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Lecture 3 - Labour Demand Continued

Labour Demand continued

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24 views31 pages

Lecture 3 - Labour Demand Continued

Labour Demand continued

Uploaded by

Gershom Musonda
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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BEC 3030 LABOUR ECONOMICS

Topic: Non-wage Labor Costs

Lecturer : Mr. Michael Mulenga


Department of economics
DISCUSSION

What is labour demand?

What are the factors affecting Labour demand in the short-run


and Long-Run?
OUTLINE

• Nonwage labor costs

• Employee benefits

• Quasi-fixed costs

• Multi-period demand for labor

• Optimal employment when training costs are present


3

• Credentials, Signals, and statistical discrimination


Nonwage labor costs

• Nonwage labor costs include:


• hiring costs,

• training costs, and

• employee benefits.
Hiring costs

• Hiring costs include the costs associated with:


• Placing advertisements,
• Selecting candidates for interviews,

• Interviewing candidates,

• Selecting candidates for job offers,

• Negotiating job offers, and

• Processing the worker's employment (filling out W4 forms, I9 forms,


and adding the worker to the company's insurance and pension
plans) in the human resources department of the firm.
Hiring costs differences across firms

• In the secondary labor market:


• hiring costs are generally relatively low.

• In the primary labor market, however,


• Hiring costs can be very substantial, particularly when a firm
is operating in a national labor market
Hiring costs differences across firms

• In the secondary labor market:


• hiring costs are generally relatively low.

• In the primary labor market, however,


• Hiring costs can be very substantial, particularly when a firm
is operating in a national labor market
Training costs

Training costs include:


• the explicit cost of hiring trainers and using materials (such as
manuals, videotapes, and capital equipment) for training
purposes,

• the implicit cost of using other workers, raw materials, and


capital during informal on-the-job training, and

• the opportunity cost of the trainee's time during training.


Training costs and wage offers

• Low wages - higher turnover rates and lower quality


applicants, leading to higher training costs.

• High wages - lower turnover rates and higher quality


applicants, leading to lower training costs
Employee benefits

• Legally mandated social insurance programs (such as


social security and unemployment compensation), and

• Privately provided benefits such as health insurance,


vacation pay, and pension plans.
Quasi-fixed costs

Quasi-fixed costs are costs that vary with the number of workers
hired by the firm, but not with hours worked per employee.
Optimal mix of employment and hours

Firms may increase their use of labor by:

• adding additional workers,

• increasing the length of the work per week, or

• some combination of increases in hours and


increases in the number of workers.
Production function

Q=f(M,H)

where: Q = quantity of output


M = number of workers
H = length of average work per week

• MP of M declines as M increases
• MP of H declines as H increases
Optimal mix of M and H
Effect of an increase in mandated overtime premium

• Equivalent to an increase in MEH

• Substitution effect: M increases and H decreases

• Scale effect: M and H both decrease


Effect of an increase in mandated overtime premium

In a more complete model, other effects would occur:


• a substitution of capital and other inputs for labor,

• increased noncompliance,

• only limited substitution of less skilled unemployed


workers for the skilled workers who tend to work
overtime hours,

• increased moonlighting, and

• a decline in the base rate of compensation in those


industries that use significant amounts of overtime.
Part-time employment and mandated benefits

• The quasi-fixed costs associated with full-time employees is


usually higher than the quasi-fixed costs associated with part-time
employees.

• Mandatory health insurance would reduce the use of part-time


employment.
Multi-period demand for labor

• Firms may lose money during a training period if they can


receive a sufficient return on the training investment in
subsequent periods.
Present value

The present value of a future payment is lower when:

• the payment is received in the more-distant future, and/or


• the interest rate is relatively high.
Two period model: definitions

Wo = wage during training

W1 = post-training wage

W* = wage if no training is received (the same in each period)

Z = hiring and training cost (paid during the training period)

MPo = marginal product during training

MP1 = marginal product after training

MP* = marginal product if no training is received (assumed to be the


same in each period)
Shifts in MP due to training
Optimal employment when training costs are present

• PV(MRP) = PV(MFC)

Definitions:
• PVP = MPo + MP1/(1+r), and
• PVE = Wo + Z + W1/(1+r).

Optimal employment:
• PVP=PVE
• MPo + MP1/(1+r) = Wo + Z + W1/(1+r)
Optimal employment when training costs are present
Optimal employment when training costs are present

Wo + Z - MPo = (MP1 - W1) / (1 + r), or

NCo = G
General and firm-specific training

• General training is training that raises a worker's productivity in more


than one firm.

• Firm-specific training increases the worker's productivity only in the


current firm.
Costs of general training

• Since general training raises the productivity of the worker in


more than one firm, the costs (and benefits) of general
training are expected to be borne by the worker.

• Wo = MPo - Z, and

• W1 = MP1
Costs of firm-specific training

• If workers bear the costs, there is no reason for the firm to keep the
worker.

• If firms bear the costs, there is no reason for workers to stay.

• It is expected that the costs of (and benefits from) firm-specific


training will be shared.

• MPo - Z < Wo < MP*

• MP* < W1 < MP1


Layoffs, productivity, and training

• a firm will be more reluctant to lay off workers who have received
training investments paid for by the firm,

• firms are more likely to rely on overtime rather than using additional
employees in those markets in which firms pay a substantial share of
training costs,

• productivity falls during a recession, and

• rises during an expansion.


Minimum wage and training costs

• For workers to bear part or all of the cost of their training, they
must be paid less during the training period.

• The minimum wage sets a floor on this wage that limits the ability of
workers to bear the costs of such training by accepting a lower
wage.

• Firms faced with such a system may respond by providing less


training, thereby limiting the rate of growth of earnings for
minimum-wage workers.
Credentials, Signals, and statistical discrimination

• Firms have imperfect information and may make decisions based


on observable worker characteristics.

• Firms have imperfect information and may make decisions based


on observable worker characteristics.

• This may lead to statistical discrimination.

• Statistical discrimination is expected to be less severe when


internal labor markets are used.
END

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