CHAPTER 7 LABOR MARKETS Figure 7.2, Labor Markets? LEARNING OBJECTIVES In this chapter, you will be introduced to labor markets and their relationship with economic growth and development. Specifically, this will help you: 1. evaluate the demand for and supply of labor and its implications on labor market equilibrium; 2. discuss labor market equilibrium; : 3. elaborate on individual earnings and wages, with a focus on the minimum wage intricacies; 4. — illustrate international immigration, its costs, benefits, and implications on economic growth and development; 5. evaluate labor market discrimination and its effect on market efficiency; 6. discuss the human development index (HDI) as a metric for economic growth and development; 7. appreciate labor markets in the article about the Rana Plaza accident; 8, recommend key areastofacus on fait labor for economic development; and naar ne 9. understand labor markets at work in unce hee the eyes of a professional in labor and —_the father of Economies and Copitalism manning agency. i : + Esmaeli, Online Image. 136LOOKING BACK In Chapter 6, we appreciated the significance of industrialization to global economic growth and development. From the first industrial revolution to today’s fifth industrial revolution, we maintained the increase in production and consumption and continued to innovate to achieve maximum efficiency in the processes involved in various economic activities. But because of this, we also realized the cost of industrialization, the widespread abuse ofland, labor, andother valuable resources, likethe issuesof child labor, bond labor, and sweatshops. Furthermore, we identified various modes of industrialization, mercantilism, protectionism, laissez-faire, importation, and exportation. Lastly, we determined the world target of making cities and human settlements inclusive, safe, resilient, and sustainable as described in the UN Sustainable Development Goal 11. INTRODUCTION ‘Among the factors of production, land, labor, capital, and entrepreneurship, labor is the most important, and in fact, has the largest share in almost all economies with the gross national earnings. Basically, the labor market operates by supplying a skill or talent that someone else would need or demand. Let us look at it this way: roles in a labor market are determined by the one who supplies the labor, or the seller of labor, and the one who buys it, the buyer of labor. There should be a voluntary exchange of work, an agreement that a certain price, that is the wage, the buyer agrees to the work and employs the seller of that work. The market for professional athletes is considered a little more complicated than other labor markets, but the idea is the same. It follows the law of supply and demand, The supply of highly talented basketball player is paid way higher than an average worker not only because their supply is scarce, the talent itself is limited, but at the same time, the demand for basketball players is high. They usually generate millions of revenue in merchandise and ticket sales, hence their wage is also high. Wages are determined in the same way, it starts with a skill or a talent. If itis abundant and the demand is low, then the wage is also low, and vice versa, This chapter talks about the demand for and supply of labor, individual earnings and wages, international immigration, labor market discrimination, and human development index. in addition, an article about one of the largest labor accidents in the world as of today will be discussed as a case study. DEMAND FOR LABOR Demand is the link between the price of a product and the quantity demanded for it. We sometimes presentit ina table or schedule to further appreciate the changes in quantity demanded as the price increases or decreases, The basic rule is that all other things remain constant, as the price increases, the quantity demanded decreases or vice versa. There is a negative relationship between the price and the quantity. A demand curve is a graphical Chapter? | Labor markers 137 7representation of the price and quantity demanded, and since the relationship is negative, the curve is also negatively sloped. Labor is the input to a factor of production. In most cases, we hire labor to produce goods to sell. Labor markets, like any other markets, exist with the invisible hand at work, the forces of supply and demand. Consider an example of the Navotas Fish Market. The table below shows the number of workers hired and the weekly output by the number of oval crates given the price and the wage. Table 7.1. Navotas Fish Market Workers Output Marginal Output Productot | Valueof the Ninel Labor | Weekly Price Labor We He Income Number of (€=c°D) eA Oval Crates 2 8 cp o Emp Fin Ginp (workers) o ° ° - - - - 1 150 500 150 75,000 = - 3 200 500 25 12,500 6,000 6,500 5 260 500 30 15,000 6,000 9,000 7 340 500 40 20,000 6,000 34,000 30 400 500 20 10,000 6,000 4,000 2 430 500 35 17,500 6,000 11,500 5 450 00 | 7{approx) 3,500 6,000 (2,500) Table 7.1 shows the ‘The Production Function relationship between ° workers, given the price and the wage of employment. it would yield an optimum marginal income and a level where loss is incurred for the number of workers employed, given a competitive market and the wage is fixed at P6,000. The value of the marginal product of labor gives us the idea about decision-makers on how much more income is expected for = additional labor employed. Gens idsmoicicstiades 138 | Economic DevelopmentIn this case, P20,000 is the maximum value of the MPL, hence an optimized number of workers of 7. The production function in Navotas Fish Market gives us the relationship of the inputs in terms of labor and the amount of product obtained. The more labor put into the production function shows that it increases at a fast rate at the beginning and moves slowly, flatter, toward the rightmost part of the graph. We call this the diminishing marginal productivity. Firms employ workers as long as the revenue generated by the output of a marginal worker exceeds the cost of that worker, i., until the worker’s marginal revenue product is equal to the market wage rate. The marginal product of labor will decline and the wage of all workers will fall.? SUPPLY OF LABOR Supply is the link between the price of a product and the quantity supplied for it. Just like demand, we sometimes present it in a table or schedule to further appreciate the changes in quantity supplied as the price increases or decreases. The basic rule is that all other things remain constant, ceteris paribus, as the price increases, the quantity supplied also increases or vice versa. There is a positive relationship between the price and the quantity. A supply curve is a graphical representation of the price and quantity supplied, and since the relationship is positive, the curve is also positively sloped or going up from left to right of the graph. Labor Market Individual Employer MRC D=MRP. Ue be a W-= Wage; W, = at Equlibrium ‘Q= Quantity of Labor; Q, = Qty Demanded; Q, = Qty Supplied D=Demand ‘MRP = Marginal Revenue Product ‘MRC = Marginal Resource Cost Figure 7.3. Labor Market to Individual Employer 7 Thve Penguin Dictionary of Economics, "Marginal Productivity Theory of Wages.” Chapter? | Labor Markets 139.It is significant to note the reservation wage theory that says individuals would be choosing not to work when they value leisure more than the wage rate that they would be receiving from working. Hence, reservation wage is the minimum rate that a worker is willing to accept for a specific job, at a given period of time, considering there is no change in an individual's overall wealth, marital status, length of unemployment, health, and security and disability issues. DEMAND AND SUPPLY OF LABOR The graph in Figure 7.3 shows the relationship between the labor market and the effect on the individual employer. The demand for labor is downward sloping and the supply is upward sloping. The point where they meet is the equilibrium wage and quantity. ‘The demand represents the revenue attributable to additional workers as they are hired. The wage rate basically is the profit-maximizing level of individual employer, also known as the marginal resource cost (MRC). In a competitive labor market, the firm can pay to hire additional workers. There are _ situations wherein there is a change in demand even if the price does not change. In effect, it shifts the demand curve to the right. Remember the notion, “all other things remain constant or fixed.” What if the “other things” change? These are the factors that result in a “change in demand:” As the price of a substitute service increases, demand also increases. For example, we always go to a famous hairstylist salon situated ina shopping mall, If the price of the same service outside the mall increases, the demand for the salon service in the mall increases as well, Another factor is the price of the 140 | Economic Development aye awt Demand Sh tthe Right ay? ys aya Figure 7.4. Demand shift Supply Shi to the Right ‘ay? Gws aya Figure 7.5 Supply Shit ‘ays ‘aye =i S01 -2 = =ocomplementary service. Let us say that the price of the shampoo-ing in the salon increases and the demand for the salon service decreases, hence there is an inverse relationship between the price of the complementary service to the demand. If there is an expectation that the price of the salon service increases in the future, then the demand for it also increases. So we can say that there is a direct relationship between the two. Let us assume this time that the income increases. The demand for the “no brand” salon decreases, a service that is considered inferior to the hairstylist salon. SHIFTING OF DEMAND AND SUPPLY GENERAL RULES ON SHIFTING OF DEMAND AND SUPPLY | __ Shifting of Demand Curve DI(P APL PAY, AVY, PDMS, ) Where: D = Demand, P, = Price of Substitute, P. = Price of Complement, P, = Future Price Expectation, Y,,= Income of Consumers (on normal goods), Y, = Income of Consumers (inferior goods), M, = Market Size, T, = Taste/Preference of Consumers, 4 = Directly Related, = Inversely Related, TW = May be Direct or Indirect Shifting of Supply Curve | SPICY, PLP. PLP 1VT. 1,6, 9,6,4,5, 1H) Where: S = Supply, C, = Production Cost, P, = Number of Producers, P, = Price of Substitute, P, = Price of Complement, P, = Future Price Expectation, T, = Technology, G, = Government Subsidies, G, = Government Taxes and Tariffs, S, = Special Influences, 1 = Directly Related, W = Inversely Related, | v= May be Direct or Indirect ‘ When the population of the city increases, there is an effect that may be attributable to the migration from the provinces or other countries. Therefore, there will be an expected increase in the demand for the salon service. As the market for salon services increases, an expected increase in salon service also increases. Lastly, there is an expected shift in the_ demand curve when the taste or preference of clients and potential clients changes. It may be deemed favorable or not favorable depending on the change itself. ° These are the factors that affect the demand for a service: price of a substitute service, price of a complementary service, expected future prices, client’s income or wealth, population growth, increase in the size of the market, and change in the taste and preference of the consumers. There may be a shift in the supply curve, even if there is no change in price when some factors change. When more and more agencies sprout in the market doing the same job. as us, it will cause an increase in the number of workers given a certain level of price. An expected increase in the wage of workers in the Middle East would mean an Increase in the number of workers that we will source out and deliver. Chaprer? | Labor Markets 142.Let us say the government would provide incentives to agencies, such as tax cuts; would mean an increase in the number of workers that we can provide to the market, an increase in tax would mean the other way around. Another special influence would be the Partnership of our government to other states in supplying workers, promising a better benefit package with our workers, safety and protection, then the supply of workers would definitely increase, as more would like to be benefited by the agreement. These are the factors that may affect the change in supply, even without changing the Price of labor: cost to acquire more skills for labor, the number of agencies and businesses Providing the same labor, expected future increase or decrease in wages, technology, government subsidies, taxes, and other special influences. INDIVIDUAL EARNINGS AND WAGES As an employee invests his or her time, labor services, ideas, skills, knowledge, and al ies, the employer must fairly compensate these with a reasonable wage, that is at par or even higher with the same employee contributing the same resources in the market. Wage must cover the opportunity cost, the value that is lost like the worker's free time and the income that may be derived from another job, or from doing something else. If the demand for a certain good or service is booming, more of it is produced and offered in the market, and ultimately increase wages. We call this derived demand. The demand for a factor of production derived from the demand for its product,.e.g., there isa demand for labor in the construction industry because of the demand for houses,’ engineers, and some medical professionals are in low supply, and yet the demand for their skill is high; therefore, the wage is also high. Whereas social work is considered a very important job for poverty alleviation and protection of human dignity, the wage is low, that is because the supply for social work is high. There are some businesses that provide high wages to their employees, compared to the market equilibrium, to motivate them to work and not leave the company (among other reasons), We call this efficiency wages. Labor unions can affect wages as they advocate the benefits and interests of the employees and improve their working conditions. Through a collective bargaining agreement (CBA), this is more common in the government sector and is slowly declining in existence. MINIMUM WAGE ‘A minimum wage is the price floor that ensures employees receive this amount or more, and employers are prevented from paying below this amount. Classical economists argue from any form of government manipulation in a competitive market like the minimum wage. They believe that this is of no value to alleviate poverty and does not solve the problem of unemployment, in fact, this worsens the unemployment problem 7 Routledge Dictionary of Economics, “Derived Demand” 142 | Feonomie Developmentin the economy. Paying the minimum wage stops some employers from hiring unskilled workers. Instead, they look for skilled or semi-skilled workers, leaving this type of labor to be untapped, hence unemployment increases. Skilled workers are those who have special skills or who have had long training.* Labor Market Individual Employer se QLewm QLe a W= Wage; W, = at Equilibrium; W,, = Minimum Wage = Quantity of Labor; Q, = Qty Demanded; Q, = Qty Supplied D=Demand MRP = Marginal Revenue Product MRC = Marginal Resource Cost Figure 7.6, Labor Market to individual Employer with Minimum Wage In the graph in Figure 7.6, we can see that imposition of a minimum wage (price floor) would change the behavior of the labor supply and demand. The quantity demanded will decrease, while the quantity supplied will increase, by the wage price difference with the existing wage rate. In effect, this would create a surplus, but in the case of labor market, we call this unemployment. In addition, from the point of view of the wage taker, that is the individual employer, a minimum wage, a new marginal revenue cost is set, leaving a decrease in the quantity of labor they would want to hire up to the level when MRP = MRC or the maximum level they wish to employ. This situation is only true in a competitive market and when the wage is lower than the minimum wage, although there are a lot of businesses now that pay more than the minimum wage. The question now is, how much should be the minimum wage? An increase in the wage would mean more and more people have the capacity to buy goods and services. It increases the demand for products and stimulates employment and the economy. A high minimum wage in high median places like major cities is probably good, but detrimental to the low median areas lke the town and provinces, hence, we need to key in all factors including the geographical location of the economy for the proper determination of the Wage. In the end, economists do agree that skill and education are factors that the market sees valuable. Perhaps because it is in low supply, in high demand, and therefore, those who have it are promised higher wages. 7 Dictionary of Human Resources and Personne! Management, “Skilled Workers” Chapter? | Labor Markets 143It is important to note that not all regions have a minimum wage, and for those who have, the minimum wage is different from one to another. In the Philippines, the minimum wage in the National Capital Region (NCR) is different from the rest of the regions. The minimum wage will not solve the problem of poverty and inequality; it will just be a trade-off of something that may have a positive or negative impact on the economy. It is still significant that the people be educated and develop skills that may be used to. contribute to the development of the country. INTERNATIONAL IMMIGRATION When people move between countries and become part of the labor market of that country, that is called immigration. The main economic benefits of immigration are the following: (1) increases the national output, the GDP; (2) enhances specialization especially with highly skilled immigrants; and (3) provides net economic benefit to the country. Immigration resulted in advancements in technology and improved transportation in terms of speed, cost, and access. Some would spéculate that it is also due to some security issues and the desire to look for greener pastures. There are two main arguments in the economic impact of immigration, that. it increases demand because of the population inctease, but low-skilled workers tend to add to the poor and worsen inequality in the market. Highly skilled immigrants contribute to, a large employment surplus, as they innovate and become entrepreneurs, adding to the factors of production in the country. LABOR MARKET DISCRIMINATION Wage discrimination has been mentioned in the news, especially the kind when a certain race or nationality is undermined and is given less respect, dignity, and attention. Discrimination happens, favoring some group of individuals according to gender, age, ethnicity, nationality, and disability. Although there are moral and ethical issues involved in labor discrimination, we focus on wage discrimination, its nature, and its impact on the economy. In evaluating wage discrimination in the labor Human Developmerit index market, we must clearly identify first who among Very High, HDI > 0.800 the workers are favored and who are discriminated, dy Hol 00 = Ges Pertans this may be sbharegt ath the wages it oe MedenieybsrcGeoe workers are receiving, having the same position an ina RE alice nature of the job. We assess the employer who offers low wages to the discriminated group, thereby causing lower labor supply and lower productivity, The economy with this irrational decision-making begins misallocating resources and tends to effect economic inefficiency. 144 | Economic DevelopmentWage discrimination happens considerably when there is monopsony—there is only one buyer of the labor offered, it can clearly be distinguished who Is favored and who is discriminated against, and an ostensible varied price elasticity of labor supply in different groups. This may negatively impact the economy, as it tends to effect inefficiency and may cause market failure. For example, the marginal revenue product (MRP) of the favored group tends to be overestimated while the discriminated group, undervalued, distorts the market as the latter inclines to withdraw from the market. The effect is decreasing the supply of labor, reduces human capital and labor, and then diminishes productivity, HUMAN DEVELOPMENT INDEX ‘As the world becomes more sophisticated, having the GDP per capita alone may not be enough to measure the economic development of a country. It is instinctive for humans to know how and what others in the world are doing, not only in terms of money ‘on their hands but also for their welfare. Human Development Index (HD!) indicates the average well-being of people in a country in a given period of time, It is a composite index combining life expectancy at birth, mean years of schooling, expecting years of schooling, gross national income per capita, and non-income using a geometric mean. There are three main components in determining the HDI: life expectancy, knowledge, and standard of living. The average life of the people in a country according to various demographic factors, such as age, gender, and so on isa part of life expectancy. The average year of schooling of adults and children is a part of knowledge. And the standard of living basically is the GDP. per capita plus all income by citizens derived abroad, foreign investments, and foreign aid received. However, not all countries have the same purchasing power to buy a specific good and service; hence, we use the purchasing power parity agreement to express the differences in dollars for more accurate results, Routledge Dictionary of Economics, “Humnan Development Index” Chapter? | Labor Markets — 145