Labor Economics

Ques No.1
A . what economics is all about? How can be these various concepts of
economics useful in decision making
process of managing human resource in an organization?
b. How does scope of labor economics differ from that of personnel
economics?
c. What is resource in economics? What are the distinct characteristics of
labor as an economic resource?

Ans:
a. what economics is all about? How can be these various concepts of
economics useful in decision making
process of managing human resource in an organization?

Definition of Economics:
Economics is characteristically a social science as it deals with Man's
behavior as a member of society. A man's behavior is to satisfy wants and
the utilization of available resources, which is the ordinary business of
man's life.

Economics, as a social or behavioral science is comparable with political
science, sociology, psychology and ethics, each or which studies a
different aspect of man's social life and behavior. For instance, political
science deals with man's relation with state, sociology broadly examines
man's social relations, ethics concerned with morality while psychology
studies man's mind. Likewise, Economics studies man's behavior in relation
to wants and resources.

Economics is a full-fledged social-science, for it is a body of knowledge
in which the various facts relevant to man's economic behavior and the
economic life have been systematically collected, co-coordinated,
processed, analyzed, and presented in an orderly way.

How Economics is Important for HR Managers
A business manager is essentially involved in the processes of decision
making as well as forward planning. Decision making is an integral part of
management. Management and decision making are to be considered as
inseparable. It is the intellectual process and a purposeful activity which
at varied times takes in hands all the managerial activities, such as,
planning, organizing, staffing, directing and controlling. It is the
process wherein an executive, by taking in to consideration several
alternatives reaches at the conclusion about how it should be dealt
successfully in a given situation. Thus, being a continuous activity,
decision making is regarded to be the heart of management.

Managerial economics is very much capable of serving various purposes and
useful for managers in making decisions in relation to the internal
environment. It aims at the development of economic theory of the firm
while facilitating the decision making process with regard to sales and
profits etc. Moreover, it enables to take decisions about appropriate
production and inventory policies for the future. It is a branch of
economics that is applied to analyze almost all business decisions. It is
meant to undertake risk analysis, production analysis that is useful for
production efficiency. Likewise, it is of great use for capital budgeting
processes as well. In the most positive form, it seeks to make successful
forecasts with the objective of minimizing the risks involved. It deals
with the aspects as how much cash should be available and how much of it
should be invested in relation to a choice of processes and projects while
making possible the economic feasibility of various production lines.

Managerial economics plays a significant role in the business
organizations. It is very much effective to the management in decision
making and forward planning in relation to the internal operations of a
business as it gives clear understanding of market conditions as well as
analytical tools through which the competitions prevailing in the markets
can be studied, at the same time the market behavior can be predicted. It
enables to analyze the information about the business environment in which
a business is managed. It is meant to undertake systematic course of
business plans by making possible forecasts. Managerial economics
contributes to the profitable growth of business and effective solutions of
the business problems by changing the economic scenario in to the feasible
business opportunities for business organizations while enabling managers
to optimize business decisions as well as involving them in the activity of
forward planning efficiently.

b. How does scope of labor economics differ from that of personnel
economics?

Scope of Labor Economics
Labour economics has to deal with may be stated as manpower planning,
labour organization, labour relations and public policy wage and employment
theory, collective bargaining theory and practice of social security and
welfare etc.

According to Dr. G.P.Sinha, the following areas of study may be listed to
fall under the preview of labour economics:-
I. Institutional framework of the particular economic system.
II. Size and composition of the labour force and labour market.
III. Labour as a factor of production- productivity and efficiency
condition of work-industrial relation standard of living
IV. Labor's risk and problems.
V. Trade unionism
VI. Labor's status and position in society
VII. Labour legislation.

Another different area of labour economics are:-
I. Advance theory of labour economics
II. Labour laws
III. Principles of personnel management and job evaluation
IV. Principle and practice of labour welfare

Scope of Managerial Economics
From the point of view of a firm, managerial economics, may be defined as
economics applied to "problems of choice" or alternatives and allocation of
scarce resources by the firms. Thus managerial economics is the study of
allocation of resources available to a firm or a unit of management among
the activities of that unit. Managerial economics is concerned with the
application of economic concepts and analysis to the problem of formulating
rational managerial decisions. There are four groups of problem in both
decisions-making and forward planning.

Resource Allocation: Scare resources have to be used with utmost efficiency
to get optimal results. These include production programming and problem of
transportation etc. How does resource allocation take place within a firm?

Inventory and queuing problem: Inventory problems involve decisions about
holding of optimal levels of stocks of raw materials and finished goods
over a period. These decisions are taken by considering demand and supply
conditions.
Queuing problems involve decisions about installation of additional
machines or hiring of extra labour in order to balance the business lost by
not undertaking these activities.

Pricing Problem: Fixing prices for the products of the firm is an important
decision-making process. Pricing problems involve decisions regarding
various methods of prices to be adopted.

Investment Problem: Forward planning involves investment problems. These
are problems of allocating scarce resources over time. For example,
investing in new plants, how much to invest, sources of funds, etc.

Study of managerial economics essentially involves the analysis of certain
major subjects like:
The business firm and its objectives
Demand analysis, estimation and forecasting
Production and Cost analysis
Pricing theory and policies
Profit analysis with special reference to break-even point
Capital budgeting for investment decisions
Competition.

c. What is resource in economics? What are the distinct characteristics of
labor as an economic resource?

Resource in Economics
The satisfaction of wants can only be accomplished by using up resources,
the inputs, the so-called factors of production or means of production.
These resources can be classified as land, labor, capital, and
entrepreneurship.

Land is land itself and anything that grows on it or can be taken from it —
the "natural resources." Imagine producing anything from a pizza to a
medical doctor without the use of land somewhere along the productive
process.

Labor, another resource, is human effort, both physical and mental. The
resource capital is also known as capital goods. An economist's use of
capital is not a reference to money but to a resource.

Capital is a man-made tool of production; it is a good that has been
produced for use in the production of other goods. Goods are produced for
one of two purposes. A good may be a consumer good used for the
satisfaction of wants, which is the ultimate purpose of production. Or a
good may be a capital goods produced not for consumption but for use in
producing more goods, either consumer or capital. So capital goods, such as
a mechanic's wrench or a school building, are resources that have been
produced and that will combine with other resources, such as land and
labor, to produce more output. Some goods may be a consumer good in one use
and a capital good in another use. For example, consider a personal
computer. When the computer is used to play solitaire, it is a consumer
good. On the other hand, when it is used as a word processor to write a
textbook, it is a capital good. To tell whether a good is a consumer good
or a capital good, ask yourself a question: Is the good going to be
consumed directly or will it be used to produce more goods? If it is to be
consumed directly and purchased by consumers, it is a consumer good; if it
is to be used to produce other goods and purchased by business, it is a
capital good.

Entrepreneurship is human effort again. Entrepreneurs are the risk takers.
They are more than managers, although they use managerial ability.
Entrepreneurs reap the profits or bear the losses of their undertakings.
Entrepreneurship is the organizational force that combines the other
factors of production — land, labor, and capital — and transforms them into
the desired output. The output may be capital or consumer goods, but
ultimately consumer goods are produced to satisfy wants.









2. a. "The price elasticity of demand is very important in total revenue
planning of a firm" – Comment on the validity of this statement. Or How can
you use the concept of elasticity in connection to labor demand and labor
supply?
b. What do you understand by the term "Market Equilibrium"? what are
the causes of shifting product market equilibrium?
c. Describe the "Law of Demand" with some of its exceptions.
d. What are the characteristics of a perfect competitive market? Is
there any perfect competitive market in Bangladesh? If any, give an
example.
e. Describe the law of diminishing marginal return.


a. "The price elasticity of demand is very important in total revenue
planning of a firm" – Comment on the validity of this statement. Or How can
you use the concept of elasticity in connection to labor demand and labor
supply?

Ans:
Price elasticity of demand is an important topic in economics. It relates
to the key concepts of supply and demand. When something changes in a
market -- price, for example -- elasticity tells us how much other things
will change. The relationship between price elasticity and total revenue is
critical, as it helps to inform management when making pricing decisions
for a good or a service.

Price Elasticity
Price elasticity tells how much of an impact a change in price will have on
the consumers' willingness to buy that item. If the price rises, the law of
demand states that the quantity demanded of that item will decrease. Price
elasticity of demand tells you how much the quantity demanded decreases.
Elastic demand means that the consumers of that good or service are highly
sensitive to changes in price. Usually, a good which is not a necessity or
has numerous substitutes has elastic demand. Inelastic demand means that
the consumers of that good are not highly sensitive to price changes. If
the price of an inelastic good, say cigarettes, rises by 10 percent, maybe
sales will only decrease by 1 percent. Consumers will still buy that good,
typically because it is essential or has no substitutes.

How to Calculate Price Elasticity
The price elasticity of a good or service is calculated as the percent
change in the quantity demanded of a good divided by the percent change in
the price for that good. A price elasticity greater than one indicates that
the good is elastic, that quantity demanded is highly sensitive to changes
in price. For example, a 1-percent change in the price of chicken might
cause a 5-percent decrease in sales. A price elasticity less than one tells
you that your good is inelastic. In this case, price changes will have a
small impact on quantity demanded. If a good/service has a price elasticity
of one, also called unitary elasticity, this means that a 5-percent change
in price will result in a 5-percent change in quantity demanded.

Total Revenue
Total revenue is calculated as the quantity of a good sold multiplied by
its price. It is a measure of how much money a company makes from selling
its product, before any costs are considered. Obviously, the goal of a
company is to maximize profits, and one way to do this is by increasing
total revenue. The company can increase its total revenue by selling more
items or by raising the price.

Why Elasticity Matters
Price elasticity of demand and total revenue are closely interrelated
because they deal with the same two variables, P and Q. If your product has
elastic demand, you can increase your revenue by decreasing the price of
that good. P will decrease, but Q will increase at a greater rate, thus
increasing total revenue. If the product is inelastic, then you can
actually raise prices, sell slightly less of that item but make higher
revenue. As a result, it is important for management to know whether its
product has inelastic or elastic demand.

b. What do you understand by the term "Market Equilibrium"? what are the
causes of shifting product market equilibrium?

Market Equilibrium
In a market, there are two sets of forces tending in the opposite
direction. On the one side, there are large number of buyers who compete
with one another for the purchase of commodities at lower prices.
Competition amongst the buyers tends to raise the price. On the other side,
there are large number of sellers who compete with one another for the,
sale of commodities at higher prices. Competition amongst the sellers tends
to lower the price. When the pressure of these two forces is equal in the
opposite direction, i.e., when the quantity offered for sale is just equal
the quantity demanded at a particular price, the market is said to be in
equilibrium.

Causes of Shifting Product Market Equilibrium
Equilibrium means a state of equality or a state of balance between market
demand and supply. Without a shift in demand and/or supply there will be no
change in market price. Changes in the conditions of demand or supply will
shift the demand or supply curves. This will cause changes in the
equilibrium price and quantity in the market.






Changes in Market Demand and Equilibrium Price

The demand curve may shift to the right (increase) for several reasons:
1. A rise in the price of a substitute or a fall in the price of a
complement
2. An increase in consumers' income or their wealth
3. Changing consumer tastes and preferences in favor of the product
4. A fall in interest rates (i.e. borrowing rates on bank loans or
mortgage interest rates)
5. A general rise in consumer confidence and optimism

The outward shift in the demand curve causes a movement (expansion) along
the supply curve and a rise in the equilibrium price and quantity. Firms
in the market will sell more at a higher price and therefore receive more
in total revenue.

The reverse effects will occur when there is an inward shift of demand. A
shift in the demand curve does not cause a shift in the supply curve! 
Demand and supply factors are assumed to be independent of each other
although some economists claim this assumption is no longer valid!

Changes in Market Supply and Equilibrium Price

The supply curve may shift outwards if there is
1. A fall in the costs of production (e.g. a fall in labour or raw
material costs)
2. A government subsidy to producers that reduces their costs for each
unit supplied
3. Favorable climatic conditions causing higher than expected yields for
agricultural commodities
4. A fall in the price of a substitute in production
5. An improvement in production technology leading to higher productivity
and efficiency in the production process and lower costs for
businesses
6. The entry of new suppliers (firms) into the market which leads to an
increase in total market supply available to consumers

The outward shift of the supply curve increases the supply available in the
market at each price and with a given demand curve, there is a fall in the
market equilibrium price from P1 to P3 and a rise in the quantity of
output bought and sold from Q1 to Q3. The shift in supply causes an
expansion along the demand curve.
c. Describe the "Law of Demand" with some of its exceptions.




Law of demand :

1. States that people will buy more of a product at a lower price than at a
higher price, if nothing changes.
2. States that at a lower price, more people can afford to buy more goods
and more of an item more frequently, than they can at a higher price.
3. States that at lower prices, people tend to buy some goods as a
substitute for others more expensive.

Exceptions
The law of demand does not apply in every case and situation. The
circumstances when the law of demand becomes ineffective are known as
exceptions of the law. Some of these important exceptions are as under.
1. Giffen goods:
Some special varieties of inferior goods are termed as Giffen goods.
Cheaper varieties of this category like bajra, cheaper vegetable like
potato come under this category. Sir Robert Giffen or Ireland first
observed that people used to spend more their income on inferior goods like
potato and less of their income on meat. But potatoes constitute their
staple food. When the price of potato increased, after purchasing potato
they did not have so many surpluses to buy meat. So the rise in price of
potato compelled people to buy more potato and thus raised the demand for
potato. This is against the law of demand. This is also known as Giffen
paradox.
2. Conspicuous Consumption:
This exception to the law of demand is associated with the doctrine
propounded by Thorsten Veblen. A few goods like diamonds etc are purchased
by the rich and wealthy sections of the society. The prices of these goods
are so high that they are beyond the reach of the common man. The higher
the price of the diamond the higher the prestige value of it. So when price
of these goods falls, the consumers think that the prestige value of these
goods comes down. So quantity demanded of these goods falls with fall in
their price. So the law of demand does not hold good here.
3. Conspicuous necessities:
Certain things become the necessities of modern life. So we have to
purchase them despite their high price. The demand for T.V. sets,
automobiles and refrigerators etc. has not gone down in spite of the
increase in their price. These things have become the symbol of status. So
they are purchased despite their rising price. These can be termed as "U"
sector goods.
4. Ignorance:
A consumer's ignorance is another factor that at times induces him to
purchase more of the commodity at a higher price. This is especially so
when the consumer is haunted by the phobia that a high-priced commodity is
better in quality than a low-priced one.
5. Emergencies:
Emergencies like war, famine etc. negate the operation of the law of
demand. At such times, households behave in an abnormal way. Households
accentuate scarcities and induce further price rises by making increased
purchases even at higher prices during such periods. During depression, on
the other hand, no fall in price is a sufficient inducement for consumers
to demand more.
6. Future changes in prices:
Households also act speculators. When the prices are rising households tend
to purchase large quantities of the commodity out of the apprehension that
prices may still go up. When prices are expected to fall further, they wait
to buy goods in future at still lower prices. So quantity demanded falls
when prices are falling.
7. Change in fashion:
A change in fashion and tastes affects the market for a commodity. When a
broad toe shoe replaces a narrow toe, no amount of reduction in the price
of the latter is sufficient to clear the stocks. Broad toe on the other
hand, will have more customers even though its price may be going up. The
law of demand becomes ineffective.

d. What are the characteristics of a perfect competitive market? Is there
any perfect competitive market in Bangladesh? If any, give an example.

Ans:
Characteristics of Perfect Competitive Market
Characteristics of a perfectly competitive market/industry:
Numerous buyers and sellers
Homogeneous products
Consumers have perfect information about prices
All firms, incumbent and potential entrants alike, have equal access
to resources

Implications of these characteristics:
Price-taking firm
Law of one price
Free entry
Perfect Competitive Market In Bangladesh
e. Law of Diminishing of Marginal Returns
A principle of short-run production stating that as a firm combines more of
a variable input with a fixed input, the marginal product of the variable
input eventually declines. This is THE economic principle underlying the
analysis of short-run production for a firm. It offers an explanation for
the law of supply and the positive slope of the market supply curve.
The law of diminishing marginal returns means that the productivity of a
variable input declines as more is used in short-run production, holding
one or more inputs fixed. This law has a direct bearing on market supply,
the supply price, and the law of supply. If the productivity of a variable
input declines, then more is needed to produce a given quantity of output,
which means the cost of production increases, and a higher supply price is
needed. The direct relation between price and quantity produced is the
essence of the law of supply.
The law of diminishing marginal returns occurs when equal increases of
variable resources are successively added to some fixed resource; marginal
physical products eventually decline.
The fixity of at least one resource in the short run makes diminishing
marginal returns unavoidable: Not all resources can be varied
proportionally, so capital and land per worker fall as more workers are
hired, inevitably leading to diminishing additions of output as extra labor
is hired. This basic economic law is without exception. Were it not for
diminishing returns, enough food might be grown in a flower pot to feed the
world.




3. a. Describe the substitution effect and scale effect in context of labor
demand.
b. Why individual labor supply is a backward bending curve? Explain
with the concepts of income effect and substitution effect.
Ans:
The Substitution Effect
The change in quantity demanded that results because a change in the demand
price of a good causes a change in the relative prices, which induces
buyers to substitute the purchase of one good for another. This is one of
two reasons, or effects, underlying the law of demand and the negative
slope of the market demand curve. The other is the income effect.
The substitution effect offers part of an explanation for the law of demand
and the negative slope of the demand curve. It rests on the observation
that a change in price changes the relative price of substitute goods. If
the price rises, then substitute goods become relatively less expensive to
buy. If the price falls, then substitute goods become relatively more
expensive to buy.

b. BACKWARD BENDING CURVE
The backward-bending supply curve of labour is a thesis that claims that as
wages increase, people will substitute leisure for working. Eventually,
wages can increase to a point where less labour is offered in the market.
Economic theory would suggest that the real wage is a key determinant of
the number of hours. The real wage is the money wage rate adjusted for
changes in the price level and it measures the quantity of goods and
services that can be bought from each hour worked. An increase in the real
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. Indeed, there is the possibility of a backward-
bending individual labour supply curve. This is illustrated in the next
diagram.
 
Two distinct individual labour supply curves are shown. In the first curve,
higher real 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. In the second curve, 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.
Income and substitution effects
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.
o The income effect: Higher real wages increase the income that someone
can earn from a job, but they also mean that the time that must be
spent at work to earn sufficient to pay for a particular product
declines. Put briefly, 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.
o The substitution effect: The substitution effect of a higher wage rate
should unambiguously give people an incentive to work extra hours
because the financial rewards of working are raised, and the
opportunity cost of not working (measured by the wages given up when
people opt for leisure instead) has increased.
4. a. Describe law of diminishing marginal product with an example.
b. Describe the different cost concepts that are related to firm level
decision making.

a. law of diminishing marginal product with an example
Law of diminishing returns refer to how the marginal production of a factor
of production starts to progressively decrease as the factor is increased,
in contrast to the increase that would otherwise be normally expected.
The average product typically varies as more of the input is employed, so
this relationship can also be expressed as a chart or as a graph. A typical
average physical product curve is shown (APP). It can be obtained by
drawing a vector from the origin to various points on the total product
curve and plotting the slopes of these vectors.

Because the marginal product drives changes in the average product, we know
that when the average physical product is falling, the marginal physical
product must be less than the average. Likewise, when the average physical
product is rising, it must be due to a marginal physical product greater
than the average. For this reason, the marginal physical product curve must
intersect the maximum point on the average physical product curve.
b. the different cost concepts that are related to firm level decision
making

Types of Cost
Total fixed costs (TFC)
Average fixed costs (AFC)
Total variable costs (TVC)
Average variable cost (AVC)
Total cost (TC)
Average total cost (ATC)
Marginal cost (MC)

Fixed Cost
Fixed Cost denotes the costs which do not vary with the level of
production. FC is independent of output.
Eg: Depreciation, Interest Rate, Rent, Taxes
Total fixed cost (TFC): All costs associated with the fixed input.
Average fixed cost per unit of output: AFC = TFC /Output

Variable Cost
Variable Costs is the rest of total cost, the part that varies as you
produce more or less. It depends on Output.
Eg: Increase of output with labour.
Total variable cost (TVC): All costs associated with the variable
input.
Average variable cost- cost per unit of output: AVC = TVC/ Output

Total Cost
The sum of total fixed costs and total variable costs: TC = TFC + TVC
Average Total Cost: Average total cost per unit of output:
ATC =AFC + AVC
ATC = TC/ Output



Marginal Cost

The additional cost incurred from producing an additional unit of
output:
MC = ( TC
( Output
MC = ( TVC
( Output


5. a. what factors would you take into account for determining real wage?
b. What is a wage differential? Distinguish between wage differentials and
discrimination.
c. Distinguish between nominal wage and real wage. Give an example of the
application of the concept of real wage in HRM?
d. "Wage differential" or "wage discrimination" – which one is important in
designing of the payroll of an organization? Why?
e. Define real wage and explain the statement – "Increase of money wage is
not necessarily an increase in real wage"

A. factors for determining of real wage
Real wage refers to the purchasing power or buying capacity of money wage.
It is the amount of necessaries, comforts, and luxuries which the worker
can command in return for his remuneration. Thus real wage is expressed in
terms of goods and services. It is the amount of goods and services or
benefits that a worker enjoys against of his job. The real wage is said to
be high when a laborer obtains larger quantity of goods and services with
his money income.
Factors determining Real Wage:
(1) Purchasing power of money:-
Purchasing power or value of money determines the real wage. If the
purchasing power of money is high purchasing power of money depends on
price level. If price is high purchasing power of money falls and real wage
declines.
(2) Additional facilities:
Besides money wages, a work gets certain other benefits in his job. If such
benefits are more besides his money income, his real income is more. For
example a worker gets free housing, free education of his children, free
medical service other than his monthly salary. In such a case his real wage
is higher.
(3) Extra income:
The extra income of a worker is also taken into consideration in
calculating the real wage of a laborer. If a worker earns extra Income in
addition to his wage, his real wage will be higher. A school teacher earns
as a private tutor and the income he earns is subsidiary to his main income
from teacher ship. In such a case his real wage is more.
(4) Condition of work:
The working condition of a laborer also determines his real wage. If the
duration of work is less and there is recreational facilities, place of
working is well ventilated, well lighted, the real wage will be certainly
higher.
(5) Nature of Job:
Real wage also depends on the nature of the job. The real wage is lower if
the job is temporary. If the job is permanent, his real wage will be more.
A temporary job is more or less insecure. There is possibility of being
retrenched. Thus if a worker earns more but his job is temporary, his real
Wage is not higher.
(6) Period and expenses of learning a trade:
The period and the money expenditure also determine the real wage. If
period of study and training and cost of learning the job are high, the
real wage of the worker is said to be falling. Thus the real wage of a
clerk in the administration is higher than the real wage of a-doctor.
(7) Nature of work:
The real wages are also determined by the risk and uncertainty involved in
the work. If the work is risky, real wage will be lower. For example a
captain in submarine always expects danger and risk. He receives higher
wages but in spite of his higher wage his real wage is lower.
(8) Future prospects:
The real wage is said to be higher in those jobs where there is possibility
of promotion and other future prospects. But where jobs are traditional and
static, there is hardly any chance of promoting to higher position, the
real wage is said to be lower.
(9) Social prestige:
Those jobs which have higher social prestige ensure a higher real wage.
Here the status the job is important. For example a lecturer in non-aided
private college gets a very poor salary but as the job is prestigious, his
real wage is more.
(10) Timely Payment:
Real wage is also determined by timely payment of wages. If the wage is
regular and timely the real wage of the worker is higher although his
income is pretty less. But in the jobs where payment of salary is
irregular, untimely and untired, real wage is said to be lower.




C. What is Wage Differentials? Distinguish between wage differentials and
discrimination
Different wages paid to different workers or in different markets that
adjust for differences in the jobs or in the productivity of the workers.
Wage differentials occur for many reasons. Quite often they are the result
of the personal preferences of workers. In some cases workers are willing
to "buy" leisure-time or other types of household production by taking
lower wages. Differences in job risks, education, and location are also
reasons for the persistence of wage differentials.

Wage Differentials
Differences in wages arising between individuals, occupations, industries,
firms and regions.

Reasons
Supply & Demand- there is a limited supply for certain professions
such as barristers who require long and difficult qualifications along
with work experience such as pupil ages. This makes them difficult to
substitute.
Therefore demand and supply are inelastic so wages are high.
Government policy-the government usually implements a minimum wage.
Trade unions can create a monophony labour market which gives workers
more power and can boost wages.
Esteem-some professions are held in high regard such as doctors.

Wage Discrimination
This is another factor why wages may differ between certain groups
Positive discrimination exists when certain groups of workers are
favoured a lot more than others.
For example the government may positively discriminate workers in
order to try and offset any negative discrimination such as an "Equal
Pay and Flexible Working Bill".
Negative discrimination exists when a certain group of workers are
treated less favourably than others.
This could be due to ethnicity, age or gender.
This may cause labour market failures such as unemployment or
undersupply of labour.


d. Distinguish between nominal wage and real wage. Give an example of the
application of the concept of real wage in HRM?

Nominal Wages - wages measured in money.

Real Wages - wages measured not in terms of money itself (as nominal wages
are) but rather in terms of how much output that money can buy.

Concept of Real Wage in HRM
A sound wage policy is to adopt a job evaluation programme in order to
establish fair differentials in wages based upon differences in job
contents. Beside the basic factors provided by a job description and job
evaluation, those that are usually taken into consideration for wage and
salary administration are:
The organizations ability to pay
Supply and demand of labour
The prevailing market rate
The cost of living
Living wage
Productivity
Trade unions bargaining power
Job requirements
Managerial attitudes and
Psychological and sociological factors
Levels of skills available in the market
The organizations ability to pay: Wage increases should be given by those
organizations which can afford them. Companies that have good sales and,
therefore, high profits tend to pay higher those which running at a loss or
earning low profits because of higher cost of production or low sales.
Supply and demand of labour: The labour market conditions or supply and
demand forces operate at the national, regional and local levels, and
determine organizational wage structure and level.
Prevailing market rate: This is known as the 'comparable wage' or 'going
wage rate', and is the widely used criterion. An organization compensation
policy generally tends to conform to the wage rate payable by the industry
and the community.
The cost of living: The cost of living pay criterion is usually regarded as
an automatic minimum equity pay criterion. This criterion calls for pay
adjustments based on increases or decreases in an acceptable cost of living
index.
The living wage: Criterion means that wages paid should be adequate to
enable an employee to maintain himself and his family at a reasonable level
of existence.
Psychological and Social Factors: These determine in a significant measure
how hard a person will work for the compensation received or what pressures
he will exert to get his compensation increased. Psychologically, persons
perceive the level of wages as a measure of success in life; people may
feel secure; have an inferiority complex, seem inadequate or feel the
reverse of all these.
Skill Levels Available in the Market: With the rapid growth of industries
business trade, there is shortage of skilled resources. The technological
development, automation has been affecting the skill levels at faster
rates. Thus the wage levels of skilled employees are constantly changing
and an organization has to keep its level up to suit the market needs



6. a. Describe the different groups in a labor market with their inter
relations.
b. What do you understand by the term "labor force participation rate" and
"unemployment rate"? Describe the various type of unemployment.
c. What is an internal labor market? How does it differ from an external
labor market?
d. Write down the main features of a primary labor market and a secondary
labor market.
e. Discuss the structure of a labor market, identifying its major
stakeholders with a diagram.
f. Discuss various types of unemployment. Give your suggestions to reduce
the frictional unemployment?
g. Discuss the concepts of labor market with the scope its segregation.
h. Explain the factors that determine the total amount of labor supply
available in an economy.
i. What are the determinants of elasticity of labor demand? How can the
concept of "labor demand elasticity" be used in retrenchment and motivation
policy of a firm?


A. Different Groups
Modern labour market segmentation theory arose in the early 1960s. It
opened the eyes of many economists viewing the labor market as just a
market with people with individual characteristics of education and
motivation as well as technology playing a major factor in terms of
producing output. The labour-market segmentation theory revolves around the
identification of a split between two analytically divisions in the economy
and the labour-market.
Two key sectors of Labour Market Segmentation: Primary and Secondary Sector
The Primary Sector
In a primary sector the workforce as a whole is motivated to serve their
employer because of wages, health benefit, and pension and job security.
Job market consists of majority blue collar and white collar jobs. The
primary sector generally contains the higher-grade, higher-status, and
better-paid jobs, with employers who offer the best terms and conditions.
The Secondary Sector
In a secondary sector, job management is entitled to complete control
because there is a larger turnout. Many in this job type either leave or
are replaced quickly. These jobs give low emphasis on job morale and their
workers lack motivation. The secondary jobs are mostly low-skilled, require
relatively little training, and can be learned relatively quickly on the
job.


b. What do you understand by the term "labor force participation rate" and
"unemployment rate"? Describe the various type of unemployment.
Labor Participation Rate
The labor force participation rate is the percentage of working-age persons
in an economy who:
Are employed
Are unemployed but looking for a job
Typically "working-age persons" is defined as people between the ages of 16-
64. People in those age groups who are not counted as participating in the
labor force are typically students, homemakers, and persons under the age
of 64 who are retired.
Labor force participation rate=


Civilian labor force
-------------------------------------------------- X 100
Total non institutionalized civilian population


Unemployment Rate
The official definition of the unemployment rate, given below in a series
of four definitions, contains a couple of unavoidable complications. (1) A
person who loses a 40 hour per week job, but works for one hour mowing a
lawn for pay is classified as employed. (2) A person who simply expresses
interest in having a job is classified as unemployed. "Discouraged
workers" who have lost a job, but do not make an effort to find a new job
in a given week are not classified as unemployed or even as in the labor
force. Both possibilities mean that the announced unemployment rate is not
as definitive as it might sound.
Nonetheless, the unemployment rate is defined as the number of unemployed
persons divided by the labor force, where the labor force is the number of
unemployed persons plus the number of employed persons. The formula for
calculating the unemployment rate (expressed as a percent) is as follows:

Unemployment Rate = (Unemployed Workers / Total Labor Force) * 100

Unemployment is an economic condition where an individual or individuals
seeking jobs cannot manage to get themselves economically employed. The
level of unemployment differs with economic conditions and other market
forces. Basically, there are five types of unemployment.

Frictional Unemployment: Frictional unemployment is a temporary condition.
This unemployment occurs when an individual is out of his current job and
looking for another job. The time period of shifting between two jobs is
known as frictional unemployment. The probability of getting a job is high
in a developed economy and this lowers the probability of frictional
unemployment. There are employment insurance programs to tide over
frictional unemployment.

Structural Unemployment: Structural unemployment occurs due to the
structural changes within an economy. This type of unemployment occurs when
there is a mismatch of skilled workers and occupational vacancies in the
labor market. Some of the causes of the structural unemployment are
geographical immobility (difficulty in moving to a new work location),
occupational immobility (difficulty in learning a new skill) and
technological change (introduction of new techniques and technologies that
need less labor force). Structural unemployment depends upon the growth
rate of an economy and also on the structure of an industry.

Classical Unemployment: Classical unemployment is also known as real wage
unemployment or disequilibrium unemployment. This type of unemployment
occurs when trade unions and labor organization bargain for higher wages,
which leads to strikes and lockouts and result in the fall in the demand
for labor.

Cyclical Unemployment: Cyclic unemployment occurs when there is an economic
recession. When there is a downturn in an economy, the aggregate demand for
goods and services decreases and demand for labor decreases. At the time of
recession, unskilled and surplus laborers become unemployed.

Seasonal Unemployment: A type of unemployment that occurs due to the
seasonal nature of the job is known as seasonal unemployment. The
industries that are affected by seasonal unemployment are hospitality and
tourism industries and also the fruit picking and catering industries.

c. What is an internal labor market? How does it differ from an external
labor market?

Internal Labor Market
Internal labor markets are those where workers are hired into entry level
jobs and higher levels are
filled from within. Wages are determined internally and may be quite free
of market pressure.

An internal labor market is "an administrative unit, such as a
manufacturing plant, within which the pricing and a location of labor is
governed by a set of administrative rules and procedures".

External Labor Market
In the context of the specific firm, the external labour market represents
its external supply or available stock of labour. Both the types of labour
that the firm requires and the potential pool of workers available are
determined by the industry sector in which the organization operates, its
central activities, its location, size and scope and its competitive and HR
strategies. In reality, as labour is not a homogenous commodity, the
external labour market can be understood as a multitude of individual
labour markets.

d. Write down the main features of a primary labor market and a secondary
labor market.

Ans;
In primary jobs, workers are allowed "responsible autonomy" and are then
motivated to serve the boss via a wage premium, job security, defined-
benefit pensions, other decent benefits, etc. (It's related to Edwards'
idea of "bureaucratic control.") They are assets to be invested in, getting
on-the-job training and the like. From most workers' perspectives, these
are the ideal jobs -- or rather, careers -- so that there is sometimes a
queue of workers trying to break in, proving themselves to be worthy using
their educational credentials and the like.
In secondary jobs, on the other hand, management treats workers like
interchangeable parts. If they don't like the job, they can leave. There's
high turnover, so the ones who leave (or are fired) can easily be replaced
by workers from the reserve army and from similar jobs. Concerns with
motivation and morale are minor, while "simple control" (intense
supervision) and "technical control" (machine-pacing) strategies are
pursued (to use Edwards' terms). The working poor are typically stuck in
this labor market segment, finding it difficult if not impossible to rise
into the primary segment. This is part of the problem of poverty: the "good
jobs" of the primary sector correspond to (and to some extent are paid for
by) the "bad jobs" of the secondary sector.
e. Discuss the structure of a labor market, identifying its major
stakeholders with a diagram

Ans:
The Structure Of A Labor Market




f. Discuss various types of unemployment. Give your suggestions to reduce
the frictional unemployment?
Ans:

Various Types of Unemployment
Unemployment is characterized into five basic types: frictional, cyclical,
seasonal, structural and technological.

Frictional Unemployment - The continuous flow of individuals from job to
job and in and out of employment is called frictional unemployment. There
will always be some frictional unemployment as resources are directed in
the market.

Cyclical Unemployment - Occurs during a major downturn in business cycle
caused by a low demand for goods/services. (An example is September 11th)

Seasonal Unemployment - Comes and goes with seasons of the year in which
the demand for particular jobs rises and falls. (An example is construction
or agriculture)

Structural Unemployment - Results from fundamental changes in the structure
of the economy. Occurs when demand for a product falls drastically so that
workers specializing in the production of that product find themselves out
of work.

Technological Unemployment - Caused by technological changes reducing labor
demands for specific tasks.

How to reduce the frictional unemployment
While totally eliminating frictional unemployment is probably unwise, if
not impossible, it can be reduced by improving the efficiency of resource
markets, in particular, by reducing the cost of information search. If
Benji had known about the assistant manager position at the Guettenburg
Book Emporium, he might have quit one job on Tuesday and started his new
one on Wednesday, without any frictional unemployment.

As a matter of fact, one prime benefit of the computer revolution and
widespread use of the Internet, has been to reduce information search cost
in the labor market. Rather than spending hours scanning the want ads or
days pounding the pavement, a job seeker can spend a few minutes searching
the World Wide Web for available jobs. Any policies that further improve
the efficiency of such information search are bound to reduce frictional
unemployment.
g. Discuss the concepts of labor market with the scope its segregation.

h. Explain the factors that determine the total amount of labor supply
available in an economy.
Availability of qualified personnel effects both labor supply and demand.
For example: A critical shortage of nurses in this country effects the
supply of qualified nurses for positions available in hospitals, and the
demand for qualified nurses to fill those slots. A shortage of nurses
effects rate of pay. The greater the demand coupled with greater shortage
of qualified applicants, the higher/more competitive the salaries for those
positions.

The economy and demand for products and/or services effects both labor
supply and demand. Sluggish economy and less demand for products and/or
services results in layoffs. A strong economy and high demand for
products/services creates jobs (labor). In a nutshell.

i. What are the determinants of elasticity of labor demand? How can the
concept of "labor demand elasticity" be used in retrenchment and motivation
policy of a firm?

Ans:
Determinants of Elasticity of Labor demand
§ Traditional microeconomic analyses tells us that federally mandated
minimum wage laws will lead to increased unemployment
§ Since a minimum wage that is higher than the equilibrium wage would
result in excess supply of workers,that is unemployment.

§ For sure LARGE increases in the minimum wage will lower the level of
employment but what about SMALL increases?
§ The responsiveness of labor demand to a change in wage rates is
normally measured as an "elasticity"
§ The own wage elasticity of demand for labor is defined as the
percentage change in its employment given a 1% change in the wage rate
§ (=(%(E)/(% (W)
If (>1, then labor demand is elastic
If (