rate, defined as:

Typically, the labor force participation rate increases during periods of economic expansion and
declines during periods of recession. Note that the changes that occur in the labor force
participation rate over the course of the business cycle tend to dampen the fluctuations that occur
in the unemployment rate. To see this, note that during a recession, unemployment rises. But
because some workers become discouraged, unemployment does not rise by as much as it would

Page | 33
if the labor force participation rate were constant. Similarly, during an expansion, unemployment
rates decline, but the decline is smaller due to the increase in the labor force participation rate
that generally occurs when an expansion occurs.

5.3. Types of unemployment

5.3.1. Categories of Unemployment

There are two categories of unemployment, voluntary and involuntary unemployment.

a). Voluntary

It is a situation whereby workers choose not to work at the current equilibrium wage rate. For
one reason or another, workers may choose not to participate in the labour market. There are
several reasons for the existence of voluntary unemployment including excessively generous
welfare benefits and high rates of income tax. Voluntary unemployment is likely to occur when
the equilibrium wage rate is below the wage necessary to encourage individuals to supply their
labour.

b). Involuntary unemployment

In this situation the person who is unemployed has no say in the matter. It means that a person is
separated from remunerative work and denied of wages although he is capable of earning his
wages and is also anxious to earn them.

Types of unemployment

1. Seasonal Unemployment

• Seasonal Unemployment affects occupations such as fruit pickers, fishermen and

shearers. Where the nature of their work means that employment may not be available
for the whole year.

• Continuous work for such workers would be highly unusual, especially for those not
prepared to travel great distances.

Page | 34
2. Frictional unemployment

Frictional unemployment, also called search unemployment, occurs when workers lose their
current job and are in the process of finding another one. There may be little that can be done to
reduce this type of unemployment, other than provide better information to reduce the search
time. This suggests that full employment is impossible at any one time because some workers
will always be in the process of changing jobs.

This is unemployment caused by people moving in between jobs, e.g. graduates or people
changing jobs. There will always be some frictional unemployment.

Also high benefits may encourage people to stay on benefits rather than get work this is
sometimes known as "voluntary unemployment"

• Frictional Unemployment refers to the unemployment that results from the time that it
takes to match workers with jobs. In other words, it takes time for workers to search for
the jobs that are best suit their tastes and skills.
• Frictional Unemployment - always some unemployment due to workers voluntarily
changing employment.

3. Structural/Technological unemployment

• Structural / Technological Unemployment refers to changes in the structure of the

economy over time due to technology changes and changes in the pattern and nature of
consumer spending.

• Technological change usually means that the demand for some types of workers
increases, while others find their skills are no longer relevant, for example, Bank tellers
under threat from ATMs

Page | 35
 • It is the unemployment that results because the number of jobs available in some labor
markets is insufficient to provide a job for everyone who wants one.

• Changes in consumer demand will result in job losses in some occupations and gain in
others. As compact discs replace records, for example, workers in records factories
become redundant.

• It should be noted that technological changes although responsible for the demise of jobs
have created many new and exciting employment prospects, for example, computer
programmer.

In summary, Structural unemployment occurs due to a mismatch of skills in the labour market
which can be caused by:
i. Occupational immobility: This refers to the difficulties in learning new skills applicable
to a new industry, and technological change.
ii. Geographical Immobility: This refers to the difficulty in moving regions to get a job.
iii. Technological Change: If there is the developments of labour saving technology in some
industries there will be a fall in demand for labour.
iv. Structural change in the economy: The decline in the demand for a certain product will
mean that the employees in that particular industry become unemployed and they may
find it more difficult to get jobs in new industries such as computers

4. Cyclical or Demand-Deficient Unemployment

This is the result of the trade cycle, in such a situation, there is going up of profit and also loss of
profit. When there is high profit, there is greater employment and when there is depression, a
large number of people are rendered unemployed. Since such an economic crisis is the result of
trade cycle, then unemployment is a part of it.

• Cyclical Unemployment or demand-deficient unemployment occurs in the downswing

and recession phases of the trade cycle.

• It is basically due to substantial reductions in aggregate demand or total spending in the

economy.

Page | 36
 Cyclical Unemployment
Aggregate
Demand
Boom

Up Turn

Down
Turn Recession
Time
5

• The reduction in demand for goods and services leads to a reduction in total output and
ultimately results in a reduction in demand for the labour that produce those goods and
services.

5.4. Causes of Unemployment

Unemployment in Zimbabwe has been caused by quite a number of factors. Most of these are
mainly because of political reasons. The following are some of the factors that are causing
unemployment:

a). Economic Issues

 Economic downturn due to the following factors:

 External influences e.g. sanctions
 Mismanagement

 Weak export performance

 The investment/business structure is unfriendly

Page | 37
  Deindustrialization of companies

 The growth path - reliance on primary products - is suboptimal

b). Urban Migration

 people are flocking to urban areas seeking refuge in towns hoping to get jobs

c). Education Policy

 Producing white collar employees, for example, managers

 Does not create entrepreneurs

d). High Salaries

 employee is expensive than equipment

 companies are now opting for machanisation which is more efficient

6. Trade Unions in the Labour Market

6.1. Definition of a Trade Union

 A trade union is a body (institution that is formed by employees to represent their
interest at industrial level.
 It is an organisation of workers that attempt to improve the working conditions, real
income, and job security of its workers by using the collective bargaining power of
the workforce in the labour market.

6.2. The Roles of Trade Unions

 negotiate wages and working condition on behalf of the employees

 take collective action to enforce the terms of collective bargaining,

 raise new demands on behalf of its members, and

 settle the grievances between employees and employers

Page | 38
  Introduce the rule of law in the workplace: employees are fairly treated, rights of
employees are upheld

6.3. Perspectives of Trade Unions

a). Unitarist/Traditional Approach
 This views an organisation as a family where there is trust, oneness and commonality
of goals
 In such a situation, conflict does not happen.
 Agitators should be dealt with once and for all

b). Pluralist/Behavioral
 This views an organisation as characterized by many people who have different
behaviors/interests
 In this situation, conflict is inevitable
 The role of the managers is to manage dysfunctional conflict

c). Marxist/Radical Perspective

 This approach is confrontational
 It views the society as consisting of social classes, the worker and the owners of
resources (Proletarian, working class vs. Bourgeoisie, Capitalist class)
 Managers are always exploiting the labour (paying low wages)
 Workers are always demanding more salaries because they want to minimize this
exploitation

d). Interactionist Approach

 This was developed from the unitarist perspective
 This view believes that conflict will always be there
 There is functional and dysfunctional conflict
 Functional conflict is good for the organisation because it makes an organisation
flexible and change

6.4. Levels of Employee Representation

Page | 39
 National Level
Federation of Trade Unions (e.g. ZFTU and ZCTU)

Industrial Level
Trade Unions (e.g. ZUCWU)

Workplace Level
Workers Committee
Types of trade unions

i. Craft Trade Union: represents a specific craft or skill, for example, the mechanics,
electricians (people who have acquired specific sets of skills through apprenticeship
training)

ii. General Trade Union: Takes everyone irrespective of skills, e.g. ZCTU, ZFTU at
national Level

iii. Occupational Trade Union: Represents anyone in a particular industry irrespective of

occupation, for example at Universities whether you are part of teaching staff or non-staff
the TU will represent you. This is most common in Zimbabwe.

Effects of Trade Unions in a Labour Market

1. Free Competitive Labour Market
Stage 1: Starting Point - No Trade union

Page | 40
 SL

we

DL

Le L

 The market clears itself, therefore, there is no involuntary unemployment, it rather can be
voluntary

 What manages this are the forces of supply and demand

ii). Second Stage: Enter Trade Union

Excess Supply of Labour (unemployment)

W1
SL

we

DL

LD Le LS L

 It is important to note that the overriding objective of the TU is to increase salaries.

 When the TU enters, it will bargain for higher wages, as a result, the demand for labour
falls as firms want less people in their firms since labour is now expensive. In this case,
they will retrench some of the employees.

Page | 41
  The supply of labour will definitely increase since the salary is now attractive (w1)

 Those who were voluntarily unemployed are now prepared to work.

 There will be an excess supply of labour leading to unemployment (Ls – Ld)

 If the TU is very strong, the gap will be big (w1 – we) and if the TU is weak, the gap will
be smaller (w1-we)

Spillover Effect

This can be best illustrated using two labour markets or two industries. In This case, we use the
Clothing Industry (unionized) and the Retail Industry (non-unionised). At start, we assume that
the two industries are at equilibrium paying the same amount of salaries. As the Trade Union
enters in the Clothing Industry, a number of changes will happen as discussed in the diagrams
below.

Effect of Labor Unions on Union and Nonunion Wages (Spillover effect)

Page | 42
 Changes in supplyconditions and wagerates in the unionizedsector can bring on
changes in supplyand wage rates in thenonunionized sector.

Wage Rate S' Wage Rate

U
SU SNU

S'NU
2
W2
1
W1 1 W1

W2 2

DU DNU

0 Q' QU 0 QNU Q'

U NU
Quantity of Labor Quantity of Labor
(a) Unionized Sector (b) Nonunionized Sector

Clothing industry Retail industry

If a Trade Union enters in the Clothing industry it will bargain for higher wages and the
following will happen:

 Wages will increase from (w1- w2) and becomes more attractive

 The labour supply curve will shift from the right to the left (S1U – S2U) which shows
that the supply of labour to the Clothing industry will decrease.

 As a result, the quantity of the employees required will decrease (QU – Q1U). In this
case, other people will be laid-off. As a result, those laid off will spill over to the retail
industry, hence the term spillover effect.

For the Non-Unionised industry, the Retail Industry, the following will happen:

 Since most of the people have been laid-off from the Clothing Industry and have been
rendered unemployed, the only option they have is to join the Retail Industry which is
non-unionised, thus increasing the labour supply in the Retail Industry (SNU – S1NU)

Page | 43
  The Retail Industry will then take advantage of the abundant supply of labour where
people are even ready to render their services at lower wages, and as a result, the Retail
industry will lower its wages (w1 – w2).

 The fact that wages are now lowered (w1 – w2) the Retail Industry will then increase the
number of employees (QNU – Q1NU)

Summary on Spillover Effect

 Salaries go up where the trade union has come in (Clothing Industry)

 Salaries go down where there is no trade union (Retail Industry)

 Number of employees increase where there is no Trade Union (Retail Industry)

 Number of employees decrease where there is Trade Union (Clothing Industry

Threat Effects

This is the situation whereby a Non-unionised sector is forced to copy what the Unionized sector
does in terms of increasing the wages and retrenching fearing of losing its most competent
people (the high Flyers)

Unemployment Poor performers

w1

we

High Flyers

Ld Le Ls

Clothing Retail

Page | 44
As a trade union enters in the Clothing industry, it will bargain for high wages and the following
will happen:

 Poor performers will be retrenched in the Clothing Industry

 High flyers from the Retail Industry will target to look for vacancies in the Clothing
Industry

 The Retail Industry will bear the fear of losing the most competent people and will copy
what the Clothing Industry has done, hence the threat effect.

Impact of the Threat Effect

 More unemployment

 Salaries will increase in the two sectors

8. Human Capital Theory

Page | 45
7.1. Definition of Human Capital theory

Edenburg: Stock of competences, knowledge and personality attributes embodied in the ability
to perform labor so as to produce economic value. It is the attributes gained by a worker through
education and experience.

The acquisition of such talents, by the maintenance of the acquirer during his education, study, or
apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in
his person. Those talents, as they make a part of his fortune, so do they likewise that of the
society to which he belongs.

Individuals thus generate, retain and use knowledge and skill and create intellectual capital.
Their knowledge is enhanced by interactions between them (social capital) and generates the
knowledge possessed by an organisation (organisational capital).

And the increasing reliance of industry on sophisticated knowledge greatly enhances the value of
education, technical schooling, on-the-job training, and other human capital. Its called human
capital because people cannot be separated from their knowledge, skills, health, or values in the
way they can be separated from their financial and physical assets

Investment is an initial cost that one incurs in the hope that over some period of time that cost
will become profitable. Human capital accumulation is an important determinant of individuals
earning capacity and employment prospects. In most countries it is associated with significant
labour market gains for the individual in question, such as higher tax earnings, increased
participation in the labour market and improved employment probability. The opportunities
provided by a modern economy, along with extensive government and charitable support of
education, enable the majority of those who come from lower-income backgrounds to do
reasonably well in the labor market. The same opportunities that foster upward mobility for the
poor create an equal amount of downward mobility for those higher up on the income ladder.
Thus for employees current labour supply decisions are also determined by chances of
investment in terms of training, education and migration. This is because the level of skills that
an employee has from education, training including learning and experience all generate a certain

Page | 46
stock of productive capital and increase the value of ones human capital by the increase in
wages.

Human capital is an intangible asset as it is not owned by the firm that employs it.

Specific human capital refers to skills or knowledge that is useful only to a single employer or
industry, whereas general human capital (such as literacy) is useful to all employers. Economists
view firm specific human capital as risky, since firm closure or industry decline lead to skills that
cannot be transferred

7.2. Stages of investment

First Stage

 Early childhood determined by parents.

 No discussion of human capital can omit the influence of families on the knowledge,
skills, health, values, and habits of their children.

 Parents affect educational attainment, marital stability, propensities to smoke and to get
to work on time, and many other dimensions of their children’s lives.

Second Stage

 Teenagers and young adults.

 High school, college, vocational training.

Third Stage

 In the labour market workers additions to their human capital through on the job training,
night school and workshops.

7.3. Human capital investment comes with costs:

Page | 47
  Direct expenses: school fees, books and materials needed
 Forgone earnings: that arises because during investment you either do not work or work
part time. The cost borne by the student and the student’s family—is the income that
college students give up by not working. A good measure of this “ OPPORTUNITY COST”

is the income that a newly minted high school graduate could earn by working full time.

 Psychic losses: psychological expenses due to stress of learning.

7.4. Modes of Training

1. On the Job Training

Training done using the company facilities with hands on the job.

Advantages

 Easy to apply what you learnt (no re-entry problems)

 Cost effective/cheap

 Little lost time – person on the job

 Little/few group dynamics – no separation of people, keeps group intact (those trained
outside will think they have status)

 Easy to monitor

2. Off the Job Training

Vast of information is given to the trainees

7.5. Types of Training

1. General training

 Not held to a specific employer

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  Skills attained through general training are transferable

 During the training, pay the person less or let the trainee pay for him/herself

2. Company Specific Training

 The skill attained is company specific

 The company pays for the training because the company will benefit, e.g, ZNA

General Training

$1400 New salary after training

$1000 Salary

$600 Salary during training

Training period

 The company underpays during the training period, i.e. $600 because $400 will cover for
the training costs. In this case, an employee pays for himself
 The employee will be worth $1000-00 but during the first 2 years the company will pay
$600-00.

 Training costs per month will be $400-00

 There is no guarantee that the employer will benefit from the employee after gaining the
knowledge, the employee can leave the organisation since general skills are transferable.

 After the training, the employee is paid more since he is now experienced.

Page | 49
Specific Training

$1400 New salary after training

$1000 Salary equivalent to employee work

$600 Salary that ought to be paid to the employee

Training period

 The training costs borne by the employer, i.e. $400-00

 The benefits are enjoyed by the employer, since the employee continue to get $1000-00
after training

 This is company specific, employee cannot leave the organisation after the training.

Situations where Training is neither General no Specific

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  In this case, training costs are shared between the employer and the employee
 Benefits also shared between the employer and the employee.

 After the training, the employee will get $1200-00 instead of $1400-00

7.6 Women and the acquisition of Human Capital

The economics of human capital have brought about a particularly dramatic change in the
incentives for women to invest in college education in recent decades. Prior women were more
likely than men to graduate from high school, but less likely to go to college. Women who did go
to college shunned or were excluded from maths, sciences, economics, and law, and gravitated
toward teaching, home economics, foreign languages, and literature. Because relatively few
married women continued to work for pay, they rationally chose an education that helped in
“household production”—and no doubt also in the marriage market—by improving their social
skills and cultural interests.

 In the labour market earnings of women are less than that of men in the same line of work
and education
 Women’s returns also rise less steeply with age.

 Women are also less likely to be in the labor force than men and if employed are less
likely to work full time, if they do work full time they average less hours than men.

 Life expectancy of women is shorter than that of men

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  Because of the reproductive role women have to at some points drop out of the market
therefore lack of continuity of experience as compared of men therefore in making
human capital investment decisions women avoid areas where their skills depreciate
during the periods they leave the labor market.

All this has changed radically. The enormous increase in the labour participation of married
women is the most important labour force change during the past twenty-five years. Many
women now take little time off from their jobs, even to have children. As a result, the value to
women of market skills has increased enormously, and they are bypassing traditional “women’s”
fields to enter accounting, law, medicine, engineering, and other subjects that pay well which has
increased human capital investment by women. Indeed, women now constitute about one-third of
enrollments in business schools, more than 45 percent in law schools, and more than 50 percent
in medical schools

7.7. Worker Mobility

This entails the extent to which workers are willing to move from one region or country to another
(geographical mobility) or to change from one occupation to another (occupational mobility). In
horizontal mobility there is no change of status, whereas in vertical mobility there is. An upward
change in status will increase a worker's mobility, whereas a downward change will reduce it.

Using the human capital investment theory mobility of workers is an investment in which costs
are borne in some early period in order to obtain returns over a long period of time. If the present
value of the benefits associated with mobility exceeds the costs both monetary and psychic,
people will then change jobs or move to new areas. But if the benefits are not as large as the
costs, then people will decide against such a change.

7.8. Employee turnover

Mobility of employees among employers without necessarily changing residence.

Factors that affect employee turnover

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Wages: employees quit low wage jobs than higher paying jobs. So those employed at low paying
jobs than they can get are likely to quit when they get something else. Those who change have
more to gain than those left.

Employer size: the bigger the firm the fewer quits because these offer more opportunities for
transfers and promotions and generally pay better wages than smaller organisations due to its
high capital base. These pay more to retain because they invest a lot in workers to get innovation
thus it will cost them more to lose these workers.

Cyclical effects: the ability to get a better job quickly can cause some people to quit easily.

Employer location: when costs of quitting are low, mobility is more likely, especially for
organisations in urban areas where mobility from one job to another does not require change in
residence as compared to agricultural estates in remote areas.

Why individuals do not move

 Lack of information of available jobs in other occupations –

 Extent and quality of remuneration packages

 Extent of skills and qualifications to do the job

 Anxiety about changing jobs

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