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LABOUR ECONOMICS
 Labour is a factor of production. The term not only includes the number of people
available for or engaged in the production of goods and services but also their physical
and intellectual skills and effort.
 Labour force is the total number of people in a country who are either working or
unemployed but looking for work.
 The mobility of labour is the degree or ability to which workers are able and willing to
move between jobs in different occupations and areas. A lack of labour mobility may
lead to a high frictional unemployment.
 The wage rate is simply the price of labour and as such is determined in a market by the
interaction of supply and demand

THE MARKET FOR LABOUR

Initially we assume ‘ceteris paribus’ perfectly competitive markets for both goods and
labour, i.e. there are so many buyers of labour services (employers) and so many sellers
(workers) that none can affect the price (wage rate).Eg to produce pineapples, farmers
hire labour. Thus, they create a demand for labour. At the same time individuals who
work on pineapple farms supply labour. Thus a market for pineapple labour has been
established.
1. Demand for Labour
Although labour is not quite just another commodity, the demand for its services
follows the pattern for other products. That is at a higher price (wage/salary), less
of it is demanded and at a lower price more is demanded. In other words, the law
of the law of demand is true for labour just like most other commodities.
There is one important difference between factors of production like labour, and
final goods/services. The demand for labour is a derived demand, i.e. the
demand for it is derived from the demand for the final product. For e.g. people
only want carpenters because they want houses or repairs to houses and buildings.
The greater is the demand for the final product, the greater will be the demand for
the particular type of labour required to produce the product.
Price (wage)

Demand Curve for Labour

DL

Quantity
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2. The Supply of Labour

The supply of labour is the quantity or amount of hours which people offer themselves for work.

The supply of labour depends on the price of labour ie. the wage rate. At a higher
wage rate people will be willing to offer themselves for work and to work longer
hours. At a lower wage rate fewer hours will be offered for work by people. Thus the
supply curve for labour will be upward sloping.
Labour has a backward bending supply curve. The theory behind this is that at very
high rate of wages, people will want to work less and spend more time on leisure
activities. This is because their wage rate is so high that they can afford to work less
and spend more time on leisure activities. As a result the supply curve will slope
upward and when it reaches a certain high wage rate it will become vertical and bends
backward on itself. Eg.millionaires.
Supply curve for Labour (backward bending)
P(wages)

DL SL

Quantity
3. Equilibrium in the Labour Market
Equilibrium occurs where the Demand for labour equals the supply of labour ie.
where the demand curve and the supply curve intersect. Refer to the table below:
P(wages)

DL SL

We

Qe Quantity
We = equilibrium wage rate. All workers who want a job are employed at this
point.
Qe = equilibrium quantity.
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 At wage rate above the equilibrium level there will be an excess supply of labour. That
means that surplus labour but less demand for labour. Therefore this will result in
unemployment because there is plenty of labour willing to work but not enough jobs to
cater for them.
 At wage rate below the equilibrium level there will be a shortage of labour as demand
for labour will be greater than the supply. At this stage employers will be looking for
workers as there is a shortage of labours.
A note of caution, wage rate differs amongst different occupations because there are a
number of labour markets e.g. carpenters, electricians, teachers etc and also people have
different skills and aptitudes.

4. Disequilibrium in the Labour Market

Disequilibrium
We can divide the unemployed into two categories:
 The Voluntary Unemployed (VU)
 The Involuntary Unemployed (IU)
Voluntary unemployment consists of the labour which does not offer itself for work or
which offers itself for fewer hours than is capable of working. This is because the wage rate
is not high enough to bring out the maximum amount of work from the labour force. It is
shown in the figure below by the gap from Y to Z at the wage rate Wm.
Involuntary unemployment consists of those parts of the labour force not working because
the supply of labour is more than the demand for them. There are people willing and able to
work but the jobs available are not enough for them. It is shown in the figure below by the
gap from X to Y at the wage rate Wm.
P(wages) SL

DL IU
Wm
We VU

X Qe Y Z Quantity of Labour

A fall in the wage rate will decrease the IU because there will be a greater demand for labour
from employers. It will also increase the voluntary unemployed as people are willing to work
less because of the lower wages.
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 Sticky wages- This occurs when wages may remain above equilibrium for some time
as market forces take time to push prices down, but wages may rise almost instantly
in response to market changes.

5. Factors Determining the size of Labour Force

The supply of labour to a market depends on the following factors:

 Size of the population

 The age composition of the labour force

 Labour force participation rate

 Geographical distribution of the labour force

 Birth rates

 Death rates

 Migration rates

 Mobility rates

 Qualifications and education level for a particular field of work

 Wages/salaries and conditions of work

 Trade unions & professional associations may affect the supply of labour & price

6. Role of Trade Unions, Employers & Government in Wage Determination

Trade unions are organizations of workers who have united to protect their common
interests. The main function of the trade unions is to obtain improved wages and
working conditions for their members. Trade unions have existed in Fiji since 1920,
although it was not until the 1960s that the unions became effective in the public sector.

Sometimes when dispute arises between workers and their employees, trade unions step in
to try and resolve the problem through the process of “collective bargaining” . This is a
process where the trade unions and the management negotiate settlement on a certain issue
e.g. wage claim.

If agreement is reached, a settlement can be drawn up. If negotiations breakdown or reach a

deadlock, there may be several consequences. The government may refer a dispute to a
conciliator or to an independent arbitrator (an officer of the law appointed by the
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government to try and resolve the dispute). In an extreme situation, workers resort to strike
or other forms of industrial action. Their purpose is to force employers to accept or at least
move towards workers demand. The union can use various forms as a weapon but this is
rarely used. Such extremes can be avoided if the two sides accept the decision of the
arbitration tribunal and sometimes through the intervention of the government.

A simple flow diagram of how trade unions, employers and the government settles dispute is
shown below.

U UNION CLAIM EMPLOYERS OFFER

NEGOTIATION

AGREEMENT DEADLOCK

7.

STRIKE
LOCK OUT

ARBITRATION

SETTLEMENT
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8. Real and Nominal Wages

The wage rate is important to a worker, but what is equally important to him/her
is what this wage will buy. If the average wage is $50 an hour, this may seem
excellent, but if this $50 can only buy a magazine or 2kg of potatoes, then it is
much less attractive.

 Nominal wages- is the amount in current dollars which an employee gets in

the bank during pay day.

 Real wages- is the amount in constant dollars which measures what the
employee will be able to buy from his/her wages. It measures the purchasing
power of how many goods/services is able to buy from his wages. It is the
wages adjusted to changes in prices. To a rational worker , real wages is an
important measure for it tells him/her the buying power of the pay they
receive.