UNIT 201ECONOMIC DECISION MAKING

LECTURER: MS.
SUBMITTED ON: 18.12.2014

STUDENT NAME:

STUDENT ID:
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TABLE OF CONTENTS
Executive Summary... 3
Introduction ... 4
Demand and Supply...4
Equilibrium in a Competitive Labor Market. 8
Concepts of Money wages and real wages 11
Conclusion. 14
References..15
Figures

Figure 1Determinants of labor demand... 6

Figure 2 Elastic demand for labor6

Figure 3Inelastic demand for labor ... 7

Figure 4Marginal revenue products of labor... 7

Figure 5Labor demand curve... 8

Figure 6Competitive labor market... 9

Figure 7Data analysis table... 10

Figure 8Employment rate chart... 11

Figure 9 Unemployment rate% chart...11

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Executive Summary:
The assignment report provides analysis & evaluation of present trends and future prospects of labor market
and the contribution towards social welfare. Methods of evaluation and analysis include the research on best
employment rate, participation rate & unemployment ratio all comparing with population of respective
countries and general global outlook on employment market trend. The report also indicates the
interdependencies of the demand, supply, consumption, income and elasticity of demand from economic
perspective for prosperity and growth of a country. From the labor market point of view, the study includes
the perfectly competitive firms profit maximizing labor demand decision based on marginal revenue of the
product of labor,equilibrium in a competitive labor market based on market wages, determinants of laborelastic and inelastic demand with examples through graphical representation best suited from demand and
supply point of view. The laws of demand and supply, diminishing returns, concepts of money wages and real
wages have been applied to understand the purchasing power of individuals and labor demand to derive the
net impact on economy, using the random data have provided examples through graphical representations on
labor demand curve as well.
The international statistics according to US, ABS, ILO and OECD have been considered to assess the past,
present and future situation on employment & unemployment rating of countries across the globe. Results in
Australia have been satisfactory based on the statistics as per ABS but discouraging in south Asia and in
some parts of Europe due to economic slowdown and aftermath impact of economic recession. The gap
between unemployed versus employed seems to be increasing due to higher percentage of unemployment
rates in majority of the countries. This shows lack of proper policies by national government to improve upon
the standard of living and providing livelihood through employment opportunities. It is highly recommended
that countries should focus policy to promote competitiveness, growth and creating job opportunities, if
necessary by cutting down expenditure on other fields and designing new tax benefit structures to promote
more and better jobs both in numbers and in quality. This can be done through sound macroeconomic policies
for economic recovery through reforms to increase competition in goods and services. To maintain
socioeconomic balance, it is recommended to enhance the education & skills of labors to reduce the gap
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between earnings of highly skilled and low skilled labor. From economic growth point of view to improve
further, it is essential to all countries consider the level and distribution of earnings, compensation for
unemployed labors, alternate welfare schemes for child labors, pension schemes for sick and senior citizens,
reduction on dependency on temporary labors, improving quality of education & skills and quality of work
environment important for sound health. There have been limitation for labor market across the globe as all
countries are not covered or rather not adhering to ILO standards and secondly lack of labor price index
definition common for all countries.

Introduction:
The term social welfare can be associated with unemployment, because other needs such living conditions,
education standard, medical assistance, housing assistance and health care assistance depend on the
unemployment rates. In a broader aspect social welfare also mean to protect environment by following
sustainable practices, adopting ethical business values, which contribute to the society welfare. Social
welfare is not just providing basic amenities to the society and citizens, it is aimed at increasing the quality of
life above standard of living. Social welfare does have effect on countrys economic growth, since the per
capita income is associated with countrys economic standard and GDP. Social welfare provided by the
governments to its citizen does enhance the countrys image and reputation on the international level and at
times helps the boost several other trades, if the reputation is excellent in terms of peace and stability in the
region or in a particular country. From the perspective of beyond unemployment, social welfare relates
welfare of senior citizen, uplifting poor section of the society, healthy state of citizens, disabled and sick
citizens, state of doing well with respect to happiness and prosperity and aid in the form of money as well.
From economic point of view socially wellbeing persons surely have income, which in turn enables increase
consumption, demand, supply and continuous production of several goods from the producer view point. The
purchasing power of goods classified broadly on category such as necessity, comfort and luxury depends on
the quality of life, employment rate and social status on the citizens. Social welfare definitely promotes
economic boost of every country. The most important factor among all the inputs is the labor (human) which
is always used to measure the economic health in terms of unemployed versus employment rate on the
country.
(Investopedia, 2010); (Collins, 2014); (Merriam-Webster, 2014)
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Demand and Supply:

The main input the firms demand include Land, labor and capital for production of output besides pricing of
the product. The output may be defined as the conversion of input (raw materials) into meaningful outputs
(finished goods).Labor market is determined by the demand and supply of labor, the two main participants
are firms and workers. The demand for product is directly proportional to the demand of labor, workers
supply labor in return for wages and firms demand labors and pay wages in return for the labor contributed
through effort to produce a goods or services. The labor supply or the demands have various categories of
skills which fit into different levels of the firm.The actual definition of demand from consumer point of view
is derived through three factors desire, purchasing power & willingness to buy a product or goods. This
demand for the goods and services creates demand for the supply of labors for all the firms, in particular a
firm demand depends on its output. As the output of the firm increases, the demand for labor increases and
vice versa.Firms try to capitalize mainly on the labor factor to generate business revenues, margins and try to
create balancing act by increasing or decreasing workforce depending on the impact on the total cost due to
labor cost. The main variable factor which determines the marginal revenue of product is the labor deployed
for production of total output. Marginal revenue of the product of the labor is the additional revenue a firm
generates by increasing the more units of labor strength. Firms consider market wages to ascertain the
strength of labor force required to produce the output. Market wages play an important role in demand and
supply of labor, demand can shift due to number of reasons such as productivity, price of the product and the
demand for the goods. In a competitive market, the output planned by the firms and its capacity determines
the demand for labor based on marginal revenue of the product of labor. As per the sticky wage theory,
unemployment rate does have effect on employed persons wages, usually the wages of employed would be
slow or remain slow due to impact on economic growth and decrease in demand for labor.
(Mifflin, 2014); (Metcalf, 2014); (Investopedia, 2007); (Alden, 2014); (economics, 2014)
From the supply point of view the factors that derive and affect supply of labors depend on the population,
immigration or expats, population seeking employment, working hours/days, education standards,
demography and local regulations. The influx of labor, retirement, labors switching jobs can affect supply
and the wage rates, the higher the wages the higher thesupply of labors. The supply of labor is driven by the
demand, one of the factor for globalization trends of markets due to low cost availability and abundance in
some countries. Due to different occupation worker earning different amount, it is important to establish corelation between demand and supply curve. As per the law of diminishing returns, as the firms increase per
unit of labors, each additional labor contributes lesser towards overall output and revenues, therefore the
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demand curve usually is a downward slope and supply curve upward slope. Market consumption and
individual income are the reflection of demand and supply.
(Mifflin, 2014); (Metcalf, 2014); (Investopedia, 2007); (Alden, 2014); (economics, 2014)
Elasticity is the responsiveness of the demand for the labor when there is change in wage rates. It is the
percentage (proportionate) change in quantity demanded divided by the percentage (proportionate) change in
price that brought it about.The factors that rule elasticity are shown below in the diagram:
(Mifflin, 2014); (Metcalf, 2014); (Investopedia, 2007); (Alden, 2014); (economics, 2014)

Figure 1

Figure 2

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(Tutor2u.net, 2014)
Figure 3

Example: If a competitive firm hires 5 labors the total products, marginal product of labor and the revenues
generated are listed below in the table: the values arrived at are considering unit product price $10.
Figure 4
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The graph representing marginal revenue product of labor is known as labor demand curve. The marginal
revenue product of the labor should be equal to market wage rate per labor, this marginal cost of the last
worker falling below market wage rate is not favorable to the firm. According to the law of diminishing
theory the slope is downward, due to more number of worker hired leading to decline of marginal product of
labor and revenue as well.In this case, considering the market wages to be at $50 the ideal labors required for
the profit maximization for the firm would be 3 labors based on the point of intersection shown in the graph,
since market wages determine the strength of workers to be hired.
(Mifflin, 2014)
Figure 5

Perfectly competitive firms profit-maximizing labor-demand decision

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From the supply point of view, the labors have two option one for consumption or buying power or income
and the second being leisure. As the wage increases the supply of labor increase leading to increase in income
and buying power. Applying the opportunity cost theory, the labor sacrifices leisure time for consumption or
buying power. The opportunity foregone is the leisure for work and income but again it depends on the
market wage and the prices of the goods for consumption. The effect of substituting leisure with work for
higher income may be discouraged due to high prices of goods.
(Mifflin, 2014)
FIGURE 4-1 Equilibrium in a Competitive Labor Market
The labor market is in equilibrium when supply equals demand; E* workers are employed at a wage of w*.
In equilibrium, all persons who are looking for work at the going wage can find a job. The triangle P gives
the producer surplus; the triangle Q gives the worker surplus. A competitive market maximizes the gains
from trade, or the sum P+Q Dollars
(Publications, 2014)

Figure 6

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Referring OECD top ten countries data, all the ten countries have more than 70% rate of employment, the
best being 88.2 % employment rates. Any country having less than 6% unemployment rate is considered to
be on the right path towards economic progress. Countries strive hard to control unemployment rate well
below 5% to avoid impacting economy and enable increase consumer spending. According to the guardian
magazine, Australias unemployment rate and participation rate remained steady in 2014.While the persons
looking for part time jobs showed an increasing trend. The best period being in March, where the rate came
down from 6.1% to 5.8 %.(Co, 2014); (guardian, 2014); (Australian bureau of statistics, 2014); (Publications,
2014); (Economics, 2014);
Table indicating statistics of Australian labor market:

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Figure 8

Figure 9

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Employed persons

Unemployment rate %
7.0

11,600.0
11,550.0

6.8

11,500.0
11,450.0

6.6

11,400.0

6.4

11,350.0

6.2

11,300.0

6.0

11,250.0
11,200.0
41640

41671

41699

5.8
41640

41671

41699

Analyzing the above data provided by CBS RAK, for the month January, February and March in the year
2014, the unemployment rate has come down and the employment rate has gone up, both are good for the
Australia. Overall persons Participation rate is good but the female participation is a concern.
(Co, 2014); (guardian, 2014); (Australian bureau of statistics, 2014); (Publications, 2014); (Economics,
2014);
Concepts of Money wages and Real wages
Money wages
The wages a person receives in return for the services or duty performed for a firm, institution or a company
regardless of the inflation, it is a common mode of earning. This may be inclusive of allowances or fringe
benefits such as sick leave, travelling, HRA etc. received in a salary package as promised by the firm or
company. It depends upon the agreement between the employer and worker and nature of services or jobs.
When a person just receives pay without any additional benefit it is usually considered as temporary service
or job.
(Hanson, 2014)
Real Wages
The purchasing ability of the person from the earned income or salary is the real wage. Usually firms
consider the inflation of the market for finalization of the salary packages. The inflation and cost of living are
directly linked to real wages. According to J.L Hanson Real wages is the wages in terms of the goods and
services that can be bought with them. This shows that real wages show the purchasing power of the person.
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Money wages and real wages depend upon the types of organizations (Public& Private), regions, countries,
states, cities, town and villages a person works and the type of facilities worker receives for their duty
performed.It could be high or low as applicable to the living zone. A worker receiving housing,food,yearly
leave travel allowance, conveyance and welfare allowance may less affected by the inflation and as such
there would no realization of real wages since the facilities provided by the firm ,compensate in terms of
money requirement to buy or spend for travelling ,HRA etc. The production cost of the product is determined
by the Money wages paid to each worker. Usually Money wages are considered for end of service benefits,
pensions and taxes payment, depending upon the rules and regulations. A higher wage may yield good tax for
the country besides prompt payment of taxes and enable reduce inflation and promote economic growth&
social welfare. However money wages alone cannot determine the purchasing power of the person. Due to
the same, in some countries the fluctuation in the prices of essential commodities is adjusted in the nominal
money wages periodically to compensate increase in prices. Money wages may vary depending upon the
skills, education, experience and seniority in the organization. Money wages may be paid based on working
hours or based on the objectives and production target achieved. Overtime paid by firms for working beyond
regular hours are variables that increase the money wages. Some countries have minimum wages act to
protect worker interest and discrimination. The importance of the money wage is due to being main
determinants for production output, sales targets, for forecasting inflation trends and profitability factor for
the firms. As the prices of essential goods vary they tend to frequent the changes in demand and supply of the
labor.A migrant worker money wages can contribute to foreign reserve of the country due to expat
remittances.
(Piana, 2014); (Hanson, 2014); (Investopedia, 2005)
On the other hand real wages have many advantages for the individuals as they contribute towards countries
economy, standard of living, cost of living, consumption, demand, supply, per capita income, inflation and
GDP.Real wages is motivation to the individual for increasing output ultimately benefiting the firm. Higher
wages means higher income and increased purchasing power and consumption, demand for the products,
production, and supply, in turn enables further growth in wages. They do boost tax revenues and reduce
public deficit. Real wages determine and affect the purchasing power, nature of employment, working hours,
future prospects, and training costs. Real wages are considered for carrying out economic analysis and cost of
living.
(Finance, 2014); (Investopedia, 2005); (Grimsley, 2014); (Canada, 2014)

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According to OECD directorate, currently there no labor index (LPI) commonly applicable to all countries.
Wage price indices are used to measure the changes in the labor wages due to adverse market condition and
affect, irrespective of the quality and quantity of the work performed-according to Australian bureau. The US
bureau defines LPI as the index designed to measure the changes in hourly compensation fixed for a basket
of jobs. The EU defines as instrument to measure average hourly labor costs. This varies from country to
country but the logic applied remains same, in general it is used to measure inflation and effectiveness of
governments economic policy. It determines the labor contribution towards GDP, economic growth and
cost/standard of living. In some countries average wage index is being used for calculating retirement benefit,
taking care of employees as a social security cover post-retirement life. According to ILO, more importance
should be given to equitable growth of wages to avoid impact due to effect of macroeconomics, which may
lead to widening of gap between bottom and top earning workers and labor income sharing decline. The
decline in the labor wage indices affects the key component of aggregate demand, consumption, investments
and exports necessary for countrys economic growth. The global wage reports with indices of each country
indicates the differences in wages due to economic condition farther trends within countries and across the
globe .The wage indices analysis is used to recommend the internal and external rebalancing for achieving
socially and economically sustainable outcomes within and across different countries for proposing policy
actions beyond labor markets and national boundaries. The ultimate aim is to look at the reasons for the
trends due to increased financial & trade globalization and advanced technology. The wage indices also
determine the purchasing power of the respective currency and exchange rates, to some extent. The income
indices are used for calculation of Human development index, one of the factors considered for ranking the
countries as developed or developing nations. Entrepreneurs use these indices for planning capital investment
and long term business plans, since the index provides information on price changes on labor, business and
nations economy to government.
(Directorate, 2014); (Labor statistics, 2014); (Statistics, 2014); (Ssa.gov, 2014); (Ilo.org, 2012);
(MacEachern, 2008)

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Conclusion:
According the International labor organization 2013 annual report the outlook of global employment market
has not been favorable. The unemployment rate has been increasing especially in the developing south Asian
countries with 45% job seekers out of 202 Million unemployed across the globe. The gap between the
employed and unemployed has been increasing since 2008 due to recession and the jobs created in several
countries is less than job seekers. All this has been accounted due to slower economic growth and inability to
recover quickly. The percentage of the persons who prefer not to participate in the labor market has gone up
as well. The youth unemployment rate steep increase is a concern from social welfare point of view as more
youth were found neither employed nor in education or training. Average unemployment period was recorded
at 8 to 9 months at some parts of Europe, increased from past records. The unemployment rate can have a
detrimental effect on advanced economies, countries may face additional burden either by increasing taxes or
cut spending due inability to increase fiscal deficit.Finally the effect would be on the demand and supply
market due to reduction in the consumption of goods and services. The gap of female ratio compared to male
employment has been found to be widening indicating the need for introspection. Proper policy by
governments and shift on focus towards advanced economic welfare, enhancing mutual cooperation among
other countries for increasing trade and globalization, FDI etc. can help improve the unemployment rate from
social welfare point of view. However, Australian labor market has been improving and more people planned
for migration for employment as well as higher studies compared to person migrating to US. The percentage
of unemployed has been under control and in fact showing a reduction trend, person seeking part time jobs
showed an increasing trends besides the economically inactive persons preferring to participate in labor
market increasing. Usually a country prefers to have strong economy as it promotes trade with other
countries enabling progressive economy, living standard and social welfare of countries bilaterally. The
quality of education provided by Australia has seen the boom in economy and labor market for citizens as
well as emigrants, as people have been preferring Australia over other countries. According to the theory of
economics, consumption, demand, supply and income are the interlinked and form a cycle, as the
consumption increases, the demand, supply and income does increase.

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