Anda di halaman 1dari 10

Labour Markets

Labour market is where individuals seeking employment interact with employers (supply) who want to obtain the
most appropriate labour skills for the production process (demand)
Demand curve is downward sloping, Supply curve is upward sloping and equilibrium price is wages
Some areas there may be unemployment (excess supply of labour)
Other areas there may be shortage of skilled works (excess demand of labour)

Demand for and Supply of Labour

Demand for labour

Demand for labour is derived demand - derived form demand for goods and services
If demand for goods and services increases during upswing
o Firms will need to increase output to meet higher levels of demand
o Firms must hire more labour to help with increased production which increases demand for labour
If demand for goods and services decreases during upswing
o Firms will need to decrease output to meet lower levels of demand
o Firms will cut down on labour as they no longer require them which decreases demand for labour

Factors affecting Demand for labour

Output for labour
o As demand for labour is derived demand, output level is most important factor affecting demand for labour
o Three factors that affect firms output
General economic conditions
Economic activity = Demand for goods and services = Demand for labour
o There is time lag as in short term, firms have excess capacity to use before taking on new staff
Economic activity = Demand for goods and services = Demand for labour
o This does not happen immediately after fall in economic activity
o E.g. firms will try to keep labour but cut back on hours
Conditions in firms industry
Positive conditions in industry reflect = Demand for labour
o Reflect Demand for goods and services or favourable government policies
o E.g. Growth in mining industry due to overseas demand
Negative conditions in industry reflect = Demand for labour
o Reflect Demand for goods and services or unfavourable government policies
o E.g. Fall in manufacturing industries due to decrease protection from foreign competition by gov.
Demand for an individual firms products
Quality of firms good or service as well as pricing and marketing strategies affect output for labour
Firms with good reputation can still have increasing sales despite industry being in decline
Productivity of labour

o Labour productivity = (Output per unit of labour per unit of time)

o Depends on quality of workforce and how efficiently labour is combined with other factors of production
o In short run,
If labour productivity is rising at faster rate than aggregate demand = Demand for labour
If labour productivity is rising at same rate as aggregate demand = No effect on demand for labour
If labour productivity is rising at slower rate than aggregate demand = Demand for labour
If labour productivity is rising and aggregate demand is falling = Demand for labour
If labour productivity is rising and aggregate demand is constant = Demand for labour
o However in long run, higher labour productivity will make labour more attractive than other inputs
Unless improvements in technology and capital outstrips labour productivity
Cost of other inputs
o If cost of labour is relatively high, firms will use more capital = Demand for labour
o If cost of labour is relatively low, firms will use less capital = Demand for labour
o If labour costs overseas are relatively low, firms will move production overseas = Demand for labour
Supply of labour

Factors affecting supply of labour

Pay levels
o Wages and salaries = Willingness of people to give up leisure time to work = Supply of labour
Working conditions
o Attractive working conditions = Supply of labour e.g. flexible hours, pleasant working premises and staff
o Unattractive working conditions = Supply of labour so firms need to offer higher wages to attract workers
Education, skills and experience requirements
o Types of education, skills and experience required for certain jobs can limit supply
o E.g. People require a degree to become nurse and there is a shortage in supply of nurses
o Human capital is the total sum of knowledge, skills and training and experience in an economy
Mobility of labour
o Occupational mobility
Ability of labour to move between occupations in response to wage differences and job opportunities
More skills and qualifications required for a job, the harder it is for labour to change occupations
o Geographical mobility
Ability of labour to move between locations in response to wage differences and job opportunities
Moving locations involves various expenses and labour mobility is particularly reduced for remote
Labour force participation rate
Labour force 100
o LFPR (%) = , Labour force = All employed + Unemployed
Popilation aged 15 and over 1
o It is affected by:
State of the economy - during upswings, LFPR increases and vice versa
Population demographics - ageing population will see LFPR fall over next 40 years
Social attitudes - More married woman are likely to work causing LFPR to rise
School retention rates - More students stay in school for longer which decreases LFPR

Australian workforce
Workforce is section of population 15 or older that are either working or actively seeking work i.e. employed and
o Aged 15 and over
Employed at least one hour a week
On paid leave, strike or workers compensation
Unemployed - actively seeking and available for work
Not included
o Retired from workforce
o Aged under 15
o Performing full time domestic duties
o Full-time, non-working students
o Without a job but not available for or not actively seeking work

Factors that affect size and quality of work force

Population size
o Natural increase is the excess of births over deaths in population in one year
Has decreased over past few decades
o Net migration is excess of permanent new arrivals over permanent departures in one year
Responds to level of economic activity
Age distribution
o Greater the proportion of population in 15 to 65 age group, greater the potential for larger workforce
o Over past few years ageing population has led to decrease in under 15 and increase in over 65
Education patterns
o Increased education leads to better quality of workforce
Labour market equilibrium

Supply Curve
o Slopes upward from left to right as wage rate increase, people will be more willing to supply their labour
o It is assumed people decide between utility derived from leisure and utility derived from income that is
consumed if they had a job
o As wage rates rise, opportunity cost of leisure rises and work is more attractive however at higher wage rates
people can have the same income by working less (e.g. $100/hr for 50 hrs and $125/hr for 40rs is the same)
o As a results labour supply curve is backward bending
Demand Curve
o Slopes downward from left to right and reflects law of diminish marginal
Each work will contribute less to total production that the previous worker
Profit-maximising firm will only employ extra worker if the pay hem a
wage rate lower than the marginal revenue from their production
As wage rate declines, demand for workers will increase
o Intersection of demand and supply curves
o Equilibrium wage rate occurs where the quantity of labour supplied is equal to quantity of labour demanded
o At any wage rate above equilibrium there is excess supply and unemployment
Unemployed would the offer to work at lower wage rate thus bringing it down to equilibrium
o At any wage rate below equilibrium there is excess demand
Firms competing for labour will force wage rate up to equilibrium

Labour market outcomes

Wage outcomes
Wages and salaries are 56%
Business profits and capital investment are 18%
Property income is 11%
Government benefits are 10%

Average weekly earnings

In 2014 average total earnings was at $1141.00 per week
Total earning have grown between 4% and 6% in past decade however this is misguiding as this is nominal wage
o Nominal wage is the pay received by employees in dollar terms for their contribution to the production
process, not adjusted for inflation
Real wage is a measure of actual purchasing power of money wages (i.e. adjusting nominal wages for inflation)
o They have generally been rising over past few decades
o However in individual years growth of wages can be out stripped by the rate of growth
Employers can afford higher real wages if there is strong increases in productivity
If growth in real wages is higher than productivity growth, real labour costs will rise and reduce profits for
o In order to maintain profitability, firms may employ less labour and use more capital

Difference in wage outcomes

Wage differentials in different occupations
o Wage differentials between jobs that do not compete reflect level of educations and skills required for job
o People receive greater income for jobs that require a higher level of skill and longer period of training
o Jobs that have unappealing working conditions are paid higher wage rate to compensate for poor conditions
o Some types of occupations receive dramatically higher pay such as CEOs
o Areas with high occupational mobility have lower wage rates as there is higher supply so firms do not need to
offer as high wages
o Areas with occupation mobility restricted, supply is less abundant so firms need to offer higher wages
o Managers and professionals are highest paid groups while labourers are lowered paid group
Wage differentials in the same occupation
o More experienced workers are more valuable and are paid more
o An occupation with high geographical mobility will offer less wages as there is more supply
o An occupation in isolated locations will offer higher wages to attract labour of equal skill and experience
o Labour productivity will generally increase wage rates especially under enterprise bargaining
o Capacity of firm to pay also influences how much wages they can pay e.g. Firms with high market power can
pay higher wages than firms that face high competition
o Income varies over course of life though is highest between ages of 25-64
o 15-19 and 20-24 age bracket have lowest wages while 35-44 age bracket has highest wages
o Shows income levels are low in earlier years of work and decline as people get older and near retirement
o Despite equal pay for equal work laws, women still have lower average earnings
o This is because woman have to reduce work hours for other duties such as child caring
o There is also large discrepancy between opportunities for highest paid positions (glass ceiling)
o Part of difference is due to lower level of skills and education due past attitudes that did not afford equal
opportunities to women however even when this is accounted for they still earn less than males in similar jobs
Ethnic and cultural background
o Main factors affecting wage rate are the length of time and where people have migrated from
o Migrants from English speaking countries have higher proportion of very high incomes in comparison to
o Long standing immigrants from English or Non-English speaking countries have similar income trends to
o Recent immigrants from non-English speaking countries have lower income levels than Australians
o Indigenous Australians have much lower income levels than rest of population

Trends in distribution of income for work

Central roles of award wages system has declined and shifted towards enterprise bargaining
Reflects change of differences in wage outcomes has increased for both industries and individuals
Led to considerable differences in income distribution between sections of community
o However relatives household incomes havent changed much due to increase family benefits for lower
income earners have offset increased wage differentials
Considerable inequality in distribution of income, though has become marginally less equal over past decade
o Top 20% have 38.5% of total income and had average weekly income 5 times bottom quintile
o Bottom 40% have had total income remain constant while highest 20% has seen total income increase
Different wage outcomes across different industries are due to structural changes in economy
o Emerging industries require skilled labour so are more likely to pay higher wages than declining industries
There is also dispersion of earnings within occupations and among employees with same skill levels or education
o Due to shift away from centralised wage determination and union membership

Non-wage outcomes

Non-wage outcomes are the benefits that many employees receive in addition to their ordinary and overtime
payments. For example:

Sick and holiday leave
Salary packaging such as company cars, laptops, childcare, gym membership etc.
Bonus cash payments such as performance bonuses
Improvement of flexibility for workers e.g. Study leave, extra parental leave, leave to look after a sick family
member, extended leave without pay, allowing workers to work from home for part of week and allowing
employees to share jobs
The costs and benefits of income inequality

Economic Benefits
o Inequality encourages labour force to increase education and skill levels
People further education to achieve higher income
However some low income workers do not have access to same education opportunities
o Inequality encourages labour force to work longer and harder
Higher incomes creates incentive to work longer hours or overtime
If increased output is rewarded with increase income, labour productivity increases
Non-inflationary economic growth as wages increase due to increased productivity
o Inequality makes the labour force more mobile
Higher incomes act as incentive to encourage labour to moves to labour shortage ares
Higher incomes are therefore indicator of labour shortages
Leads to more efficient allocation of resources
o Inequality encourages entrepreneurs to accept risks more readily
Higher incomes increase reward for entrepreneurs
Increased entrepreneurs encourages innovation = Business growth & Employment opportunities
o Inequality creates potential for higher savings and capital formation
Higher incomes = MPS = National savings = Pool of domestic funds to borrow from
Leads to Reliance on foreign savings
Increased pool of funds leads to potential for Investment in medium to longer term
Social Benefits
o There are none due to inequality of opportunity
Lack of opportunities due to inequality as higher income have better access to better education
Difference in mental and physical attributes in relation to potential for jobs
People who have wealth are can create more wealth easily as opposed to those who start with no wealth
People may not have access same networks of people that may lead to new opportunities
Economic Costs
o Inequality reduces overall utility
Higher income earners derive less utility from increase in income that lower income earners
Therefore more equitable distribution would increase total utility
o Inequality can reduce economic growth
Lower incomes spend higher proportion of income therefore
o Inequality reduces consumption and investment
In short term, Higher incomes = MPC = C = AD = Eco. Growth = Unemployment
Less incentive to invest = Investment = AD
o Inequality creates poverty and social problems
Creates relative poverty which leads to underclass of low income earners
Creates cycles of disadvantage due to lack of education opportunities, health disadvantages etc.
o Inequality increases cost of welfare support
Government provides support to low income earners and other people with disadvantages
o Inequality creates conspicuous consumption (not very important)
Creates leisure class which spends to just show off wealth
Social costs
o Inequality decreases level of well-being
Increases social problems e.g. mental illness, crime, lower life expectancy
o Inequality creates social class divisions
E.g. Upper class, middle class, working class
o Inequality creates high level of poverty
Creates cycle of low income and limited economic opportunities

Unemployment is the situation where individuals want to work but are unable to find a job
o Labour resources are not being utilised and output is less than maximum
o Full employment is major goal of government
Not zero unemployment rather where AD is point where there is no unemployment to lack of demand
Unemployed persons are people aged 15 and over, who are available for work and are actively seeking work
o Actively seeking work includes
Regularly checking job advertisements
Willing to respond to job advertisements and apply for jobs and attend interviews
Registered with employment agency linked to Job Services Australia
Number of person employed 100
o Unemployment rate % =
Total labour force 1
Importance of unemployment rate
o Measure of proportion of labour force that is under-utilised
o Indicator of the performance of economy
o High UE% = Limited employment opportunities in over supplied labour market
o Low UE% = Tight labour market, potential scarcity of skilled labour and future cost pressure from wage
demands for workers
o Unemployment rate for different groups identifies areas of social concerns (e.g. younger people)
Labour force = Total part time and fulltime employed people over 15 + Total unemployed over 15 (12.5 million)
Labour force 100
Labour Force Participation Rate (%) =
Popilation aged 15 and over 1
o Possible to have rising unemployment and employment at the same time as LFPR can lead to UE%
o Jobs increasing but as LFPR rises, more people competing for those jobs
Official interest rates do not take underemployment into consideration
o People who are working but for less hours than they would like (e.g. Part time workers want to be full time)
o May 2015 - Underemployment was 8.5%
o Labour force under utilisation rate = Unemployment rate % + Underemployment rate %

Types of unemployment
Cyclical Unemployment
o Caused by contraction in economic activity or aggregate demand
o Rises during downswing as spending and GDP growth fall causing employers to cut labour and stop hiring
Structural Unemployment
o Due to structural changes in economy caused by changes in technology, pattern of demand for goods and
service and microeconomic reform
o Mismatch of skills and labour
Frictional Unemployment
o People who are temporarily unemployed as they change or find jobs
Seasonal Unemployment
o Frictional unemployment for occupations characterised by seasonal work e.g. Ski instructors, fruit pickers
o Official figures are seasonally adjusted to take this into account
Hidden Unemployment
o Includes those who are not reflected in official ABS statistics
o E.g. Women with children who could not find child care or those who received income support from support
o Also includes discouraged job seekers who have given up on looking for work
o People who work less than full time hours per week but would like to work full time
o Has risen in recent years due to high creation of causal and part time jobs
Long term unemployment
o People who have been unemployed for 12 or more months
o Difficult to reduce as people can lose skills and confidence and employers may treat them with suspicion
Hard core unemployment
o People who are consider unemployable, often due to physical, mental, emotional or attitude difficulties
Non-accelerating inflation rate of unemployment (NAIRU) a.k.a. natural rate of unemployment
Level of UE at which there is no cyclical UE
At NAIRU, economy is experiencing structural, frictional, seasonal and hard core UE - these are inevitable
At NAIRU, economy is at full employment
If UE is above NAIRU, increased economic growth will create jobs and reduce Cyclical UE
o Once Cyclical UE is eliminated, economic growth will see firms raise wages to compete for existing workers
o Economic growth will also increase AD without increase in aggregate supply
o These two factors will cause inflation

Trends in unemployment
Unemployment had upward trend from 1970-1990 after very low levels during 1960s and early 1970s
In early 1990s, structural changes and microeconomic reforms contributed to unemployment problem
o Peaking at 10.7% in 1992-93 which was highest since Great Depression
o Skill mismatch between workers who lost jobs and areas were labour was required
Unemployment rate fell gradually from 1990s to GFC 2008 where is rose by 2%
o However with stronger growth it fell back to 4.9%
With slow growth again, it started rise with UE at 6.25% for 2014-15
Due to resource boom there is two speed economy
o Mining states such as WA and NT have low UE% while non mining states have higher UE%
UE% tend to be higher in regional areas in comparison to metropolitan areas

Movement away from full-time work

Part-time employment
Part-time employment is defined as those employees regularly working 20 hours or less per week
Casual employment occurs when employees have occasional working hours with no set pattern
o Considered most insecure as they do not have any certainty about future work prospects
Proportion of part-time work as grown considerably over recent decades
Australia has also experience large increase in casual employment (casualization of workforce)
o Some employees prefer part time work, allowing them to balance with other responsibilities such as family
o Employers have greater flexibility in staffing arrangements is a lot of their employees are less than full time
o During busier times, they can increase hours and vice versa
o Also can avoid some responsibilities they have to give to full time workers e.g. holiday leave, sick pay etc.
o Less job security
o More difficult for employees to plan for future without secure income
o Less staff loyalty and less development of workforce skills

Changing employment structures

Trend in recent years from direct employment arrangements towards use of contractors and outsourcing
o Firms pay contractors to provide specific service for the business e.g. consulting role or role that is not full
time for an extended period
o Arrangements with contractors are governed by commercial law rather than employment law
o In theory, contractors have greater control of how they provide their services
Outsourcing (a.k.a. subcontracting agreements)
o When a firm pays another business to perform a function that is doesnt regard as core part of its focus
o Aims to improve efficiency as allows firm to firm to focus on area of specialisation while other firms who
specialise in other tasks are allowed to do them
o Creates shorter-term employment arrangements as workers work on short-term contracts and are not
actually employed by the company
Allows firms to have benefit of staff without obligations of normal employment arrangements
However can lead to loss of staff loyalty, higher rate of staff turnover and less experience and possible less highly
skilled workforce
Labour market policies

Labour market policies are macroeconomic policies that are aimed at influencing the operation and outcomes in the
labour market

Industrial relations policies regulate processes of wage determination

Training, education and job programs improve skills and assist unemployed

Centralised vs Decentralised wage determination system

Centralised labour market: Government or industrial tribunal determines wages and working conditions for all
employees, regardless of which firm they work for

Decentralised labour market: System in which wages and working conditions are determined through negotiations
between individual firms and their employees (at enterprise level) with limited role of industrial tribunals

Recent trend
Australian industrial relations system has moved from highly centralised to more decentralised system
Benefits of a more decentralised labour market
o Improved allocative efficiency of labour resources and promotes structural changes
More profitable/growth industries attract skilled workers e.g. Mining industry
o Increase productivity
Increased incentives as labour rewarded with higher wages which then decreases inflationary pressures
o Reduces unemployment
Downward wages flexibility acts a shock absorber during downturns and troughs in business cycle
Disadvantages of a more decentralised labour market
o Increases income inequality (wages dispersion)
i.e. Workers doing the same jobs in different industries or firms have different pay and working conditions
Low skilled workers have less bargaining power
o Wage-push inflation more likely when economic growth is strong and labour is close to full employment
Workers use labour supply shortage to demand higher wages rather than increased labour productivity
o Limits policy tools of government

Regulation of labour market

Traditionally, a combination of federal and state laws
Different industrial awards at federal and state levels with lack of consistency between states increase compliance
costs and caused inefficiency
Replaced by Workplace Relations Amendment (Work Choices) Act 2005 which create uniformity across borders
Replaced by Fair Work Act 2009 which had unified national industrial relations system
Benefits of national system of industrial relations regulation
o Expected to decrease compliance costs - modernisation of awards had reduced 4300 state and federal awards
replace with 122 modern awards
o National System of OHS - increase uniformity and improve compliance

Current industrial relations framework (Fair Work Act 2009)

National employment standards (NES)

Maximum weekly hours of work
o Full time employees must not exceed 38 hours of work, plus reasonable additional hours of work
Right to request flexible working arrangements
o Right to paid annual leave, public holidays, carers and compassionate
o Also the right to unpaid parental, community service and long service leave
Notice of termination and redundancy pay
o Employers have to give 1-4 weeks of notice of a job termination and in most circumstances, redundancy pay
National minimum wage (Currently $17.29/hour for full time adult)
o Specialist minimum wage panel within fair work commission annually
Fair Work Act 2009
Formal System
o Awards (Safety net) - 16.1%
Set of pay and conditions that are specific to an employees work or industry sector
Sets minimum wages and conditions however most employers pay above award wage rates
Extends protection of NES with provisions tailored to needs of specific industry or occupation
o Enterprise Agreements - 42.0% (a.k.a. Collective agreements or Certified agreements)
Most common type of wage determination
Workplace agreements that is negotiated collectively through enterprise bargaining between an
employer(s) and employees, usually represented by unions
Must meet NES and cannot offer pay rate below award rates
Workplace agreements must all pass BOOT (Better off overall test), which requires employees be made
better off overall by agreement in comparison to applicable award
Informal System
o Common Law contracts - 38.7%
Only type of individual contract in industrial relations system
Add essentially add-ons to relevant awards and cannot offer rates below equivalent award rates
However does not apply for wages over $133,000 where common law contract replaces awards
o Working owner of incorporated business - 3.3%
Not covered by awards or NES

Labour market institutions

Role of trade unions

Trade union is an association of workers that aims to advance the interest of their member by improving their
wages and working conditions
o Occupational unions (a.k.a. Craft unions)
Members from a particular occupation skill or range of skills e.g. Australian Medical Association
o Industry-based unions
Cover workers in a particular industry e.g. Finance Sector Union
o Enterprise-based unions
Unions represent only the workings of one specific enterprise e.g. No examples and very rare
o General unions
Cover whole range of workers with many different skills across various industries e.g. Australian workers
Memberships had decreased gradually from 55% in mid-1970s to just 17% in 2013
o Causes of decrease
Movement from centralised wage determination has reduces influence of unions in wage outcomes
Industries with low union membership are growing while high membership areas are declining
Decrease in proportion of full time employees leads to fall as part time employees have lower membership
Role of union in labour market
o Representing employee interests
Representing individual employees interests (e.g. legal advice) and providing collective voice for workers
o Exercising their bargaining power in negotiations with employers
Workers collectively have increased bargaining power as it is very difficult to replace entire workforce
Can negotiate a higher wage rate than equilibrium wage rate
However higher wages may price labour of jobs, increasing unemployment
Therefore, they must find a balance between achieving a higher wage rate and maintaining current
employment levels
o Restricting the supply of labour
Can restrict supply of labour to firm or industry on an ongoing base to increase wage rate
Restriction on hiring employees e.g. Doctors professional associations often oppose admission of
overseas trained doctors to work in Australia
Demanding employers only hire member of their union or association
Role of Employer associations
Employer associations are a body of employers, usually from the same sector of the economy
o Generally not as well co-ordinated as unions as employers have differing interests and are in direct
competition with each other
Most employers deal directly with unions rather than going through an employer association
Main roles
o Represent and promote interest of members by lobbying the government on industrial relations policies
o Assist employers in managing industrial relations issues, e.g. representing members in industrial tribunals
Role in labour markets
o Industrial companies have more importance that employer associations in influencing wage outcomes
o However employer associations can take actions that benefit both employees and employers
E.g. Lobbying government for protection from foreign competition
o This increases demand for labour which increases equilibrium wage rate and quantity (employment)

Dispute resolution
Industrial dispute occurs when employers or employees take action to disrupt the production process in order
to highlight a disagreement between employers and employees
Industrial action includes strikers, work bands and lockouts
o It is lawful if it occurs during process of enterprise bargaining
Industrial tribunals are government agencies that oversee industrial relations system and attempt to prevent or
resolves workplace conflict between employers and employees. E.g. Fair Work Commission
Conciliation is process where firms and employees meet to discuss differences in presence of third party who
attempt to bring the parties to an agreement
o Third part does not have any power to impose agreement on those firms
Arbitration is process which an industrial tribunal hands down a legally binding ruling to firms and employees
o Fair work commission will only intervene (i.e. arbitration) when:
Enterprise agreement includes provision for compulsory dispute resolution system
Industrial actions is occurring, and this action poses threat of significant harm to economy or population
When employers or employees do not bargain in good faith e.g. not participating in all meetings
Benefits of effective dispute resolution system
o Helps resolve disputes that have become deadlocked, reducing length of strike action
o Faster resolution can limit damage of industrial action to firms and employees
o Can balance interests of employers and employees
o Economy can avoid disruptions of supply that can cause damage to other sectors of economy

Training, education and job placement programs

Education, training and employment programs are labour market policies that aim to improve productivity and
skills, as well as increase LFPR through funding for training/education and labour market assistance programs
o Benefits of education and training
Increase skill, quality and productivity of workforce (technical efficiency)
Increase adaptability to changing economic conditions (dynamic efficiency)
Decreases structural unemployment
Increases economic growth
Labour market programs assist unemployed people, particularly long term or hard core unemployed or have
language barriers, gain employment and are often integrated with the receipt of welfare payments
o Two key organisations
Centrelink - National agency that oversees individuals access to income support and their interaction with
labour market programs
Job Services Australia - oversees the provision of a range of job search services provided by the
government through a mix of government, non-profit and private sector organisations
o Benefits of labour marker programs
Increase incentives to work and reduce reliance on welfare (decrease burden and reduce G)
Increase and sustain participation in the workforce (increase Y and decrease T)
Boost productive capacity and economic growth