Labor and Employment

1
Labor and Employment

• Emmanuel Nnadozie

2
Labor and Employment

• The need to promote employment
• It improves resource use and efficiency
• It improves national income share and inequality
• Labor productivity varies world-wide. It depends
  on peoples attitudes, skills, and health and
  nutrition.

3
Attitudes and Values

• Labor productivity varies world-wide. It depends
  on peoples attitudes, skills, and health and
  nutrition
• Peoples attitude toward work and their
  preparation depend on
• their values and attitudes toward paid employment
• their ability to be adventurous
• their views toward savings

4

• Labor productivity varies world-wide. It depends
  on peoples attitudes, skills, and health and
  nutrition
• Skills are
• the know-how, savoir-faire or the dexterity of
  the workers

5

• Labor productivity varies world-wide. It depends
  on peoples attitudes, skills, and health and
  nutrition
• Health and nutrition involves
• the possession of mental and physical stamina

6

• In LDCs, the number of people who want to work
  increases at 2 percent per year.
• Labor force growth lags population growth by 15
  to 20 years
• The majority of the work force is employed in
  agriculture

7
Characteristics of the Labor Force

• Low wages
• Large wage differentials
• Rapid growth of labor supply
• Underutilization of the existing labor supply

8
Structure of Labor Markets

• Segmentation or three-tiered employment
  structure
• URBAN FORMAL SECTOR
• URBAN INFORMAL SECTOR
• RURAL SECTOR

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Urban Formal Sector

• Employers are government, large-scale,
  enterprises, bank, factories, etc.
• They pay the highest wages
• Employ the best workers
• They pay more for two reasons
• Efficiency wage theory--productivity is a
  function of wage paid
• Government-imposed minimum wages

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FORMAL MARKET
Market Equilibrium Wage
S
W
D
E
L
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Urban Informal Sector

• The labor force operates at the alleys and
  fringes of the formal sector
• Hawkers, transporters, shops and curbside
  establishments
• Provides jobs for migrants who couldnt be
  employed in the urban formal sector
• Ease of access
• Wages are lower than the formal sector
• Frequently suppressed by government in spite of
  the numerous services they provide

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COMPARING...
URBAN FORMAL
URBAN INFORMAL
S
Surplus Labor
W
D
E
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Rural Labor

• Mostly family labor
• Lower wages

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RURAL LABOR
S
W
D
E
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RURAL LABOR

• Mostly family labor
• Lower wages

S
W
D
E
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Unemployed or Underutilized Labor

• Openly unemployed
• usually 15-24 years of age, urban educated
• Underemployed
• Those who work less than they would like to work
• Underutilized Labor
• 1. Visibly active but underutilized
• Neither unemployed nor underemployed but have
  found visible means of marking time
• 2. The impaired
• 3. The unproductive

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• Visibly Active but Underutilized
• DISGUISED UNEMPLOYMENT--doing jobs that may
  require less than full-time farms, government,
  etc.
• HIDDEN UNEMPLOYMENT--Those engaged in
  nonemployment activities especially education or
  household chores as a second choice
• PREMATURELY RETIRED--especially in civil service

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• The impaired
• Working full-time but work is impaired through
  malnutrition or inadequate health care
• The unproductive
• Working long hours but lack the skill or capital
  needed to acquire even the essentials of life

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Labor Reallocation

• Ragnar Nurkse and Arthur Lewis
• Nurkse Construction work reduces surplus labor
  and increases capital
• Lewis Industrialization is the route to
  reducing rural surplus labor

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• Note the criticisms of the two approaches because
  of the costs of labor reallocation
• 1. MP of labor is always positive not zero
• 2. Even if the MPl 0 there are other costs
  associated with physical movement of labor from
  agriculture to industry
• 3. The gains would not be easy and would not be
  free

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Urban Job Creation

• Mainly the John Harris and Michael Todaro model
  
• Social costs of urban job creation
• Opportunity cost and costs of urbanization
• The social costs of employing labor is more
  significant than thought.

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• Induced migration has its problems
• The number of migrants per urban job opportunity
  is more than one. It increases when families are
  brought along. There is therefore the forgone
  output
• Costs of urbanization--
• some costs are internalized by workers--higher
  cost of food, housing, etc.
• others are externalized social services,
  pollution, congestion, additional security
  requirements.

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• Reduced savings
• due to increased consumption by those left in the
  rural area and the urban worker whose income has
  increased

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Why is there Rural Urban Migration?

• Push and Pull factors
• Income differentials
• wretched conditions in rural areas
• Employment opportunities in urban areas
• Better conditions in urban areas

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The Harris-Todaro model
Mt f(Wu - Wr)
Mt Number of rural to urban migrants in time
t f Response function Wu Urban wage Wr
Rural wage
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Wu p Wu
Expected urban wage
p Probability of finding a job
p Eu/(Eu Uu)
Where Eu Urban employment Uu
Urban unemployment
Mt h(pWu - Wr)
Where Mt the migration in period t
h the response rate of potential migrants As
long as Wu gt Wr migration will continue
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Types of Migration

• Induced migration
• Internal migration
• Rural-urban migration
• Reverse migration
• International migration
• Skilled and educated labor
• Unskilled labor

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Brain Drain

• Causes an increase in global GNP
• Positive impact on Industrialized countries
• Negative impact on LDCs
• Unskilled labor emigration beneficial to both
  industrialized and LDCs

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Unemployment

• Unemployment is measured by the unemployment rate
• The unemployment rate is the ratio of the
  unemployed to the labor force expressed in
  percentages

Number of the unemployed
Unemployment rate
100

x
Labor force
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The Problem of Unemployment

• The problem of unemployment and labor
  underutilization has a demand and a supply side
• The supply side is more difficult to deal with --
  mostly a long-run issue
• Policy must focus on the demand side

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Policies to Reduce Unemployment

• Population policies
• Policies to discourage rural-urban migration
• Appropriate technology
• Policies to reduce factor price distortions
• Educational policy
• Growth-oriented policies

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• Two different approaches
• Stimulate output, especially in relatively
  high-productivity and high-wage sectors of the
  economy
• Try to increase the amount of labor use to
  produce a given amount of output. This means
  focusing on labor-intensive approaches
• To create labor-intensive systems
• alter prices and create incentives for
  substitution of capital with labor
• develop labor-dependent technologies

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• Note that different types of policies affect
  employment
• wage
• industrial promotion
• fiscal
• foreign trade
• educational policies

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Employment Policies

• Employment policies can involve direct job
  creation and indirect job creation through
  forward and backward linkages as well as
  secondary job creation through expenditure by
  workers employed in industry
• Focus on labor-intensive industrial output for
  export, i.e. try to export labor-intensive
  manufactured products

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Other Policies

• Improvement of income distribution
• Investment that complement labor
• Increase in capacity utilization
• Small informal-sector establishments
• Food-for-work programs

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Causes of Factor Price Distortion

• Often government-induced distortions promote the
  growth of sectors that are technologically better
  suited to capital-intensive (basic metal) than
  labor intensive production (textile)
• Government policy can also make capital to be
  artifically cheap relative to labor

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• Usually union political power and minimum wage
  make labor expensive
• Credit rationing and interest rate ceilings make
  capital cheaper for those who can obtain loans
• Overvaluation of the domestic currency in terms
  of foreign exchange
• Giving tax incentives to firms based on the
  amount of capital investment they undertake

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Answers to Factor-Price Distortions

• Avoid the policy-induced price distortions or
  deregulate if they are already in place
• If there are political difficulties, use taxes or
  subsidies
• Create investment incentives based on the number
  of jobs created by an investor
• How great the employment-creating effect of
  factor price distortion corrections depends on
  the ELASTICITY OF SUBSTITUTION

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Elasticity of Subsitution (ES)

• The percentage change in the capital-labor ratio
  (K/L)/ (K/L) that results from a given
  percentage change in the ratio of the price of
  labor to that of capital (w/r)/ (w/r)

ES (K/L)/ (w/r) (w/r) / (K/L)