Chapter 9 - Labour Demand and Supply

What is a labour market

Where individuals seeking employment interact with employers who want to obtain the most appropriate labour skills for their production processes

If a labour market does not function well

It is significantly constrain the economy’s ability to grow

How many labour markets in an economy

There are many distinct labour markets

Why is the demand for labour a derived demand

The demand for labour is derived from the demand for goods and services within the economy

Labour is demanded only because it is needed

for the firm to produce goods and services to make a profit

The demand for labour is what type of curve

downward-sloping

What are the factors influencing labour demand

Output Factors:

• General economic conditions

• Conditions in the firm’s industry

• Demand for an individual firm’s goods or services

• Productivity of labour versus other inputs

• Cost of labour versus other inputs

• Cost of labour versus cost of foreign labour

Because the demand for labour is a derived demand, the single most significant influence on a firm’s demand for labour is

its level of outputs

Many factors will influence the firm’s output such as

• General economic conditions (aggregate demand)

• Conditions in the firm’s industry

• The demand for an individual firm’s products

What is aggregate demand

Refers to the total demand for goods and services within the economy

What are components of aggregate demand

Consumption (C)

Investment (I)

Government spending (G)

Net exports (X-M)

There is a time lag between firms observing a pick-up in the level of demand and

raising their demand for labour

When aggregate demand increases, firms can satisfy the higher demand by

using their existing labour and capital resources more efficiently and intensively

During a fall in the level of aggregate demand, businesses will usually delay

Making staff redundant, in the hopes that conditions improve soon

Any changes in the pattern of consumer demand will affect the pattern of

demand for laour

A firm’s output is ultimately determined by its effectiveness in

selling its goods and services in the marketplace

The productivity of labour and overall labour costs, in comparison to the cost of other inputs such as capital

will determine the extent to which a firm uses labour in its production

The productivity of labour an be defined as and the equation of labour productivity

the output per unit of labour per unit of time

Labour productivity = Total output/Labour input

Labour productivity depends on

• The quality of the workforce

• How efficiently labour can be combined with other factors of production

• Investment in technology

Higher labour productivity means

the output of a firm will be rising without the firm having to increase the number of workers

Overall effect of an increase in productivity on the demand for labour depends on

current level of aggregate demand

If aggregate demand is rising there is

a higher demand for goods and services

If aggregate demand is unchanged, but labour productivity is rising,

the existing workers will be producing more goods and services, but there won’t be any higher demand in the economy

If aggregate demand is falling, but labour productivity is rising

demand for labour will fall even more

Higher labour productivity will make labour

a more attractive input to production than the other factors of production

Higher labour productivity should increase labour demand in the long term as firms

substitute labour for other factors of production

If the productivity of labour is lower than improvements in technology and capital,

labour demand might decline

Capital is a substitute for

labour

Changes in the price of capital have a similar effect on the demand for labour as a

change in the price of any substitute good has on a demand curve

A firm’s demand for labour will be more elastic - that is, it will respond more sharply to price changes - when:

• It is easy to substitute between labour and capital

• Labour costs are a relatively high proportion of its total costs

• It is more difficult for the firm to pass on increased labour costs in the form of higher prices to consumers

The cost of labour does not reflect wage rates it also includes other labour on-costs such as

• Superannuation

• Payroll tax

• Sick leave

The cost of capital is affected by a number of factors, with the most important being

the interest rate, as it represents

• the cost of borrowing funds to purchase new capital equipment

• Opportunity cost if the firm is using its own funds to finance capital expenditures

structure of the tax system

The demand for labour in certain industries in Australia will be influenced by

the cost and productivity of foreign labour

Why is the labour supply curve upward sloping

The higher the wage, the more individuals will be ready and willing to work

Individuals make up the ….. of labour

Firms make up the …… of labour

Supply

Demand

The wage or salary paid to employees is an important determinant of

the supply of labour for any individual firm or industry

Attractive working conditions encourage

a higher supply of labour to a workplace

Most jobs require some level of training or experience and some roles require a formal qualification or licence.

These are all:

Elements of human capital

What is human capital

Total sum of knowledge, skills, training and experience of workers that contributes to the process of production

Human capital reflects the

quality of the labour force and it is the main influence on productivity growth

Supply of labour is limited by the availability of

human capital

Supply of labour will be affected by its responsiveness to

changes in the demand for labour in different areas and industries

There are two types of labour mobility

• Occupational mobility

• Geographical mobility

Occupational mobility refers to

the ability of labour to move between different occupations in response to wage differentials and employment opportunities

Geographical mobility refers to

the ability of labour to move between different locations in response to improved wage differentials and employment opportunities

Factors that limit geographical mobility include

• The cost of relocating (travel, transportation and real estate)

• The personal upheaval associated with moving (breaking ties with family and friends, changing schools)

Who is included in the working age-population

People between the ages of 15 and 64

The labour force participation rate is defined as

The percentage of the civilian population aged 15 years and over who are in the workforce

How do you calculate the labour force participation rate

There are a number of both long and short term factors that influence the participation rate

Short term  the state of the economy will tend to be the most important influence:

• The participation rate is said to be pro-cyclical

• In times of prosperity and economic growth, people will be more inclined to actively seek work, since there are better prospects of finding a job

• In times of recession, on the other hand, people are less optimistic about job prospects and therefore less inclined to actively seek work

Trends in the ageing of the population and the age of retirement are long-term influences on participation rates:

• Recent generations have seen a sustained increase in the participation of women in the workforce

• This reflects several factors, including changing social attitudes, increased childcare support, lower fertility rates and cost of living pressures on households

• Increased school retention rates due to the growing tendency for young people to remain at school longer, as well as seek further full-time tertiary education, mean that people tend to join the workforce later in life

Immigration plays a major role in expanding

the supply of labour

Immigration gives priority to people

With skills that are in short supply

Professional associations imposes standards on their members which tends to restrict

the supply of labour

How can the government limit the supply of labour

Imposing certain qualifications and licence restrictions

What is the workforce

The number of people 15 years of age and above who are either working or actively seeking work

A person is defined as being employed if

they have one or more hours of work per week

A person is defined as unemployed if

they are currently unavailable for work, actively seeking work and are unable to find it

What are the two aspects of the workforce and what do they do

1. Size (the greater the contribution it can make to the production of goods and services)

2. Quality (The more productive it is)

Quality of the workforce are affected by three main factors

• Size of the population

• Age distribution within the population

• Educational patterns

Population growth is influenced by two factors

1. Natural increase

2. Net migration

Natural increase refers to

Excess of births over deaths in the population, taken over a period of one year

Net migration refers to

Excess of permanent new arrivals to our country over permanent departures, over a period of one year

Why has Australia’s natural increase been on a downward trend

• Result of families having fewer children

• Rising average age for first-time mothers and parents in full-time work

The rate of net migration is strongly influenced by

the level of economic activity

In times of depressed economic activity and high unemployment levels, the government does what to migration to

reduces, to ease pressure off the labour market

During periods of stronger economic growth, labour shortages can prompt governments to raise

migration quotas

Although an increase in immigration results in greater demand for housing and public services,

A skills based immigration policy expands ………. more than …….

aggregate supply

aggregate demand

The ageing population is a result of

• Declining birth rates

• Increasing life expectancy

What is the most important factor influencing the quality of a nation’s workforce

Education outcomes