Human Resource Economics

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Labour Economics

Labour Economics may be defined as a study of the organization, institutions and behavior of the labor market in an industry or industrial economy.

LABOUR ECONOMIC DEFINITION

´Labour economics or manpower economics is primarily concerned with efficient

utilization and conservation of manpower and resources. It studies and seeks tounderstand the processes by which manpower is applied and utilized in modern society. It

is concerned of natural resources in the land.

- Dole Yoder

SCOPE

1. Labour Economics has to deal

2. Manpower Planning,3. Labor Organization,

4. Labor Relations And Public Policy5. Wage And Employment Theory,

6. Collective Bargaining Theory

7. Practice Of Social Security And Welfare Etc.

AREAS OF STUDY

1. Institutional framework of the particular economic system.2. Size and composition of the labor force and labor market.

3. Labor as a factor of production-productivity and efficiency condition of work-industrial relation standard of living4. Labor's risk and problems.

5. Trade unionism

6. Labor's status and position in society7. Labour legislation.

Another different area of labour economics are:-

1. Advance theory of labour economics

2. Labour laws3. Principles of personnel management and job evaluation

4. Principle and practice of labour welfare

Nature of Labour Economics:

Labour economics is in the process of development, its definition tends to vary and

change according to the nature of the economy and is supposed to indicate the criteria for

delimiting its scope and enumerating and classifying the problems.

A. The theoretical section



B. The institutional section

A. The Theoretical Section: The theoretical section of labour economics is concerned

with building up of models of economic behavior by making different sets of assumption.B. The Institutional Section: The institutional section of labour economics is concerned

with studies of labour problems in an institutional historical content. The nature of the

labour problems changes with the change in the institutional framework of the economicsystems.

LABOUR DEFINITION

Any exertion of mind or body undergone partly or wholly with a view to have some good

other than the pleasure derived directly from the work.- Dr. Alfred Marshell

CHARACTERISTICS OF LABOUR 1. Labour cannot be separated from the person who labours-In other words we can

say that labour cannot be separated from labourer body and personality. Thus, theenvironment and the working conditions in which the worker has to work are of

utmost important in the supply of labour.

2. The worker sells his work services but he himself remains his own property: - In

the words of Marshell, “The worker sells his work but he himself remains his own property. Thus, the supply of labour along with other things depends upon the

forethought and selflessness of those who bring up the labourer.

3. Labour is perishable commodity, therefore it does not last and cannot be storedfor future- If a worker does not work for a particular day, that day is lost for ever

and he would never be in a position to make use of his lost services.

4. As the seller of labour are commonly poor and have no reserve fund, thereforethey cannot with held labour from the market.

5. The supply of labour cannot be decreased or increased with fall or rise of wage-

Hence, a paid adjustment of the supply of labour to its demand is not possible.6. Labour is not mobile as capital: - The difference in environments, languages,

customs etc at different places is hindrances to the mobility of the worker from

one place to another.

7. The marginal productivity of labour is comparatively less than capital8. Finally, labour is a living thing and that makes all the differences.



LABOUR MARKET

Á process by which supplies of particular type of labour and demands for that type of labor seek to obtain a balance.’

Ít is the only device for sorting out worker with varying skills and interest among themultitude of different jobs in the economy.

Án area or place where relative wage levels for different plants, industries occupationsand d regions are determined.’

CHARACTERISTICS OF LABOUR MARKET1. Buyer seller relationship is not temporary: Unlike a commodity market,

relationship between a buyer and seller in a labour market (expecting a casual

labour market) is not temporary and is expected to continue for some limit.

2. Essentially local: The concept of labour market stands for the buyer and sellers of labour who are in contact with each other for the purchase and sale of workers

services. Thus, labour market is normally local markets in the sense of thedemand for the supply of labour being confined to a particular locality.

3. Lack of mobility: Lack of mobility is an important characteristic of a labour

market owing to various reasons. Labour obviously cannot move with the same

ease and facility with which commodities are transported from place to place andthe buyers of labour as well.

4. An imperfect market: Labour market is an imperfect market where one does not

find a normal wage rate to which the market rate naturally tends. There is adiversity of wage rate in a labour market for the same types of work different

wage are paid: a feature, which may last for a long period and may even be

regularized.5. Extremely rare monopoly: Monopoly in labour market is extremely rare

excepting when the skill of a particular type of extremely rare or when a very

powerful trade union exercise a complete control over the supply of labour in agiven industry or in a given area.

6. Usually the buyers market: Most of the labour markets in the world do not justice

to the workers in the matter of the division of the proceeds of industry as between

the employers and workers. In other words, the labour markets are usually the buyers market.

IMPERFECTIONS OF LABOUR MARKET

1. No equilibrium between demand for and supply: In the markets of other

commodities prices keeps on changing till demand is equal to supply. In other words, the other markets are normally cleared. However, in labour market wages

are not freely flexible. Therefore, as Hicks pointed out, the effect of incre3ase in

demand for labour on wage rate is felt only after a long passage of time.



2. Wage differentials: In a perfectly competitive market for a commodity, all units

of the commodity are homogeneous and price tends to be uniform. In fact, George

Stigler defined the mar4ket of a commodity as all those places where the price of that commodity tends to be uniform after allowance for transport cost. However,

in the actual market the wage differentials are often due to imperfections in the

labour market.3. No perfect knowledge: Worker and employers do not have perfect knowledge

about the conditions in the labour market. Therefore, the wage differences prevail.

4. Lack of perfect mobility of labor: There is no perfect mobility of labour from oneindustry top another or from one locality to another.

5. Barriers to the entry of labor: There are barriers to the entry of new workers in

specific occupations and so the artificial storage of such workers is maintained

and so the wages of such workers continue.6. Employer’s monopoly: The labour market may have monopsony employer of

labour power and he can follow the policy of wage discrimination by paying

different wages to different workers for the same work.

7. Institutional forces in determining wages: In the market of the other commodities, mainly the market forces of demand and supply determine the price.

Therefore, there cannot be an economic explanation of wage rates based purely ondemand and supply conditions.

DEMAND FOR LABOUR

In labour market, demand for labour is made by individual firms, which want to employlabour to carry out their production. It means a firm is a buyer in the labour market.

Unlike demand for consumer goods, demand for labour is a derived demand. Demand

for labour by firms depends on the following factors:-

1. Demand for commodities produced by labor: When demand for commoditiesincreases, firms wants to sell more, for which they have to increase production. In

such cases, they need labour as a factor of production.

2. Availability of Capital: Largely capital and labour are complementary factors of production. If more capital is available, private firms want to invest more. When

they increase investment and set up new production units, they need more labour

and so demand for labour increases because of increase in supply of capital.3. Substitution between labour and machinery: Labour and capital can also be

substituted for each other. If work done by labour can also be performed by

machinery i.e. capital, it means producers have choices between labour and

machinery.



4. Motives of the firms: In modern economy, private firms are joint stock

companies. They are run by professional managers. The management follows

many different motives. Sometimes firms have motives of maximum growth rate.To achieve this goal they keep investment and producing more. It creates larger

demand for labour.

5. Labour productivity: Just as demand for a commodity by a consumer depends onits utility, demand for labour as a factor of production depends on the

productivity. If labour productivity is low, it becomes costlier to employ labour

and so it is not profitable to increase demand for labour.6. Wage rate: Price of labour is nothing but wage rate per unit of labour. Normally

there is inverse relation between wage rate and demand for labour. The inverse

relation between wage rate and demand for labour until marginal product is equal

to wage rate.

SUPPLY OF LABOUR

Supply of labour refers to the number of labour units offering themselves for work.Supply of labour is normally measured as the number of person-hours (or person-days)

which workers are willing to offer at the market wage. Factors, which influence thesupply of labour in a country or to the economy as a whole:-

1. Size of population: Potential labour force in a country depends upon the size of

the population and its growth. Thinly populated countries like Canada, Australia

have less supply of labour.2. Rate of working population to total population: Though supply of labour depends

primarily on the size of population of the country. We must also remember that

not all people are available for work.3. Sex ratio: The ratio of males to females in the working age group is determining

factor in the supply of labour.

4. Working Hours: Workers can give continuous and sustained work only if theworking hours are reasonable. Unreasonable long working hours means fatigue

and inefficient work.

5. Age of Retirement: Workers retire at a certain age. In some cases, the retirementage is 55 years. In some other places, it is 58 to 60 years of age.

6. Social Attitude: In certain occupations, sex and caste are taken into consideration.

This restricts the mobility and availability of labour.

7. Wage Level: Labour supply is related to the wage level in a country. High wagelevel contracts the supply of labour and lower wage level forces the worker to

work more due to economic compulsions.

8. Potential Desire to Work: The actual labour supply depends not only on howmany workers are there in the working age group. However, it also depends on

their enthusiasm towards work.

9. Training Period :- If labour is educated and trained then the period of educationand training will be an important factor in influencing supply of labour.

LABOR MOBILITY DEFINITION



´The ability and willingness of a worker to move from one place to another plac or from

one occupation to another occupation to get a job is called mobility of labour.”

IMPORTANCE OF MOBILITY OF LABOUR:-

Mobility is of great advantage to the worker himself. It is advantageous to them to movefrom the place of less demand to place where their services are mere demanded or

opportunities available. Mobility of labour is advantageous from the point of view of the

industrial structure. Industrial structure has undergone lot of changes. Example: -Fromagriculture, we reached to industrial stage. In industrial field too from traditional

industries to modern and now automation. Unemployment is kept at bay by the mobility

of labour. A labour move from place where it is not demanded is there.

FACTORS EFFECTING LABOR MOBILITY

Among all factors of production, labour is least mobile. Land is geographically immobile

and in an exception. Capital may be money or machine. It is a life less they and istransported to the place where required which much ease and less difficulty. However, in

case of labour, it is different. He is not merely actuated by economic or monetaryconsideration. He has practically a fixed place in the society and does not liked to be

rooted out from the known surroundings. Hence it is rightly remarked that among all

sorts of luggage, man is the most difficult to be transported. The factors, which hinder or

inhibit the mobility of labour, can be listed as follow:-1. New climate

2. Transport

3. Accommodation4. Language barriers

5. Education and training

6. Diet and food habits7. Age and time of transfer

8. Psychological conditions.

9. Environment and surroundings10. Political, social disturbance

11. Cost of living

12. Racial differences

13. Family attachment14. Customs and rituals conventions

15. Wages/pay scale

LABOR EFFICIENCY DEFINITION

Normally though efficiency of labour means the ability or4 fitness of a worker to producegoods and services in proper quantity and of the right quality which is a given period.

The ability can be measured in terms of number of units of a commodity produced by a

worker with in a given period. Thus, one factor worker producing more number of a

commodity with in a given time than the other worker is considered more efficient.



Efficiency of labour is thus an important determinant of the study of labour in a

productive sense. It determines the size of real productive labour force in a country. Acountry labour supply will be substantially augmented if it possesses a relatively small

labour force possessing a high degree of efficiency.

FACTORS AFFECTING LABOR EFFICIENCY

1. Racial Stock: Man acquires some physical qualities from the racial stock to

which he belongs. The Sikhs and Jats are very strong and are capable of hardwork.

2. Wages: If a labourer get a low wage, he can’t maintain his efficiency, if wages

are low, labour productivity will also be low.

3. Climate: In temperate and cold climate, people can work hard. Hot climate is notconductive to very hard work. In hot climate, labourers cannot work as hand as

labourer in cool climate can.

4. Hours to Work: The efficiency of labour is affected by the working hours. If a

labourer works for long hours, work becomes monotonous and the labourersworse only half heartily. He cannot give the best.

5. Working Conditions: If the factory building is dirty and not well-ventilatedworkers cannot hard work. However, if factory building is clean and well

ventilated and if the atmosphere is pleasant, workers like to work hard.

6. Education and Training: Education and Training impact technical knowledge,

sense of responsibility and improve the efficiency of labour. Trained labourer canuse modern machinery efficiency

7. Welfare Activities: Social security measures like medical facilities and maternity

benefits help laborer to maintain their health and efficiency.

IMPROVING EFFICIENCY OF LABOUR 1. Motivating Labors through Wages and Incentives

2. Mutual argument between management and workers

3. Improving industrial relations4. Quality consciousness in production and in cost control

5. Material handling and better internal management

6. Improve labour welfare

7. Introducing modern methods of organization



WAGE

Beham defined a wage as

“A sum of money paid under contract by an employer to a worker for services rendered”

“Payment made for all kinds of services, whether by way of salaries or in any other way

is included in wages.”

CONCEPTS OF WAGES:1. Minimum Wage

2. Living Wage

3. Fair Wage

MINIMUM WAGE

The concept of “Minimum Wage” stands for different standard of different countries. The

fair wage committee in India has observed that in India the level of the national income is

so low at present that it is generally accepted that the country cannot afford to prescribe by law a minimum wage must provide not merely for the bare sustenance of life but for

the preservation of the efficiency of the worker. Thus, a minimum wage is one, whichmay be sufficient to enable q worker to live in reasonable comfort having regard to all

obligations to which an average worker would ordinally be subject.

THE OBJECTIVE OF MINIMUM WAGE1. To prevent explanation of workers and secure a wage equal to work load.

2. To raise the wages in the industries where they are low, thus prevent sweating in

industry.3. To promote peace in industry by guaranteeing a wage rate this will enable them to

meet their minimum requirements.

4. Raise the standards of living and efficiency of workers.

LIVING WAGE

According to the committee in fair wages,“The living wage represented the higher level of wage and it would include all amenities

which a citizen living in a modern civilized society could afford. After considering

various observations made by Indian authorities, the committee on Fair wages observed,

the living wages should enable to male earner to provide for himself and his family the bare essential of food, clothing and shelter but a measure of frugal comfort including

duration for the children, protection against ill health requirement of essential social

needs and a measure of insurance against the more important misfortunes including oldage.”

FAIR WAGETo bring improvement in the relations between labour and management the industrial

truce resolution was passed in 1947, which provided for the payment of fair wages of

labour, govt. of India appointed a Fair wages committee in 1948, and the committee

report was published in 1949. Marshell and Pigou have defined fair wages. Marshell



Says, “In any given industry wages are fair relatively to wage in industry in general.”

Lower limit of fair wages must be the minimum wage for workers and upper limit will be

the industry capacity to pay. However, between these two limits following factors haveto be considered:

a. The productivity of labour

b. The prevailing rate of wages in the same or neighboring localityc. The place of the industry in the economy

d. The level of national dividend and its distribution

TWO TYPES OF WAGES:

1. Nominal wages

2. Real wages

NOMINAL WAGES:-

The amount of money that a labourer gets in exchange of his services is called money

wages or nominal wages. If a labourer gets Rs.200, a day for his work, his money or nominal wages will be Rs. 200. However, mere money payment does not reflect the real

earnings of the labourer. They do not reveal the standard of living or the goods andservices which labourer can buy and consume.

REAL WAGES:-

The amount of goods and services that labourer can get with his nominal wages is calledreal wages. Real wages refer to the goods and services, which the money wages can buy,

and advantages and disadvantages associated with the jobs. Labourer is not so much

interested in money wage as they are in real wages because their standard of livingdepends on real wages. According to Wicksell, real wages means real income.

Real Income = Money income/Price Level

CALCULATING REAL WAGES

1. Purchasing power of money: Real wages (i.e. wages in terms of goods andservices) depend on purchasing power of money, which means on the prevailing

price level at particular place where a worker is working and living.

2. Incidental advantages and benefits: While calculating real wages, extra benefits

or advantages a worker may be getting must be taken into consideration. Theseextra benefits may take the form of free or subsidized transport facility. These

incidental benefits generally known as ‘Fringe Benefits’ or ‘Perks’ if available

must be added while comparing and calculating real wages.3. Working Conditions: While considering real wages, working conditions must be

considered. By working conditions are meant number of working hours per day,

healthy atmosphere free from pollution, availability of facilities like drinkingwater and rest house etc.

4. Possibility of extra earnings: Possibilities of extra earnings must be taken into

account while calculating and comparing real wages of workers. Some jobs (like



professors and teachers) enjoy the opportunities of making extra income by

writing books, undertaking tuitions etc.

5. Nature of jobs: While considering real wages of a worker nature of job must betaken into account whether the job is injurious to health, whether there exists great

hazards, whether it involves frequent traveling, etc.

6. Possibilities of promotion and success: Possibility of quick promotions, foreigntours etc. must be taken into account while calculating real wages.

7. Social prestige and status: For example, some jobs carry higher social status and

prestige than some other. This must be taken into account while calculating realwages of workers and comparing real wages of two workers doing two jobs in

different occupations.

8. Training expenses: Training expenses involved in the case of different jobs must

be taken into account while calculating real wages and especially while realwages of two jobs.

9. Trade and office expenses: Some jobs like doctor’s and pleader’s involves

trading expenses like maintaining an office and a clerk etc. while certain jobs do

not involves such expenses. This must be taken into account while determiningand comparing real wages.

WAGE DIFFERENTIALS

In the real world however, it is seldom seen that uniform level of wages is established

even in long run. On the contrary, one witnesses apparently permanent differences in thewages paid in different occupations with hardly any significant movement of labour form

low paid occupations to highly paid ones. Wage difference is also found between male

and female workers. Wage differences may be horizontal and vertical. Horizontal wagedifference is found among workers who have the same amount of skill training and

efficiency. Vertical wage differences on the other hand denote the differences (in wages)

in different grade of an occupation.

UNDERLYING FACTORS1. Difference in Skill And Efficiency: Where different skill and efficiency norms

are involved in different industries wage must be different.

2. Trade Unions: Where powerful trade unions exist in some industries wages in

those industries will be higher than in others where such trade unions do not exist.3. Profitability of the Organization: In those industries, which have high

profitability in comparison to those industries where profitability is lesser, wages

will be higher.4. Status of the Organization: Wages are normally higher in organization, which

have a higher status. Foreign companies and multinational corporations normally

pay higher wages merely because of status norm.5. Nature of Work: Wages also differ based on nature of work. Risky employments

6. normally involve higher wages or compensations in comparison to less risky jobs.

7. Ignorance: When workers suffer from ignorance, they suffer from lower wages.



WAGE DIFFERS BETWEEN MALE AND FEMALE LABOUR:

Female labourer is paid much less than male workers. The reasons for this disparity are-1. In certain occupations, there is an over crowding of female workers. For instance,

jobs such as teaching, domestic servants, nursing etc.

2. Owing to lower physical strength and other factors, the productivity of femalelabourers is believed to be low.

3. The trade union movement is not very strong and has not taken deep roots in case

of female labour.4. It is believed that the necessity for the earnings by man is greater than that of a

woman. Generally, females are not sole breadwinner of the family.

5. The mobility of female worker is also low because of family ties and domestic

responsibilities. Female workers would not like to change jobs even if a change of job has better prospectus for them.

Differences in wages based on differences in sex are not justified. Many countries have

tried to eliminate them based on principle of “Equal pay for equal work”. Theinternational labour organization had laid down in its constitution that men and women

should receive equal remuneration for equal work.

SOCIAL SECURITYSocial security as at present understood is one of the dynamic concepts of the modern

age, which has deeply influenced the social and economic policy of many countries in the

world. The idea of social security is that the state shall make itself responsible for

ensuring a minimum standard of material welfare to all its cities on a basis wide enoughto cover all the main contingencies of life.

The social security system aims to help individual in such times of dependency. The mainrisk of insecurity, to which human life is liable and in relation to which organized society

can afford relief to the helpless individual are incidents of life occurring right from

childhood up to old age and death and include mainly sickness, maternity invalidityaccident and industrial disease unemployment, old age, death of bread winner and other

such emergency.



SOCIAL SECURITY MEASURES IN INDIA:-

In an industrial economy, the worker is subjected to periodic unemployment due to

cyclical fluctuation in business, sickness industrial accidents and old age. There isnothing more serious to worker to his/her family than unemployment. Sickness suspends

earning capacity of a worker temporarily industrial accidents may disable him/her

permanently or partially and old age put a stop to his/her ability to earn supporthimself/herself and the family.

Naturally, the state has the obligation to help the worker and provide them security. Inwestern countries, Govt. started various measures to protect workers in time of sickness

and unemployment and provide relief in case of accident and old age. All these measures

are collectively known as social security schemes.

Various security measures adopted in India is divided into two categories:-

1. Before Independence

2. After Independence

BEFORE INDEPENDENCE SOCIAL SECURITY

Workmen’s Compensation act:- In 1923, the Govt. of India passed the Workmen’sCompensation Act in order to provide for compensation to the workers in case of

industrial accidents and injury. The act now covers workers employed in factories, mines

plantation, mechanically propelled vehicles construction workers and certain other

hazardous occupations. Under this act, the amount of compensation depends upon thenature of the injury and the salary of worker concerned. The Act is however not

applicable to the persons who are covered by Employee State insurance Act, 1948.

AFTER INDEPENDENCE-THE EMPLOYEE’S STATE INSURANCE ACT, 1948.

The employee’s state insurance act was passed in 1948 with the objective of providing

compulsory and contributory health insurance of workers. The act provides for medicalcare and treatment cash benefits during sickness, maternity and employment injury,

pension to the dependent on death.

SOCIAL SECURITY ADMINISTRATION

The act of 1948 set up the autonomous Employee’s state corporation, which has the

responsibility of administering the body of 40 people representing the union and the state

Governs, the parliament, employees and employer’s organization and the medical profession.

FINANCE AND CONTRIBUTIONThe act of 1948 provided for the setting up of a fund known as the Employee’s State

Insurance Fund. The rate of contribution by the employer, which was earlier fixed at 4%,

has been raised to 4.75% and that of employee rose from 1.5% to 1.75% of the wage.

The state Govt. share the expenditure on the provision of medical care to the extent of

12.5%. Besides the employer, employee contribution the central and state Govt. also

provides grants for the working of the scheme.



TYPE OF UNEMPLOYMENT

Unemployment of some kind has always been a running problem of modern societieswhether developed or underdeveloped. The various types of unemployment may be

classified are as follows:-

1. Voluntary Unemployment: In every society, there are some people who are

unwilling to work at the prevailing wage rate and there are some who do not wantto work. Such type of unemployment in any society is known as Voluntary

Unemployment.

2. Frictional Unemployment: Frictional unemployment is a temporary phenomenon.

It may take place in various ways. When some workers are temporarily out of work while changing job it called Frictional Unemployment.

3. Casual Unemployment: In industries such as building construction catering or agriculture where workers are employed on a day-to-day basis, there are chances

of casual unemployment occurring due to short-term contract.

4. Seasonal Unemployment: There are some industries and occupations such as

agriculture, the catering trade in holiday resorts, some agro-based industriesactivities such as sugar mills and rice mills etc. in which production activities are

seasonal in nature.

5. Structural Unemployment: Due to structural changes in economy, structuralunemployment may take place. Structural unemployment is caused due to a

decline in demand for the production in a particular industry.

6. Technological Unemployment: A kind of structural unemployment may take place in an economy because of technological improvement. Such unemployment

may be described as technological unemployment.

7. Cyclical Unemployment: Capitalist biased, advanced countries are subject totrade cycles. Trade cycles, especially during recession and depression phase cause

cyclical unemployment in these countries. Since cyclical phase cannot be

Permanente, cyclical unemployment remains only as a short-term phenomenon.

8. Chronic Unemployment: When unemployment tends to be a long-term feature of a country, it is called “Chronic Unemployment”. Lack of developed resources and

their utilization.

9. Disguised Unemployment: Unemployment may be classified into (i) Open and(ii) Disguised: The term-disguised unemployment commonly refers to a situation

of employment with surplus manpower. Disguised unemployment in the strict

sense implies underemployment of labour.

UNEMPLOYMENT PROBLEMS IN INDIA:-



In developed countries, unemployment of labour is mostly cyclical or frictional in nature.

Cyclical unemployment can be cured by increasing aggregate demand for goods. Causes

of unemployment in India:-1. Population growth: - In India during the planning period, population has increased at

the average rate of 2.5% but employment opportunities owe not increase accordingly.

2. Change in age structure of population: - It is estimated that when population increases by 2.3% per year, the population belonging to the working age group increase by

more than 4.5% per year.

3. Increase in labour force participation rate: - It shows that percent of working population is actually ready to work at existing wage rate. It is found that people now

want the income as income of one person in family is not enough & hence

unemployment increases.

THE LAW OF VARIABLE PROPORTIONS/THE LAW OF DIMINISHINGRETURNS

In production not all factors are fixed usually land is a fixed factor and the others are

variables.

If one input is variables and all other factors fixed, the firm’s production functions exhibit

the law of variable proportions.

As you increased the unit of the variable factors keeping other factors constant total

product will increase at a decreasing rate.

As more and more units of variable factor are used holding the quantities of the fixed

factor constant a point is reached beyond which the marginal product then the average

product and finally the total product will diminish.

i. Total Product (TP)

This is the maximum amount of output that can be produced from a given set of input

or the final goods and services produced from a given set of input.

ii. Average Product (AP)

This is a total output per unit input

AP = TP = out put

L inputiii. Marginal Product (MP)

MP = Change in TP



Change in L

Example:

a) 8 - 1 = 8

1 - 0

b) 20 – 8 = 122 – 1

c) 36 – 20 = 16

3 – 2

STAGES OF PRODUCTION

Stage One

Marginal Product is increasing due to increasing marginal product, total product and

average product also increased.

At this stage the cost of production decreases as output increases because firms enjoyeconomies of scale or increasing returns to scale.Stage TwoIt is also called the stage of diminishing returns at this stage Total Product increases and

reaches maximum both Marginal Product and Average Product decreases but are still positive. It is logical to continue producing at this stageStage ThreeThis is also known as negative return to scale the Total Product and Average Product

decrease. Marginal Product is negative it is illogical to produce at this stage.

DIVISION OF LABOUR/SPECIALIZATION

The splitting of tasks into various smaller units and entrusting each unit to particular individual or groups of workers for execution depending on their areas of expertise skills

and experience. In this way a small part of the work is undertaken by one person and the

whole job is completed by different persons.

TYPES OF DIVISION OF LABOUR 1. Complicated / Process Division of Labour: This is where one job is subdivided

into different smaller parts and each part is given to a separate set of workers.

2. Occupational / Professional Division of Labour: This is where different peopleadapt different occupations.

3. Geographical / Territorial / International Division of Labour: This where

different geographical / region / countries specialize in the production of different

groups of services.



ADVANTAGES OF DIVISION OF LABOUR 1. Promote Efficiency – this is because tasks are divided into specialized units and

assigned to individuals with specific skills those areas.

2. Reduced Supervision – workers are easily supervised since they have been assigned

specific tasks which they are directly accounted for.

3. Responsibility – workers develop a sense of responsibility towards their tasks.

4. Easy Management – Management of the organisation becomes easy because work

is divided into specialized task.

5. Specialization – it is highly increase by division of labour as a given individual

repeated does the task.

6. Increased Output – division of labour leads to increase in output since workers are

specialized in the task which they know best.

7. Reduction in Cost – division of labour promotes cost effectiveness since the

workers becomes efficient and thereby perform their given tasks in minimum cost.

8. Time Saving – division of labour reduces time wasting since workers know their

tasks and therefore perform their tasks in a shorter time period.

9. Employment Creation – when work is divided in different occupation there is a

chance that most people will get employment.

10. Increase in Skills – by reducing every work business to a single operation skills are

increased through repeated performance.

11. Less Fatigue – because of subdivision into smaller units.

12. It Encourages Team Work

13. It Promotes International Trade – through international trade each country is left

to specialize into goods and services that they produce best.

DISADVANTAGES OF DIVISION OF LABOUR

1. Monotony

2. De motivation

3. Over specialization – it may lead to unemployment.



4. Increased cost of production – people who are highly skilled may hold the producer

at ransom

5. Case of absenteeism

6. The case of minimum supervision – workers may take advantage of the minimum

supervision and make the whole process counter productive.

7. Increased fatigue

8. High degree of interdependence – if work is affected in one area or unit the whole

process is affected.

9. lack of identity

10. Reduces mobility of labour

LIMITS TO DIVISION OF LABOUR

1. The extent of the market – if the market is small then there is no need for division

of labour.

2. The extent to which exchange and distribution networks are developed –

because division of labour is associated with large scale the exchange and

distribution network should be develop.

3. Size of the labour force – if there is only one worker then there is no need for

division of labour

4. Nature of goods and services – some goods by their own nature cannot be produced

by divisions of labour example gold, alarm, making of money.

PRODUCTIVITYIt means different things to different people some of the more commonly used definitions

include the following:

1. Productivity is the relationship between output and input used to create thatoutput.: According to this definition high productivity means producing more

with the same amount of resources or achieving higher output in terms of volume

and quality for the same input. Productivity is therefore the efficient and effectiveuse of resources



2. Productivity is the relationship between results and time taken to accomplish

them: According to this definition the less time it takes to achieve the intended

results the proactive the system is. Time is often a good denominator since its auniversal measurement and it is beyond human control.

3. Some people also view productivity as a more intense use of resources: This

definition has been criticize by many. The essence of product improvement isworking more intelligently or smarter and not harder

4. Productivity is also defined as a concept of the mind which is match to perfection.

It is assumed that workers who have experience are more productive.

IMPORTANCE OF PRODUCTIVITY IN ECONOMIC DEVELOPMENT

1. Improved productivity leads to economic growth

2. Productivity determines how competitive a company products are internationally

3. It’s a comparative tool for managers and economist since it compares production

with the resources used.

4. Productivity is used as a guide by employers

5. Through productivity a wide variety of goods and services are made available at

affordable prices

6. Higher income are enjoyed

7. Surplus wealth and value is created

8. Investment in social services such as education and health is made possible.

9. Foreign exchange generation

10. Inflation control – (demand pool inflation)

11. Employment generation / creation

PRODUCTIVITY MEASUREMENT

- It can be measured on a national / industry basis / company

- It can also be measured for departments / one person

- Measurement of productivity involves an estimation for both output and input

- The major problem faced in this estimation is:

• The nature

• Availability

• Reliability of data



There are two types of ratios that are used in productivity measurement.

1. Total Factor Productivity

TP = Total outputTotal input

In total factor productivity all the four factors of production are considered

2. Partial Factor Productivity

PFP = Total input

Partial output

In partial factor productivity one of the factors of production is considered

In measuring productivity ratios whether TFP / PFP two approaches are generally

used:

a) Input – output approach b) Value added approach

A. Input output Approach

This is generally used in manufacturing and non service sectors.

According to this approach productivity is arrived at by dividing the volume of

output by the amount of input used in producing that output.

Productivity = Output

Input

B. Value Added Approach

This is mainly used in the service sector.

In this approach the same method of comparing output with input still applies.

However since quantitative measurement of output in a service sector is difficult

value added approach is used.

The value added is the difference between turn over and the cost of intermediate

input.

WAYS TO IMPROVE PRODUCTIVITY:1. Organisational restructuring

2. Rationalization of the product of service range.

3. Introduction of bonus or incentives



4. Staff right sizing

5. Research and development

6. Automation and computerization

7. Product or process redesign

8. Conducting productivity audit

9. Staff training

LIMITATIONS TO PRODUCTIVITY IMPROVEMENT

1. In ability to understand what productivity rarely means

2. The focus is on reducing input rather than increasing output.

3. In ability to isolate the basic cause from the symptoms

4. Technical issues such as automation and computerizations are over emphasized

while human issues are neglected.

5. There is no productivity measurement system in place.

6. Unclear productivity improvement goals.

7. Sharing of productivity gains among the various share holders is not properly

defined.

8. Lack of productivity improvement skills and expertise

9. In effective leadership and management for productivity improvement strategies.

10. Lack of ownership among the stake holders.

BOTTLENECKS/HINDRANCE/IMPEDIMENTS/OBSTACLES TO PRODUCTIVITY

IMPORVEMENT IN DEVELOPING COUNTRIES

1. Shortage of capital due to low capital formation

2. High population growth rate.

3. Ineffective labour management practices

4. Low wages and inferior terms and conditions of employment

5. Low levels of education and training

6. Poor infrastructures

7. Political instability and civil wars

8. HIV AIDS and other diseases



9. Cultural factors and practices

10. Absence of a national integrated and institutional frame work for productivity

promotion measurements

11. Lack of knowledge on productivity measurements techniques and bench marking.

LABOUR PRODUCTIVITY

This is the output per worker per given period of time

It is a measure that relates output to the labour resources used in producing that output.

It is also a measure of the efficiency and effectiveness with which labour is being utilized

in the production process.

Labour productivity tells us how many units of outputs we can obtain from a unit of

labour input.

If output per unit labour input increases then we can rightly say that labour productivity

has risen and if output per unit labour input decreases then we can rightly say that labour

productivity has reduced.

Labour Productivity = Total output/Total input

Total man- days /man-hours

= Total output/Wage bill= Total output/No of workers

DETERMINANTS OF LABOUR PRODUCTIVITY

1. Salaries and wages – adequate , poor (key words)

2. Staff motivation – motivated and demotivated

3. Level of skills – highly skilled workers / less skilled workers

4. Computerization – availability of the system makes workers to be more efficient.

5. Professionalism – people who are professional in their work are more productive

than those who are not.

6. Specialization

7. Job rotation

8. Availability of resources

9. Training , coordination

10. Working conditions – poor , conducive



11. Attitude and mind set

12. Hours of work

13. Absenteeism

14. Health and physical well being

15. Effective communication

16. Social and cultural factors

TRADE UNIONSDifferent countries use the term trade union differently but generally it refers to

association employees’ organisation employers association.

A trade union or labour union is a continuous association of workers for the purpose of maintaining or improving the conditions of their employment.

It can also be defined as a body of workers organized into a voluntary association or union to further their mutual interest respect to wages hours of work, working conditions

and other matters of interest to the workers.

EFFECTS OF INTRODUCING TRADE UNION IN A PERFECT LABOUR MARKET

1. They ensure good health and safety at work 2. They enable the worker to get economic security

3. They restrain management from taking any action which is irrational, illogical,

discriminatory or prejudicial.

4. They act as channel of workers to air grievances and ideas5. They secure protection during emergency

6. They promote cordial relationship

7. They provide a chance to get employment

CONDITIONS UNDER WHICH TRADE UNIONS CAN RAISE WAGES ANDTERMS AND CONDITIONS IN A PERFECT LABOUR MARKET

1. By ensuring that the workers are paid in line with there marginal productivity

2. By improving the productivity of workers through there welfare activities

3. By restricting the supply of labour



4. By raising the standard wage rate

5. By studying market conditions and advising appropriately both parties

FACTORS DETERMINING THE EFFECTIVENESS OF TRADE UNION

1. Availability of funds2. Efficient management of the unions by competent individuals

3. Support from the union members

4. United workforce5. Lack of interference from political figures

6. Support from the government and employer

7. Clear objectives

8. Sound internal organisation

IMPACT OF TRADE UNIONS ON ECONOMIC ACTIVITIES

1. Trade unions resist any attempts by firms to reduce wages.2. Trade unions enable workers to get economic security

3. They help to increase the productivity of workers through their welfare activities4. They help in providing employments

5. They also help in small saving schemes

NEGATIVE OF TRADE UNION ON ECONOMIC ACTIVITIES

1. They can cause inflation

2. They also reduce production when they call for strikes3. They can also cause unemployment when they ask for higher wages more than the

employers can afford.

COLLECTIVE BARGAINING

There are negotiations between employers and workers about working conditions andterms of employments.

Conditions Necessary / Essential / Requirements / Pre Requisite/ Pre Requirement for the Success of Collective Bargaining

1. Clear objectives

2. Spirit of give and take

3. Unreasonable demand should be avoided4. Parties should rely on facts and figures to support their views.



5. Strong union leadership

6. Progressive management – the managers should be supportive

7. The agreement should be embodied in a document8. Incase of an agreement the agreement should be honoured

IMPORTANCE OF COLLECTIVE BARGAINING

1. Effecting social change

2. Establishing peace between the two parties3. Promoting good relationship

4. Opens of channel of communication

5. Promotes a sense of job security

6. Creates a peaceful industrial climate nationally which increases economic andsocial development.

FORMS OF COLLECTIVE BARGAINING1. Single employer bargaining – this is where the problem is unique

2. Multiple employers bargaining – this means there is a common problem.

LABOUR FORCEThese are all members of a country’s population who are physically fit, mentally alert

and able to work.

According to International Labour Organisation (ILO) the age ranges from 16 – 64 years

in Kenya its 18 – 64yrs.

The size of active labour force however depends on customs, traditions, religions, beliefs,

education and training.

LABOUR FORCE PARTICIPATION RATE

This is the proportion of population which is in work or seeking for a job. It’s the

proportion of a country’s population that is in wage employment, self employment or unemployed but is actively looking for work.

It’s influenced by the availability of jobs, wage rates, performance of the economy, levelsof education and training, culture, attitude etc.

FULL EMPLOYMENT



In ordinary usage it means that situation when all those persons who are willing and able

to work are fully employed however in strict economic terms it means, that situation

when there is no demand deficiency and unemployment. This will mean demand =supply.

SEARCH PERIOD

This is the period during which unemployed individuals look for jobs.

It can either take too long for a person to get a job or just a short time. Such period is

determined by the wage rate, availability of jobs, level of education and training,

willingness of the unemployed to take up jobs, mobility of labour, information flow etc.

THEORY OF EMPLOYMENT

1. Classical Theory / Traditional Free Market

2. Keynesian theory of income and employment

CLASSICAL THEORY / TRADITIONAL FREE MARKET:It’s based on wages and employment.

According to this theory wages and employment are determined by the market forces of

demand and supply.The theory states that labour is demanded so long as marginal product is greater than

wage rate.

It also considers that workers are ready to work so long as wage rates are high. The

classical were also of the opinion that wages should be reduced to increase employment.

LIMITATIONS OF THE CLASSICAL THEORY1. The theory assumes that wages are flexible which is not the case wages are only

flexible when being adjusted upwards but sticky downwards.

2. Many people in developing countries are willing to work at less than market wagerate because of unemployment and poverty.

3. The theory recommends a wage cut to cheat employment which does not

automatically lead to increased demand of labour.



4. It assumes that a fully employment condition can be attained which is not

realistic.

5. It’s based on competitive market situation which is not attainable in the realworld.

KEYNESIAN THEORY OF INCOME AND EMPLOYMENT

According to Keynesian employment is a function of the national income.

The higher the national income the higher employment and vice versa National income depends on natural resources, quality and efficiency of labour and other

factor inputs such as technology and capital.

Keynesian also states that effective demand determines the level of employment.

Employment is further boosted by savings and investment.

LIMITATIONS OF KEYNESIAN THEORY

1. The theory assumes that firms can respond quickly and effectively to increaseddemand by expanding outputs and hence employment.

2. In developing counties the major bottleneck to increase output is not insufficientdemand by structural and institutional constrains on the supply side e.g. shortage

of capital, raw materials and deficiencies in management of human resources

combined with poorly functioning and inefficiently organized commodity and

labour markets.

COSTS OF EDUCATION

There are three types of costs associated with a college education:

1. direct costs such as tuition, books, and supplies,2. forgone earnings (the opportunity cost of time), and

3. psychic costs.

Notice that the direct costs include only those direct expenditures that a student wouldmake only if he or she attends college. The costs of meals, dorm fees, etc., would not

generally be a cost of education since these individuals would face costs of meals and

lodging if they had been engaged in some alternative use of time (such as working).Room and board fees would partially enter as a cost only if these costs are higher than

they would have been under the next-best alternative use of time.

As noted earlier, the forgone earnings associated with being a full-time student is usually

the largest cost associated with acquiring a college or advanced degree.



The psychic costs associated with attending college include the stress, anxiety, and

sometimes boredom associated with classes, exams, assignments, papers, etc.

BENEFITS OF EDUCATION

The benefits associated with acquiring a college degree include:1. higher expected earnings,

2. more pleasant jobs,

3. lower expected unemployment rates, and4. psychic benefits.

In general, college graduates receive not only higher pay, they also receive jobs that are

more secure and involve less tedious work, less physical work, more pleasant work environments, better working conditions, higher social status, and so forth. The psychic

benefits associated with education include the enjoyment that may be received by being

in the college environment.

FACTORS AFFECTING HUMAN CAPITAL INVESTMENTThe human capital model suggests that the level of human capital investment is affected

by:

1. interest rates,

2. the age of the individual,3. the costs of education, and

4. the wage differential between high school and college graduates.

Since most of the benefits associated with a college degree occur relatively later in the

lifecycle while the costs are borne more immediately, an increase in the interest rate

facing an individual will be expected to lower the net benefit of education. (This occurs because an increase in the interest rate lowers the present value of more distant benefits

and costs by more than it lowers the benefits of short-term benefits and costs.)

Government subsidized student loan programs are designed to reduce interest ratedifferentials across households. (In the absence of these subsidized interest rates, low-

income households would face substantially higher interest rates, resulting in a lower

probability that children from such households will attend college.)

It is expected that individuals will tend to invest more in education at an earlier stage of

their lifecycle because this results in a larger period over which the increased earnings

may be realized. (Exceptions to this often occur when individuals change careers.)

The theory discussed above, of course, directly predicts that more people will attend

college when the costs are lower and/or the benefits are higher.



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Human Resource Economics

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