TOPIC 4: Labour MarketsThe demand for labour by individual firms

Labour is not demanded for itself, but 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 and make a profit

Downward sloping curve (As price of labour falls, firms would employ more labour)

Factors affecting demand Output of the firm

o General economic conditions (Aggregate demand): Total demand for goods and services within the economy

Good economic conditions: Higher sales, require more employees

Bad economic conditions: Lower sales, require less employees

Time lag between change in labour and economic activity Higher demand: Firms operate with excess capacity

can use more existing capital/labour resources more efficiently/intensively

Lower demand: Takes time to notice falling sales, and a lot of time/expense to train workers

o Conditions in the firm’s industry Contract restrictions: Avoid paying retrenchment fees Consumer tastes/preferences: Allocation of labour b/wn diff

industries Barriers to entry/regulation/price competition: High = low

labour demand o The demand for an individual firm’s products

Effectiveness in selling its g/s in the marketplace Quality, Reputation/size, customer service, marketing efforts Increase in market share = declined demand has no effect

Productivity of labour TotalOutputLabourOutput o Higher productivity = Higher output w/out Higher inputo AD rising at a faster rate than productivity: Increased labour

demand to produce the increased level of demanded goodo AD unchanged, labour productivity is rising: Businesses would be

operating with excess capacity, would not need any more labour. Decreased demand for labour: Firms can cut back on workers and still produce the same output as before

o AD falling, labour productivity is rising: Larger decrease in demand for labour (Firms wish to maintain profits), existing workers producing more than is demanded

o Higher labour productivity: Higher labour demand as firms substitute other FOPs

o Lower labour productivity: Lower labour demand (improvements in tech/capital)

Improves efficiency of capital investment, creates cheaper alternative production methods

Costs of other inputs: Firms’ choice in combination of labour and capitalo Labour Costs: Not just wage rates, but non-wage outcomes as well

TOPIC 4: Labour Markets High cost: Firms will use more capital inputs in production

process Low cost: Firms will use less capital inputs in production

processo Capital costs: Interest rates (cost of borrowing funds), tax

(allowances)o Option of shifting some of its operation overseas (lower labour

costs) Increasingly easy to set up operations and to engage

contractors Clothes manufacturers China/Indonesia Service (call centres/back office info processing)

India/Philippines

The supply of labourFactors affecting supply

Pay/remuneration: Wage/salary paid to employees (price paid for labour)o Higher wage/salary: Higher supply (prepared to sacrifice leisure

time)o Non-wage incentives, such as company cars, extra superannuation

benefits Working conditions

o Attractive: Higher supply of labour (flexible hours, work from home)o Unattractive: Lower supply of workers (discouraged: dirty,

dangerous etc.)o Travel/experience different cultures: Could be better than high

salaryo Training opportunities and experience: High priority for young

employees Skills, experience, education/training levels

o Higher level of ese: lower supplyo Acquiring human capital requires considerable time, sacrifice, and

efforto Changes in availability of education and training

(scholarships/subsidies) Mobility of labour

o Occupational: Ability to move between different occupations in response to wage differentials and employment opportunities

Higher level of skills required: Low occupational mobility in response to improved wage/job opportunities (time and effort for new skills)

o Geographical: Ability to move between different locations in response to wage differentials and employment opportunities

Relocating costs: Travel, transportation, real estate Personal upheaval: Breaking ties with family/friends,

changing schools Remote locations must offer higher wages: Requirement for

workers to relocate to more distant locations with fewer educational and entertainment opportunities

Participation rate (%) Labour ForcePopulationaged 15∨¿

× 100

TOPIC 4: Labour Marketso Working age population: Number of people in an economy aged 15

or overo Labour Force: All people (employed and unemployed) in the

countryo Overall trend: Slowly risen over the past three decades (61%

65%) Male: 80 to 71% from early 1970s to 2015 Female: Upward trend (increased participation of married

women)o Factors affecting Participation rate

State of economy: Prosperous = more inclined to seek work Ageing population: Lower participation rate Higher retirement age: Higher participation rate Social attitudes toward working wives/mothers, improved

provision of childcare, and declining birth rates: Increased participation rate due to married women working for longer periods

Increased school retention rates: Lower participation rate Government policy decisions/Unions

Govt: Imposing certain qualification/license restrictions Unions: Pressure employers to hire members, no-one

else Law Society, Australian Medical Association,

Institute of Engineers: Standards of education, continuing training, professional conduct

Labour market equilibriumDetermining equilibrium

Supply curve: Slopes upwards from left to right (As wage rate increases, people will be more willing to supply their labour)

o Increase in wage rate: Opportunity cost of leisure (rest/recreation/education) rises, working is more attractive

Workers achieve the same level of income by working less (Backward-bending labour supply curve)

Demand curve: Slopes downwards from left to right (As wage rate declines, demand for labour increases)

o Each extra worker will contribute less to total production than the previous worker

o Profit-maximising firm will only employ the extra worker if they pay him or her a wage rate that is lower than MR earned from production

Equilibrium: Intersection of the supply and demand curves (QS = QE)

o Wage above WE e.g. W1: Unemployment exists (QS>QD). Unemployed would offer to work at a lower wage, bidding down wage rate, forcing it down to equilibrium

o Wage below WE e.g. W2: Excess demand (QD>QS). Firms would

TOPIC 4: Labour Marketsoffer higher wages to attract more workers, forcing wage rate up to WE

Changes in equilibriumIncrease in demand can be caused by an ageing population (Increase in demand for aged care nursing, increasing the demand for health workers)

Shift demand curve for labour to the right Increase in wage rate (WE to WE1) Increase in level of employment (QE to QE1)

Factors Overall demand for labour is most heavily influenced by the level of

aggregate demand in the economy (the level of economic activity) An increase in labour productivity will have a positive influence on the

demand for labour if it is accompanied by rising aggregate demand A change in the relative costs of capital and labour will influence the

demand for labour, but that influence can be overshadowed by changes in the level of economic activity

o Persistent declines in labour productivity + rise in rel. labour cost = Long-term incentives for firms to substitute labour for capital

Labour mobility depends on the workers’ skills levels and the requirements for each occupation

o Highly-skilled markets = Inelastic supply curves, e.g. medical specialists

The Australian WorkforceTerminology

Workforce: The portion of the population above working age who are either employed or actively seeking work

Employed: Persons over the age of 15 who are employed at least once a week

Unemployed: Persons who are actively seeking but unable to find work

Factors and Trends Population size: The larger

the population, the greater the potential workforce

o Natural increase: Excess of births over deaths in one year, declined (Above 0.6% of population per year)

o Net migration: Excess of permanent

TOPIC 4: Labour Marketsnew arrivals over permanent departures in one year, contributed for 40% of population growth since WWII

Rate is influenced by level of economic activity Low growth = low migration intake High growth = shortages raise migration quotas

o Enterprise Migration Agreements: Fill skill shortages in largest mining projects

Education patterns: Critical for a highly skilled and productive workforce. Individuals who endure years of training/studying benefit through higher earnings. Across OECD countries, unemployment rates among people who did not complete high school were five % points higher on average than people who only completed high school

o 2005-2015: 8% increase in proportion of young workers with a post-school qualification (64 72%)

o Only 76% aged 25 to 64 have completed an upper secondary school education (OECD: 14/34, Average completion rate = 75% in 2012)

o School completion rates are much lower than US/Canada/Czech R. (90%)

o AU’s spending on education is above average by international standards, but lower on public spending (4.3% compared to 5.3%) More reliant on private funding

Age distribution: The greater the proportion in the 15 to 65 age group, the greater the potential for a larger workforce

o Proportion of age 16-65 population is beginning to decline after increasing for several decades (post-war baby boom into working age group, then into retirement)

o Ageing population: decrease in proportion of people under 15, increase in proportion of people over 65

Median = 31.6 to 36.8 over the past 2 decades Industrialised economies phenomenon: Declining birth rates,

increased life expectancy (higher living and health standards) Smaller sized workforce needs to support a growing

population of aged people AU workforce grew by 2,266,000 during the 2000s

decade, expected to grow by just 190,000 during the 2020s (less than one tenth of its growth rate)

TOPIC 4: Labour MarketsSignificant constraint on future economic growth

Wage Differentials: Non-Wage Outcomes Additional benefits received in addition to ordinary and OT payments Are not quantifiable in dollar terms, varies substantially between

workplacesTypes of non-wage outcomes

Salary packagingo Company caro Laptop computero Subsidised childcareo Gym membershipo Superannuation

Bonus cash paymentso Made as a performance bonus (Profit performance/individual work)

Flexibility in work patternso Study leaveo Extra parental leaveo Leave for looking after sick family memberso Extended leave without payo Long-service leave entitlementso Work from homeo Sharing of jobs between employees

TOPIC 4: Labour MarketsWage Differentials: Wage OutcomesTerminology

Nominal Wage: The pay received by employees in dollar terms for their contribution to the production process

Real Wage: A measure of the actual purchasing power of money wages, adjusting nominal wages for the effects of inflation

Inflation: Sustained increase in the general level of prices over a period of time, measured by % change in CPI (Consumer Price Index)

Between different occupations Reflect level of skills and education required

o High level of education/skills required High wageso Low level of education/skills required Low wages

Reflect working conditions of the jobo Unappealing (Dangerous/dirty/irregular hours) = High wages

Occupational Mobility (Ease with which labour can move from one occupation to another)

o High: Labour supply is high, less need for employers to raise wages to attract labour

o Low: Labour supply is less abundant, wage rates tend to be higher Veterinary surgeons, accountants, lawyers

Within the same occupation Geographic mobility

o Ease with which labour can move from one area to anothero Isolated location = Higher wages relative to similarly qualified

individuals in urban area Relocation costs (travel/transportation/real estate) Personal upheaval (Family/friends/schools)

Labour Productivityo Quantity of output produced by one person over a period of timeo Higher productivity = Higher wages (through enterprise bargaining)

Capacity of a firm to payo Profitable firms = ↑ capacity to payo Firms in oligopoly markets (↑ market power) can set prices, earn

higher profits, and are able to pay higher wageso Firms in competitive markets (↓ market power) face fierce

competition, are price takers, don’t earn high profits, are not as able to pay higher wages

Ageo Income varies over the course of life (highest = 25-64 years old)o Low levels in earlier years of working life (↓ levels

education/experience)o Low levels in later years of working life (aged pensions/retirement

income) Gender

o Women have to reduce paid work hours (having children)o Women face discrimination for job opportunities i.e. highest paid

jobs or positions, known as the ‘glass ceiling’o Females w/ similar skills and experience receive lower incomes than

males

TOPIC 4: Labour Markets Ethnic and cultural background

o English-speaking backgrounds: Higher income levels than localso Non-English-speaking backgrounds: Lower income levels than localso Indigenous Australians: Experience high levels of disadvantage

Trends in the distribution of income from work over time

Enterprise bargaining: Negotiations between employers and employees/their representatives about pay and work conditions

Income distribution: The way in which an economy’s income is spread among the members of different social and socio-economic groups

Fair Work Commission sets the award wages systemo Ensures that difference in wage outcomes both between and within

occupations were smaller Shift towards enterprise bargaining Greater different in wage outcomes

Considerable differences in income distributiono There is considerable inequality in the distribution of income in

Australia, which has grown slightly over the past decadeo The top 20 percent of income recipients accounted for 40.8 % of

total income. Further, they had average weekly incomes over five times higher than the average of the bottom quintile

o The share of total income accruing to the bottom 40 % of income recipients has remained relatively constant in recent years, while the highest income quintile has seen its share of income expand slightly

o Since 1996-97, the highest income earners have gained a significantly larger share of income while the share of every other

group has shrunk. Changes to the structure of the economy:

o Emerging industries that required skilled labour are likely to pay higher wages

o Declining industries that are experiencing a fall in demand are likely to pay lower wages

Increase income dispersion within occupationso Shift away from centralised wage determinationo Declining level of union membership Different wage outcomes

TOPIC 4: Labour MarketsArguments for/against more equitable distribution of incomeEconomic benefits (derived from incentive effects)

Encourages labour force to increase education and skill levels (↑ skills = ↑ income)

Encourages labour force to work longer and harder (OT, rewarded for ↑ output)

Makes labour force more mobile o ↑ income = ↑ mobility = efficient resource allocation = ↑ rate of

economic growth) Encourages entrepreneurs to accept risks more readily (↑ income

rewards) Creates potential for higher savings and capital formation

o More ↑ income earners = ↓ foreign reliance for investmentEconomic/social costs

Reduces overall utilityo Principle of diminishing marginal returns: As more of a good is

consumed it will provide progressively less utility to the consumero More equitable distribution of income would increase total utility

Reduces consumption and investmento ↑ inequality = ↑ low-income earners = ↑ spending on essentials =

↓ economic activity, employment, living standards, investment Creates conspicuous consumption

o Creates a ‘leisure’ class: Spends money on expensive g/s, e.g. designer label clothes, purely for the purpose of displaying wealth

o Contributes towards a culture where individuals’ sense of their own worth depends on their relative position in the wealth and income hierarchy

Creates poverty and social problemso Development of low-income earners who have limited access to

education opportunities, and can suffer health/other disadvantages that may reduce labour force participation, creating a self-perpetuating cycle of disadvantage

o Reduces educational opportunities and lower self-esteem, may result in people not working at full capacity/not at all

Increases cost of welfare supporto Comes from govt. revenue (Increased amount spend on welfare

than others)o Provides safety net income support for people out of work, the aged

and people with disabilities Well-being

o Mental illness, crime, lower levels of life expectancy/social mobility Social class divisions

o Creates tensions between people and between different occupations

o Can lead to social and economic inability Poverty

o Traps families into a vicious cycle of low incomes and limited economic opportunities

TOPIC 4: Labour Marketso Associated w/ ↑ levels of crime, suicide, disease, reduced life

expectancy

TOPIC 4: Labour MarketsLabour market trendsTerminology

Unemployment: Individuals are willing and able to work but cannot find a job, causing under-utilised resources in an economy (‘actively seeking work’)

Part-time work: Employees regularly working 20 hours or less per week Casualisation of work: Growth of casual employment (and relative decline

of full-time permanent jobs) as a proportion of the total workforce Structural change: The process by which the pattern of production in an

economy is altered over time, and certain products, processes of production, and even industries disappear, while others emerge

Unemployment rate: Level of unemployment, Number of unemployment people

Total labour force×100

Types of unemployment Cyclical: Caused by a downturn in the business cycle

o Demand for goods and services falls, firms are forced to cut back production and will lay off some workers to maintain their profit levels

o ↑ Aggregate demand = ↑ demand for g/s = ↑ Demand for labour for increasing production levels = ↑ available jobs = ↓ Unemployment

Structural: Caused by a shift in how an economy is structured (old to emerging industries), and intro of new tech.

o Laid-off workers possess skills not appropriate for new industries (diff/higher)

Long-term: Unemployed for more than 12 monthso The longer a person is out of a job, the harder it is to find a new job

Loss of job-related skills, employers reluctant to hire themo Downturn in economic cycle: Workers are laid off

Economy may not be growing quickly enough to eliminate all cyclical unemployment

Seasonal: Occurs because of the seasonal nature of some jobs, such as tourism or holiday related jobs

Frictional: Movement between jobso Time-consuming: Must search for employment opportunities, attend

job interviews, complete any administrative detailso Can be reduced by improving the efficiency of job placement

Hard-coreo Individuals who are considered unemployable because of

mental/physical disabilities, anti-social behaviour, or drug abuse Hidden

o Individuals have given up actively seeking work, or gone back to school

o Rises during prolonged economic downturn (discouraged from continuing to seek work as prospects of finding a job are very low)

o Would work if labour market conditions were better Underemployment

o Part-timers/Casual workers who are willing and ready to work more hours

TOPIC 4: Labour Marketso Represent under-utilised labour resources

TOPIC 4: Labour MarketsUnemployment Trends

Low rate in 1960s and 1970s, 8.6% in 90s (Upward trend in average unemployment level)

Severe recession in Australia and in the global economy: 10.7% in 1992-1993

o Falling AD, Production cutbacks, firm closures = Increased unemployment

o Structural change + Microeconomic reform: People retrenched during recession were unable to obtain jobs (declining v. emerging industries, new technologies and production techniques changed the structure of business)

Sustained economic growth during 1990s and 2000s: Gradually fell to avg. 5.5% since 2010

o GFC: 2% increase, then dropped (late 2009-March 2011): stronger economic growth

Recent reduction in economic growth (end of mining investment boom): Rising rate

o July 2015: 6.4%, Treasure forecasts that it will remain > 6% at least until mid-2017

Significant regional diversity: Large differences in unemployment rates within states, within cities, and b/n cities/regions/remote areas

o Regional areas tend to have a higher unemployment level than metropolitan areas

Sydney = 4.9%, 7.5% in NSW Inner west, norther beaches, Sutherland,

Hawesbury, Baulkham Hills = <4% Parramatta, south-west, Newcastle, Murray

region, Central west = >8%o Mining boom = Low rates in WA, QLD, NT

(Resource-intensive) Nat. averageCasualisation of work

Proportion of part-time/casual workers has increased over recent decades: Australia has highest rate (24.6%) compared to OECD average (16.9%)

o Employee’s choice Easier to balance other commitments, e.g. family More flexible arrangements, e.g. working part-time from

homeo Employer’s choice

Greater flexibility in staffing arrangements Busier times: Increase hours, not OT costs/additional

staff No fringe benefits (redundancy, sick pay, long service

leave) Changing employment structures

o Allows businesses to change their staffing levels more easily and more often

Contractors: Specific service (Specialised consultation/role that is not meant to be full-time), e.g. trucking industry

Outsourcing: Organisation pays another business to perform a function that is not one of its core aims, e.g. governments

TOPIC 4: Labour Marketsand their IT operations, data processing of social security claims efficiency (focus on specialisation)

Advantageso Flexibility for employers to increase/reduce staff as business

demands changeo Employers avoid paying non-wage costs e.g. penalty rates or

redundancy entitlementso Flexibility for employees with family/other commitments

Disadvantageso Less job securityo Difficult for future planning/obtaining home loans etc. w/out secure

incomeo Less staff loyalty and less development of workforce skills

TOPIC 4: Labour MarketsLabour market institutionsTerminology

Industrial relations: The system that involves the laws, institutions, and processes established to manage the relationship between employers and employees. The structure of the industrial relations system determines the process of wage determination and conflict resolution in the Australian labour market

Types of unions Occupational (craft): Members from persons who possess a particular

occupational skill or range of skills, regardless of the industry or firm in which they work

o Ex: Electrical Trades Union, Australian Medical Association Industry-based: Workers in a particular industry regardless of the type of

work they doo Ex: Finance Sector Union, Australian Meat Industry Employees Union

Enterprise-based: Workings of one specific enterprise (rare)o Past govt. policies encourage its creation

General: A whole range of workers with many different skills across various industries

o Ex: Australian Workers Union, Construction, Forestry, Mining, and Energy Union

Most are affiliated with the Australian Council of Trade Unions (ACTU)Decline in union membership

AU: Large fall in trade union membership in recent decades

o Post-war era to 1970s: >50%, mid 1970s: 55%, 2014: 14%

o Public sector = 39%, Private sector = 11%

o Older workers (22% for 55-59 year olds), Younger workers (7% for 20-24 year olds)

Changes to wage determination: Centralised wage determination enterprise bargaining reduced the overall influence of unions in wage outcome

Changes within industries: Proportion of workforce, growth and shrinking of industries

o Business/domestic services, retail trade sectors: Low levels of union membership

o Manufacturing/government owned businesses: High levels of union membership\

Changes in the nature of employmento Part-time/casual/temporary workers: Low trade union membershipo Full-time workers: High union membership

Role of unions in the labour market

TOPIC 4: Labour Markets Representing employee interests: Collective voice for workers during

organisational changeso Better access to training and educationo Improving workplace safety standardso Easier to combine work and family responsibilitieso Changes in work structures

Exercising their bargaining power in negotiations with employerso Alone: Limited bargaining power, easy to replaceo Combined: Significant bargaining power, hard to replace entire

workforceo Threat of industrial actions Higher wage rate than market

determined rateo Negotiation of wage increase

Wage rate is W1 rather than WE Changes shape of supply curve (SS to

W1S) Excess supply: Quantity supplied (Q1) >

Quantity demanded (Q2) Employment will be less than QE at Q2

Restricting the supply of labouro Restrictions on hiring (no overseas trained doctors reduced

supply, higher pay)o Demanding that employers only hire members (NSW Law Society)o Only provide a license to work for their members

Employer associations

Industry-based or general lobby groups, representing business interest on issues of economic policy such as taxation, regulations, and industrial relations

Federal level: Business Council of Australia (BCA), the Australian Industry Group, and the Australian Chamber of Commerce and Industry (ACCI)

o Provide a national voice for employers, and have played an important role in the debate over industrial relations policy changes during recent years

Major industries: National Farmers Federation, Housing Industry Association, Minerals Council of Australia

TOPIC 4: Labour Marketso Specific industry concerns of members

Industry assistance (Protectionism): Benefitting both employers and employees

o Lobbying the govt. for protection from foreign competition, tax exemptions, industry assistance Larger share of the domestic market for AU producers

Increase demand for labour (DD to D1D1)

Increase in wage rate (WE to WE1)

Increase in employment rate (QE to QE1)

o Less successful in recent years: Lower protection levels and industry assistance

o Long run: Industry assistance helps one sectors but will hurt others

TOPIC 4: Labour MarketsCurrent employment/industrial framework

Gradually evolved during past 3 decades (Highly centralised Negotiations at level of firm)

Allowed wages/working conditions to take into account specific workplace characteristics

Fair Work Act 2009 replaced the Workplace Relations Act 1996, overseen by Fair Work Commission, setting minimum standards and helps resolve disputes

o Industrial awardso Collective agreementso Individual employment contracts

Minimum employment standards

Maximum weekly hours of work: Full-time must not exceed 38 hours per week

Right to request flexibility: Caters for parents and carers, employers can only refuse on ‘reasonable business grounds’, justifying actions in writing

Leave: Employees have the right to paid annual/public holidays/carers/compassionate leave, unpaid parental/community/long service leave

Notice of termination and redundancy pay: One and four weeks of notice of a job termination, entitled to redundancy pay

National minimum wage for any employee not covered by an awardIndustrial awards (the safety net)

Awards: Set of pay/conditions specific to an employee’s work or industry sector

Provides safety net of minimum wages/conditions (many pay above award wage rates)

Different minimum award rates in around 122 different awards (incl. casual loadings)

19% of workers = Pay set directly through award rates 40% of employers = Award-based pay arrangements Extends the protections of the National Employment Standards

o Types of employment, OT/penalty rates, leave related matters, allowances, superannuation, procedures for consultation/representation/dispute settlement, arrangements for when work is performed

Enterprise Agreements

Negotiated collectively through enterprise bargaining (employer/ee represented by union)

Covers 41% of employees in AU, covering all workers to management level in company

Must comply with the National Employment Standards, cannot pay below rates in award

BOOT (Better Off Overall Test): Employees are better off compared to award (FWC admin)

TOPIC 4: Labour Markets Wage increases, loadings (additional hrs), change to workplace practices,

other changes Since early 1990s, agreements have produced annual wage increases of

around 4%Common Law Contracts

The only form of individual employment contract in the industrial relations system

Not part of the formal industrial relations system, complies w/all min. standards, 37% WF

Simple agreements (few pages), involves add-ons to relevant awards Cannot offer pay rates/conditions below an equivalent award, exc.

>$136,700 Generally enforced through ordinary law courts, rather than through

industrial tribunals Popular form = short term work contracts, e.g. Labour hire company

selling services to another company (outsourcing)