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The Labour MarketDemand and Supply


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The Indian labor market can be categorized

into three sectors

Rural workers , who constitute about 60% of the workforce

Urban Organized or the formal sector, that constitutes about

8% of the workforce; and

Urban unorganized or informal structure which represents the

32% of the workforce


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Labour market structure

Two-third of Indias workforce is employed in agriculture and

rural industries.

One-third of rural households are agricultural labor

households, subsisting on wage employment.

Only about 9 percent of the total workforce is in the organized

sector; the remaining 91 percent are in the unorganized sector,

self-employed, or employed as casual wage laborers.

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Labour market structure


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The largest numbers of informal workers are in agriculture. In fact,

98.84 percent of the employment in agriculture is informal. In the

non-agricultural sector, the highest numbers of informal

employees are in retail trade, construction, land transport, textiles

etc.

Thus, the unorganized sector plays a vital role in terms of

providing employment opportunity to a large segment of the

working force in the country and contributes to the national

product significantly.

In the matter of savings the share of household sector in the total

gross domestic saving mainly unorganized sector is about threefourth.

Thus unorganized sector has a crucial role in our economy in

terms of employment and its contribution to the National Domestic

Product, savings and capital formation.

Organized and Unorganized Labor


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Demand for labour

Demand for labour is a derived

demandFactors of production are not wantedas an end product but rather for whatthey can produce

The number of workers a firm wishes

to employ depends mainly on thedemand for the output they produce

Aggregate (total) demand for labourdepends principally on the level ofeconomic activity

If the economy is growing and firmsare confident that it will continue to

grow employment levels will tend toincrease

Derived demand

- occurs when the

demand for afactor of

production arises

from the demand

for the output it

produces


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Demand for labourThe individual firms demand for labour (inaddition to levels of demand) is determined bythe following factors

The price of labour a rise in wage rateswhich exceeds any rise in labourproductivity will raise unit labour costs andwill lead to a contraction in demand forlabour

Productivity as output per worker per

hour increase the more attractive labourbecomes

The price of other factors of productionif capital becomes cheaper firms may seekto substitute some of their workers withmachines

Supplementary labour costs e.g. ifNational Insurance contributions increasethis will lead to a fall in demand for labour

The first will cause a movement along thedemand curve

The last three will cause a shift in the demandcurve


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Marginal productivity theory

This is the key theory underpinning the demand for labour

The theory states that demand for workers depends on their

marginal revenue productMRP is the value of the physical addition to output arisingfrom hiring one extra unit of a factor of production

Where the marginal cost of taking on an additional unit oflabour equals its marginal revenue product the equilibrium

quantity of labour employed will be established


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Marginal productivity theorythe table below assumes that there is a constant market price of Rs.5 perunit and a constant wage rate of Rs.100 per worker per week

After the employment of the second worker right up until the 9th workereach one adds more revenue than cost

After the 9th this is reversed

Profit is maximised when 9 people are employed

At this point the gap between total revenue and total cost is greatest(Rs.1700 - Rs.900 = Rs.800)

Insert table 7.1

P77


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Marginal productivity theoryIn the short run as a firm takes on moreworkers output rises at first - because thereis division of labour

This leads to an increase in marginalproduct

At a certain point the marginal product willstart to fall due to diminishing marginalreturns

The marginal revenue product iscalculated

MRP = MP x MR

With perfect competition the firm is a pricetaker so the MR will be equal to the price

The firm will be able to sell all of its outputat the market price

If there is perfect competition in the labourmarket firms can recruit workers at aconstant labour rate

Marginal product

of labour the

change in total

output arising from

hiring one worker

MRP = MP x MR

(Marginal Product

x Marginal

Revenue)


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Shifts in the demand curvefor labourIf the MRP of labour increases thedemand curve for labour will shift out to the

rightThe MRP of labour will increase ifmarginal product of labour increasesand/ormarginal revenue increases

The demand for car assembly workers willincrease if the productivity of the workers

rises (perhaps as a result of training or if theprice of their output increases due to anincrease in demand for cars)

We draw the demand curve for labour inthe same way as we drew demand curvesat AS level downward sloping

Working out MRP can be difficult in reality

Insert figure 7.2

P78


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Marginal productivity theoryThe marginal revenue product of labour curve shown belowshows the quantity of labour demanded at each wage rate

The MRP of labour curve is the demand curve for labour

A firm will demand labour at the point where MRP equalsmarginal cost (the wage rate)

When the wage rate is W1 the firm will thus demand Q1units of labour

If the wage rate rises to W2 the firm will demand Q2 units oflabour (less)

Insert figure 7.1P77


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Marginal productivity theory assumptionsAll factors of production other than labour are fixed in quantity

Workers are homogeneous and have the same level of aptitudefor a job

The labour market is perfectly competitiveThere may be a perfectly competitive product market

In reality most of these assumptions dont hold but it does not alterthe fact that the MRP curve as drawn below does broadly describewhat happens in the real world when increasing quantities of labour

are added to fixed stock of capital

Insert figure 7.1P77


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The supply of labour

The labour supply consists of those that are economically

active those who are either in work or who are searching for

work (unemployed)

The labour supply is known as the labour force or the

working population

Those that are economically inactive are not part of the

labour supply

E.g. those that are not old enough to work; Students in

full time education; Housewives; Those who have retired

early; Prisoners; Disabled


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The supply of labour to a

particular occupationThe number of people willing and able to work in a

particular occupation is influenced by monetary andnon-monetary factors

Monetary wages/salary, commission, bonus

Non-monetary non financial rewards e.g.

job satisfaction (see later)

The higher the wage rate the more people arelikely to want to do the job e.g. a large number of

people seek to be a lawyer because of the potential

for earning high wages

Non-monetary factors

Convenience and flexibility long orunsociable hours will deter potential workers.

Choosing what hours to work will attract people

to that occupation

Status people are attracted to high status

occupations such as doctors


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The supply of labour to a

particular occupationPromotion prospects people may be

willing to work for relatively low wages when

they start knowing that may be the opportunity

for promotion into high paid jobs

Working conditionsworkers will beattracted to jobs with good working conditions.

Holidays/Leisure time teachers and civil

servants

Perks and Fringe benefits company cars,

expense accounts, private health care etcJob satisfaction a combination of all of the

above plus other intangible features such as

making a difference, enjoying colleagues

company etc

Th l f l b i l


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The supply of labour to a particular

firm

In addition to the factors influencing the

supply of labour to a particular occupation

some additional factors influence the supplyof labour to particular firms

Availability of training high quality

and quantity of training will attract

workersLocation firms in cities (with good

transport links) will have a higher supply

of labour

Level of unemployment when the

level of unemployment is low there maybe skills shortages making it difficult for

firms to fill vacancies

Opportunities for overtime overtime

is paid at higher rates - this may attractworkers


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The industry labour supply

curve

A change in the wage level in

an industry causes a movementalong its labour supply curve

An industry labour supply curve

is generally upward sloping like

the diagram belowThis is even though the labour

supply curves of individuals may

be backward bending

This is because a higher wageis likely to attract new workers

into the industry

Th l i i f l f


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The elasticity of supply oflabourThis measures the responsiveness of

the quantity of labour supplied to achange in the real wage rate and willvary from industry to industry

The formula is% change in quantity of labour supplied

% change in wage rate

The elasticity depends on

The skills and qualifications requiredfirms that require highly qualified

workers will find it more difficult toattract workers with wage rises sincethe supply is low.

Elasticity is higher for lower skilledjobs

Th l ti it f l f


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The elasticity of supply oflabourThe length of the training period

jobs with long training periods willhave low elasticities. Workers maybe put off by the time to train andeven if they are attracted it will takethem a long time to become qualified.

Sense of vocation e.g. teachers ornurses the reward is not whollyfinancial therefore changes in wagesmay not affect supply significantly

Time period in the long run supplyof labour tends to be more elastic dueto notice periods and training etc


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Unemployment

Unemployment is a state of joblessness in an economy

Unemployment is usually measured in terms of unemployment

rate where the number of unemployed individuals will be divided

by the total number of employed individuals

According to International Labor Organization definition, public

aged 16 and above will be called as unemployed if they are out of

work, need a job, have vigorously wanted work in the last four

weeks and are available to start work in the next two weeks, have

found a job and are waiting to join the job in the next two weeks.


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Important Causes For Unemployment In India

Increasing population of India is increasing day by day and iscrossing all the boundaries. Today, India is the second largest

country in population after china and it is expected that the rate of

population may be doubled in the next coming decades. This isone of the major reasons that is leading to huge unemployment.

Programs for family planning to restrict the population have so far

not yielded desired results

Technological advancements will lead to some jobs becoming

outdated as people will be replaced by machines


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Important Causes For Unemployment In India

Many big corporations try to maximize their profits and reducethe costs by outsourcing people to well developed countries at

cheaper workforce. The work pressure in such countries will be

more and many people come back, leaving the job because of the

heavy work pressure

Even in India, many companies make workers to work forlong

hours or overtime instead of hiring new employees. This way

they try to save money. This will lead to a state that the average

salary stays the same and no new jobs will be produced.


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Rising Rate Of Unemployment in India

Financial experts have implemented different measures for

bringing stability in the inflationary condition of the country.

They have also designed programs for boosting the overall

economy of the country. As per the reports, the Indian

unemployment rate 2011 has also remained a cause ofconcern among the people. The latest reports indicate that the

unemployment rate of the country is at 9.4 percent this year

which is quite high. According to the reports, forty million

people are still unemployed in the country and moreemployment opportunities are required for balancing the

condition.

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Types of unemployment

(1) Voluntary unemployment

In this type of unemployment a person is out of job of his own

desire doesn't work on the prevalent or prescribed wages.

Either he wants higher wages or doesn't want to work at all.

(2) In voluntary unemployment

In this type of situation the person who is unemployed has no

say in the matter. It means that a person is separated from

remunerative work and devoid of wages although he is capable

of earning his wages and is also anxious to earn them.

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In voluntary unemployment

Cyclical unemployment - This is the result of the trade cycle

which is a part of the capitalist system. In such a system, there

is greater unemployment and when there is depression a large

number of people are rendered unemployed. Since such an

economic crisis is the result of trade cycle, the unemploymentis a part of it.

Sudden unemployment - When at the place where workers

have been employed there is some change, a large number of

persons are unemployed. It all happens in the industries, tradesand business where people are employed for a job and

suddenly when the job has ended they are asked to go.

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Unemployment caused by failure of Industries - In many

cases, a business a factory or an industry has to close down.

There may be various factors responsible for it there may be

dispute amongst the partners, the business may give huge loss

or the business may not turn out to be useful and so on.

Unemployment caused by deterioration in Industry and

business - In various industries, trades or business, sometimes,

there is deterioration. This deterioration may be due to various

factors. In efficiency of the employers, keen competitions lessprofit etc. are some of the factors responsible for deterioration

in the industry and the business.

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Seasonal unemployment - Certain industries

and traders engage workers for a particular

season. When the season has ended the

workers are rendered unemployed. Sugarindustry is an example of this type of seasonal

unemployment.

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Measures To Control Unemployment


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1. Heavy Investment in Basic Industries: Investment in heavyand basic industries and consumer goods industries should be

increased. They provide more employment along with the

supply of consumer goods

2. Development of Cottage and Small-scale Industries: Asthey provide more employment by adopting labour intensive

techniques.

3. Change in Educational System: More emphasis should be

given to vocational education.4. Checking of Population Explosion: Rapidly rising

population should be checked by adopting family planning

and welfare schemes



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5. Modernization of Agriculture: Modernization of agriculture should

be done. Wastelands should be utilized.

6. Introduction of Rural Works Programmes: Rural works

programmes should be increased.

7. Developing Infrastructure of Economy: Infra-structure of the

economy should be developed.

8. Subsidies to Private Sector: Subsidies and other incentives should

be given to private sector

9. Stress on Self-employment: Young entrepreneurs should be

financed for self employment


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