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1 MODULE 1: NATURE OF THE LABOUR
MARKET
1
BASIC INFORMATION ABOUT LABOUR
MARKETS
Unit Structure:
1.0 Objectives
1.1 Introduction
1.2 Concept of Labour Markets
1.3 Characteristics of Labour Markets
1.4 Types of Labour Markets
1.5 Search in Labour Markets
1.6 Summary
1.7 Questions
1.0 OBJECTIV ES
To understand the meaning of labour market.
To study the characteristics of labour markets.
To study of types and search in labour markets.
1.1 INTRODUCTION
A labour market is the place where workers and employers interact with
each other. In the labour market, employers compete to hire the best, and
the workers compete for the best satisfying job. In a labour market,
services of human labour are bought and sold like other commodities. But
there is a vast difference between labour market and commodity mar ket.
Labour market can never be perfect market.
Labour market is defined as the market for hiring and supplying labour to
perform certain jobs at a wage rate.
Labour market can be defined as a process by which supplies of a
particular type of labour and d emands for that type of labour balance or
seek to obtain a balance.
1.2 CONCEPT OF LABOUR MARKETS
The labour market, also known as the job market , refers to the supply of
and demand for labour, in which employees provide the supply and munotes.in
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Economics of Labour Markets
2 employers provide the demand. It is a major component of any economy
and is intricately linked to markets for capital , goods, and services.
The labour market refers to the supply of and demand for labor, in which
employees provide the supply and employers provide the demand.
The labour market should be viewed at both the macroeconomic and
microeconomic levels.
1.3 CHARACTERISTICS OF LABOUR MARKETS
The basic characteristics or features of labour markets are as follows -
1. Labour market is concerned with labour which is a human resource.
2. The relationship between a buyer and a seller in a labour market is
likely to the continued for some time.
3. It is pro cess in which a balance between supply of a particular kind
of labour and demand is maintained.
4. It is a market where wage rates differ for the same kind of work due
to lack of perfect mobility.
5. Labour markets are normally local markets.
6. In labour market price does not change very often, but remains
constant for a period of time.
7. As labour is not homogeneous, we find different types of workers in
labour market.
8. In the labour markets, workers try to increase their strength by
forming their trade unions and resort to collective bargaining.
9. There is exploitation of labour in the labour market.
10. Wages, terms and conditions of employment etc. are determined in
the labour market through bargaining tussles between workers and
employers.
11. Labour cannot move w ith the same ease and facility with which
goods are transported from one place to another. So, there is lack of
mobility of labour.
12. Labour market is essentially an imperfect market.
1.4 TYPES OF LABOUR MARKETS
In labour markets, labour is supplied by househ olds and demanded by
firms Labour Market in India can be classified into following types:
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Basic Information about Labour Markets
3 1) National Labour Market:
A national labour market is one in which most job search by employers
and firms takes place on a national level. The markets for college
professors, top management positions in large corporations, and similar
occupations are national labour markets.
2) Local Labour Market:
Most job search takes place at a local level in a local labour market.
Secretaries, carpenters, truck drivers, electri cians, and lathe operators are
employed through local labour markets. A national labour market exists
only when there are few employers and employees in most geographical
regions. Local labour markets exist when there are many employers and
employees in mo st geographical regions.
3) Internal Labour Market:
An internal labour market is said to exist within a firm if the firm fills
higher level positions in the firm primarily by promotion from within the
firm
4) Primary Labour Market:
Jobs in the primary l abour market are characterized by high wages and
stable employment relationships. Examples of jobs in the primary labour
market include: accountant, lawyer, teacher, carpenter, and plumber.
5) Secondary Labour Market:
Workers employed in the secondary labo ur market receive low wages and
experience unstable employment relationships. Workers in fast -food
restaurants, gas station attendants, dishwashers, janitors, etc. are employed
in the secondary labour market.
1.5 SEARCH IN LABOUR MARKETS
Search theory was orig inally applied to labor markets but has applications
to many subjects in economics. In labor markets, search theory is the
basis for explaining frictional unemployment as workers change jo bs. It
has also been used to analyze consumer choices between different goods.
In search theory, a buyer or seller faces a set of alternative offers of
varying quality and price to accept or reject, as well as a set of
preferences and expectations, all of which may vary over time. For
workers, this means the wages and benefits of a job in combination with
working conditions and characteristics of the job. For consumers, it
means the quality of the good and its price. For both, the search depends
on their p references for price and quality and their beliefs regarding other
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Economics of Labour Markets
4 Search theory describes the optimal amount of time that the searcher will
spend on their search before settling on one alternative to accept. Search
time will depend on several factors:
Reservation Price: The individual’s reservation price is the minimum
they are willing to accept/maximum they are willing to pay. For example,
a buyer who has a fixed budget of $5,000 cash to spend on a car will
search long enough to fin d a car of suitable quality for under $5,000.
Because they raise reservation wages, welfare and unemployment
benefits may induce a qualified worker to sit at home and collect
unemployment checks instead of seeking a job.
Costly Search: If there are costs t hat increase with the length of the
search, optimal search time will tend to be shorter. For example, if a
worker’s skills may degrade or become obsolete over time, then they will
tend to shorten their search for a new job.
Price and Quality Variance: The amount of variation in price and
quality of offers will also influence the optimal search length. Greater
variation can convince the seeker to hold out longer in their search
expecting to find a superior alternative.
Risk aversion: Risk aversion can also play a part in search time. For
example, a longer job search often means that the searcher may be
spending down savings and face an increasing risk of becoming destitute
as the search lengt hens. A risk -averse seeker will tend to shorten their
search under this condition.
1.6 SUMMARY
The search theory is a study of transactional frictions between two parties
that prevent them from finding an instantaneous match.
Search theory explains how buyers and sellers decide when to accept
a matching offer for a transaction.
Search theory extends economic analysis beyond the idealized world
of perfectly competitive markets.
Search theory helps explain why frictional unemployment occurs as
workers search for jobs and businesses search for new employees.
1.7 QUESTIONS
Q1. What is meaning of labour markets? What are the characteristics of
labour markets?
Q2. What are the types of labour markets?
Q3. White a note on ‘search in labour markets’.
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5 2
NATURE OF LABOUR MARKETS – II
Unit Structure:
2.0 Objectives
2.1 Introduction
2.2 The Theory of Human Capital
2.3 Investment in Human Capital
2.4 Costs and Life -Time Benefits to Education
2.5 Summary
2.6 Questions
2.0 OBJECTIVES
To understand the concep t of human capital.
To analyse model of human capital theory.
To discuss various aspects of investment in education
2.1 INTRODUCTION
Some activities influence the future wellbeing of workers. According to
Becker, investing in the activities that influence future incomes through
imbedding of resources in people is called investing in human capital.
There are many ways to invest in human capital.
On the job training
Schooling
Vitamin consumption.
Acquiring information about an economic system
All these ac tivities differ in their impact on earnings, amount of
investment, extent to which there is a connection between investment and
return. But one common thing about all these activities is that they
improve physical and mental abilities of people and thereby raise future
income prospects.
Over years, it has been observed that the factors other than availability of
physical resources play important role in determining the level of
wellbeing of people or a country. These factors include less tangible
resources like knowledge possessed or education, skill acquired or training
or health, etc. In this unit, we will focus on the impact of human capital
investment in education, training and migration. munotes.in
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Economics of Labour Markets
6 2.2 THE THEORY OF HUMAN CAPITAL
2.2.1 What Is Human Capital?
Human capital is a loose term that refers to the educational attainment,
knowledge, experience, and skills of an employee. The theory of human
capital is rel atively new in finance and economics. It states that
companies have an incentive to seek productive human capital and to add
to the human capital of their existing employees. Put another way, human
capital is the concept that recognizes labour capital is n ot homogeneous.
Human capital the intangible economic value of a worker's experience
and skills. This includes factors like education, training, intelligence,
skills, health, and other things employers value such as loyalty and
punctuality.
The human capit al theory posits that human beings can increase their
productive capacity through greater education and skills training.
Critics of the theory argue that it is flawed, overly simplistic, and
confounds labour with capital.
2.2.2 The Origins of the Human Cap ital Theory
In the 1960s, economists Gary Becker and Theodore Schultz pointed out
that education and training were investments that could add to
productivity.As the world accumulated more and more physical capital,
the opportunity cost of going to school d eclined. Education became an
increasingly important component of the workforce. The term was also
adopted by corporate finance and became part of intellectual capital , and
more bro adly as human capital.
Intellectual and human capital are treated as renewable sources of
productivity. Organizations try to cultivate these sources, hoping for
added innovation or creativity. Sometimes, a business problem requires
more than just new machi nes or more money.
The possible downside of relying too heavily on human capital is that it is
portable. Human capital is always owned by the employee, never the
employer. Unlike structural capital equipment, a human employee can
leave an organization. Mos t organizations take steps to support their most
useful employees to prevent them from leaving for other firms.
2.2.3 Critiques of the Human Capital Theory
Not all economists agreed that human capital directly raises productivity.
In 1976, for instance, Ha rvard economist Richard Freeman argued that
human capital only acted as a signal about talent and ability; real
productivity came later through training, motivation, and capital
equipment. He concluded that human capital should not be considered
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Nature of Labour Markets – II
7 Around the same time, Marxian economists Samuel Bowels and Herbert
Gintis argued against the human capital theory, stating that turning people
(i.e.labour) into capital essentially squashes arguments around class
conflict and efforts to empower workers' rights.
In the 1980s and 1990s, with the rise of behavioural economics, new
critiques were levelled at the human capital theory in that it relies on the
assumption that h uman beings are rational actors. Therefore, the human
capital theory will experience the same defects and limitations when it
attempts to explain phenomena because its basic assumptions on human
motives, goals, and decisions are, it turns out, not well -grounded.
More modern critiques from sociologists and anthropologists argue
against the human capital theory, saying it offers extremely simple
principles that purport to explain everyone’s wages, all the time or, a
universal connection between human capital, productivity, and income.
But when researchers look closely at this, for the most part, productivity
differences between individuals cannot be measured objectively.
According to a 2018 paper, studies that claim to find a link between
income and productivi ty do so by using circular logic. And when we
restrict ourselves to the objective measurement of productivity, we find
that individual productivity differences are systematically too small to
account for levels of income inequality.
2.3 INVESTMENT IN HUMAN CAPITAL
Workers undertake three kinds of labour market investment:
1. Education and Training
2. Migration
3. Search for a new job
All the three involve initial cost in the hope and expectation that they will
gain in future. Such an investment is call ed as investment in human
capital. Here, the workers embody a set of skills in themselves which can
be rented out to the employers. Knowledge and skills that workers get by
investing in education and training help them generating a stock of human
capital w hereas migration and job search increase the value of capital.
Society’s total wealth includes human and non -human capital. Human
capital includes expenditure on education, training and migration. Non -
human capital includes expenditure on building, machine ry, equipment,
etc.
Investment in human capital and particularly on education and training
takes place in three stages.
1. During early childhood – When generally parents resources and
guidance are used to acquire knowledge in basic language, mathematica l
skills and attitude towards learning. munotes.in
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Economics of Labour Markets
8 2. During teenage – it includes the acquisition of knowledge and skill at
the high school or vocational training.
3. After entering into job market – here workers may decide to add to
their human capital on the par t-time basis, through on the job training or
by participating in short -term training programmes.
2.4 COSTS AND LIFE -TIME BENEFITS TO
EDUCATION
People invest in education because they believe that additional schooling
would make them better off or would mak e them better off or would
increase their living standards. It was noted earlier that additional years of
schooling involve two types of costs for the investor.
1. Monetary cost – for tuition fee, books, etc.
2. Psychic cost – toil and trouble of additio nal schooling.
Also, it is noted that additional benefits from schooling are in the form of
increased future earnings. A person would invest in education when he
expects his earnings to rise with every additional year of schooling.
Following diagram depic ts a situation in which a human capital investor
has two choices:
1. Taking up stream A of schooling where earnings begin at very early
stage (at the age of 18 years)
2. Taking up stream B of schooling where earnings begin at a later stage
(at the age of 18 years) and there is an additional cost involved in
schooling.
Figure No. 2.1
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Nature of Labour Markets – II
9 The earnings curve of stream A begins immediately but does not rise
much. The earnings curve of stream B is negative in the beginning (due to
additional cost of schooling) an d then it rises above the earnings curve of
stream A. the basic points to be noted from the discussion so far and the
diagram above are as follows:
1. Those who value present period more than the future period would go
for stream A and spend less on educat ion. But those who are future
oriented would invest more in schooling. The present oriented people
would have very high discount rate ® in the equations (1) and (2) and
hence for such a person, benefits of schooling would be smaller.
2. Most of those who would invest in schooling would be young. Younger
people have larger present value for future benefits on investment in
education simply because they have more years with them to enjoy
these benefits. That is the reason why the younger people are likely to
invest more in schooling and training than the older people.
3. Investment in education would be inversely related to cost of schooling.
That is, if the tuition fees are high (other things remaining the same),
investment in education would be low.
4. Hi gher the gap between the earnings of high school educated and
college educated, more will be an investment in education. Earning
differentials are important determinant of investment in schooling.
Human capital theory predicts that the demand for education is
positively related to the increases in lifetime earnings that occur due to
college education. And hence, if the average earning differentials
between college graduates and high school graduates decline, the
demand for college education would also decli ne.
More recently, the importance of friends, ethnic affiliation and
neighbourhoods have become important in the decision making regarding
human capital investment. The educational and occupational choices of
friends appear to have a significant effect on an individual’s human capital
investment. This may be because the experiences of others may be
considered as useful in the environment of uncertainty regarding the future
benefits of any human capital investment or investment in college
education.
2.5 SUMM ARY
1. In the recent years, importance of investment in human capital vis -à-vis
an investment in physical capital is clearly emphasized.
2. Investment in human capital may involve an investment in education,
training, health, migration, etc.
3. Human cap ital investment, like any other investment involves current
expenditure for future earnings. munotes.in
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Economics of Labour Markets
10 4. Schooling is an important form of human capital investment that tends
to increase future earnings and employability of a worker.
5. Returns on investment in h uman capital are compared with the cost of
investment before taking a decision regarding investment.
2.6 QUESTIONS
Q1. Explain the theory of human capital in detail.
Q2. Write a note on –
a. Investment in Human Capital
b. Costs and Life -Time Benefits to Education
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11 MODULE 2: APPROACHES IN LABOUR
MARKETS
3
LABOUR DEMAND
Unit Structure:
3.0 Objectives
3.1 Introduction
3.2 The Theory of Labour Demand
3.3 Time Period and Types of Markets
3.4 Industry Demand for Labour
3.5 Determinants of Labour Demand
3.6 Summary
3.7 Que stions
3.0 OBJECTIVES
To analyse demand for labour.
To understand short run and long run theories of labour demand.
To discuss the determinants of labour Demand.
3.1 INTRODUCTION
In economics, labour is a measure of the work done by human beings. It is
conventionally contrasted with such other factors of production as land
and capital. Labour economics seeks to understand the functioning and
dynamics of the markets for labour. Labour markets function through the
interaction of workers and employers. Labour economics looks at the
suppliers of labour services (workers), the demands of labour services
(employers), and attempts to understand the resulting pattern of wages,
employment, and income.
The labour in India consists of about 487 million workers, the sec ond
largest after China. In 2011, India had about 487 million workers
compared to China's 795 million and United States' 154 million.
The labour market is like other markets in that a commodity (labour
services) is bought and sold. It differs from most pr oduct markets in
several important ways. Among these differences are:
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Economics of Labour Markets
12 labour services are rented, not sold,
labour productivity is affected by pay and working conditions, and
The suppliers of labour care about the way in which the labour is
used.
Labour demand is a derived demand; that is, hiring labour is not desired
for its own sake but rather because it aids in producing output, which
contributes to an employer's revenue and hence profits. The demand for an
additional amount of labour depends on the M arginal Revenue Product
(MRP) and the marginal cost (MC) of the worker. The MRP is calculated
by multiplying the price of the end product or service by the Marginal
Physical Product of the worker. If the MRP is greater than a firm's
Marginal Cost, then the firm will employ the worker since doing so will
increase profit. The firm only employs however up to the point where
MRP=MC, and not beyond, in economic theory.
3.2 THE THEORY OF LABOUR DEMAND
3.2.1 Short Run Demand for Labour:
Marginal revenue product of labour
Marginal revenue productivity of labour (MRPL) is a theory of the
demand for labour and market wage determination where workers are
assumed to be paid the value of their marginal revenue product to the
business.
Marginal Revenue Product (MRPL) mea sures the change in total revenue
for a firm from selling the output produced by additional workers
employed.
MRPL = Marginal Physical Product x Price of Output per unit
Marginal physical product is the change in output resulting from
employing one extra worker.
The price of output is determined in the product market – in other
words, the price that the firm can get in the market for the output that
they have produced A simple numerical example of marginal revenue
product is shown in the next table:
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Labour Demand
13 Table No. 3.1
Numerical Example of Marginal Revenue Product
Labour Capital (K) Output (Q) MPP Price (Rs.) MRP = MPP × P (Rs.)
0 5 0 - 5 -
1 5 30 30 5 150
2 5 70 40 5 200
3 5 120 50 5 250
4 5 180 60 5 300
5 5 270 90 5 450
6 5 330 60 5 300
7 5 370 40 5 200
8 5 400 30 5 150
9 5 420 20 5 100
10 5 430 10 5 50
We are assuming in this example that the firm is operating in a perfectly
competitive market such that the demand curve for its output is perfectly
elastic at Rs. 5 per unit. Marginal revenue product follows directly the
behaviour of marginal physical product. Initially as more workers are
added to a fixed amount of capital, the marginal product is assumed to
rise. However beyond the 5th worker employed, extra units of labour lead
to diminishi ng returns. As marginal physical product falls, so too does
marginal revenue product.
The story is different is the firm is operating in an imperfectly competitive
market where the demand curve for its product is downward sloping. In
the next numerical exa mple we see that as output increases, the firm may
have to accept a lower price. This has an impact on the marginal revenue
product of employing extra units of labour.
Table No. 3.2
Labour Capital (K) Output (Q) MPP Price (Rs.) MRP=MPP× P (Rs.)
0 5 0 - 10.0 -
1 5 25 25 9.60 240
2 5 60 35 9.00 315
3 5 100 40 8.70 348
4 5 150 50 8.20 410
5 5 210 60 7.90 474
6 5 280 70 7.70 539
7 5 360 80 7.00 560
8 5 430 70 6.80 376
9 5 450 20 6.50 130
10 5 460 10 6.00 60
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Economics of Labour Markets
14 MRP theory suggests that wage differentia ls result from differences in
labour productivity and the value of the output that the labour input
produces. The MRP theory outlined below is based on the assumption of a
perfectly competitive labour market and rests on a number of key
assumptions that re alistically are unlikely to exist in the real world. Most
of our labour markets are imperfect – this is one of the many reasons for
the existence and persistence of large earnings differentials between
occupations which we explore a little later on.
The ma in assumptions of the marginal revenue productivity theory of the
demand for labour are:
Workers are homogeneous in terms of their ability and productivity.
Firms have no buying power when demanding workers (i.e. they have
no monopsony power).
Trade uni ons have no impact on the available labour supply (the
possible impact on unions on wage determination is considered later).
The physical productivity of each worker can be accurately and
objectively measured and the market value of the output produced by
the labour force can be calculated.
The industry supply of labour is assumed to be perfectly elastic.
Workers are occupationally and geographically mobile and can be
hired at a constant wage rate.
The profit maximising level of employment:
The profit max imising level of employment occurs when a firm hires
worker up to the point where the marginal cost of employing an extra
worker equals the marginal revenue product of labour. This is shown in
the labour demand diagram shown below.
Figure No. 3.1
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Labour Demand
15 Shifts in the labour demand curve:
Marginal revenue productivity of labour will increase when there is -
An increase in labour productivity (MPP) e.g. arising from
improvements in the quality of the labour force through training, better
capital inputs, or better management.
A higher demand for the final product which increases the price of
output so firms hire extra workers and thus demand for labour
increases, shifting the labour demand curve to the right.
The price of a substitute input e.g. capital rises – this makes employing
labour more attractive to the employer assuming that there has been no
change in the relative productivity of labour over capital.
The next diagram shows how this causes an outward shift in the labour
demand curve. For a given wage rat e W1, a profit maximising firm will
employ more workers. Total employment in the market will rise.
Figure No. 3.2
3.2.2 Long Run Demand for Labour:
Long Run Demand for Labour
In the long run, the profit -maximizing firm can vary the inputs of both
labour (L) and capital (K)
o we assume that there are diminishing marginal returns to adding more
units of K (holding L constant) and to adding more units of L (holding
K constant)
o we assume that the first derivatives of Q = f(L, K) are positive and the
second derivatives are negative. munotes.in
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Economics of Labour Markets
16 An iso -quant -iso-cost diagram can be used [i] to determine the optimal
combination of L and K and [ii] to derive the demand for labour when
K is a variable input into the production process
Isoquants
Each iso -quant depicts the va rious combinations of L and K which
can be used to produce a particular level of output, say Qo in Figure
3.3.
Iso-quants depicting larger quantities of output (such as Q1 in Figure
3.3) will be further from the origin (they require greater quantities of
inputs).
Figure No. 3.3
The shape of the isoquant reflects the technological possibilities for
substituting L and K in the production process.
Isoquants are convex to the origin.
The slope of the isoquant is equal to MPL/MPK, where MPL is the
marginal product of labour and MPK is the marginal product of
capital.
Given diminishing returns to hiring each factor, the slope of the
isoquant exhibits a diminishing marginal rate of technical
substitution between L and K.
Larger and larger amounts of L must be substituted for each unit of
K as the amount of K used in the production process decreases.
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Labour Demand
17 Iso-cost Lines:
Assume that factor prices are given: 'W' is the wage paid to labour and
'r' is the implicit (rental) cost of using capital for a given COST
outlay, a firm can purchase different quantities of L and K according
to the following equation:
COST = WL + rK,
An iso -cost line depicts the various quantities of L and K which can be
purchased for a particular COST outlay 45.
Re-arranging the COST equati on produces the following equation for
an iso -cost line:
K = COST/r – (W/r)L
As shown in Figure 3.3, the slope of the solid iso -cost line is – (W/r),
the horizontal intercept is COST/W and the vertical intercept is
COST/r
The greater the COST outlay, t he further the iso -cost line will be from
the origin (more of both L and K can be purchased).
In Figure 3.3, the dashed iso -cost line has a higher cost outlay than the
solid iso -cost line; the dashed iso -cost line is parallel to the solid iso -cost
line (bo th iso -cost lines have slope – W/r).
The Optimal Quantities of L and K
A profit -maximizing firm will choose the least cost combination of L
and K to produce a particular level of output, such as Qo
The least cost factor input combination will be determi ned by the
tangency of an iso -cost line with the Qo iso -quant the closer the iso -
cost line to the origin, the smaller the cost
As shown in Figure 3.3, the optimal tangency position is given by
point Eo given factor prices (W, r), the optimal combination of inputs
to produce Qo is Lo and Ko
At this optimal tangency point, the slope (W/r) of the iso -cost line is
equal to the MPL/MPK slope of the iso -quant the ratio of factor
marginal products is equal to relative factor prices; the firm's internal
rate of factor substitution is equal to the rate at which the factors can
be substituted in the market place.
To summarize, in the short run the firm hires labour up to the point where
the VMPL (of MRPL) is equal to the wage rate and in the long run the
firm hire s labour up to the point where the relative value of the MPL (in
terms of the MPK) is equal to the relative price of labour (W/r).
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Economics of Labour Markets
18 Deriving the Long -run Demand for Labour
As illustrated in Figure 3.4, the long -run demand for labour can be derived
by deter mining the optimal combination of L and K for different wage
rates, holding the cost of capital (r) constant.
Figure No. 3.4
Given a wage rate Wo the firm maximizes profits at point A in the upper
diagram, the GF iso -cost line (with slope Wo/r) is tange nt to the Qa
isoquant at point A the firm uses La units of labour and Ka units of capital
to produce Qa units of output in the lower diagram, in the long run the
firm hires La unit of labour when the wage rate is Wo; point A is one point
on the long -run de mand for labour. munotes.in
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Labour Demand
19 Now suppose that the wage rate increases to W1 the GF isocost line will
rotate inwards to the dashed line GH (the horizontal intercept COST/W1 is
now located closer to the origin) and the new 47 set of dashed iso -cost
lines will be steeper (with slope W1/r) an increase in the wage rate also
shifts firms' marginal cost curves upwards, resulting in higher output
prices and a lower level of output demanded (say Qb) in the product
market.
As discussed below, the reduction in output depends on t he price elasticity
of the product demand curve.
The firm now minimizes costs at point B in the upper diagram of Figure
4.6, where a dashed iso -cost line with slope W1/r is tangent to the lower
Qb iso -quant the increase in wage rates from Wo to W1 has resu lted in a
decrease in the amount of labour (from La to Lb) and an increase in the
amount of capital (from Ka to Kb) used in the production process in the
lower diagram, the firm hires Lb units of labour when the wage rate is W1
(holding the cost of capital constant) point B is a second point on the long -
run demand for labour an increase in the wage rate (from Wo to W1 in
Figure 5) reduces the long -run demand for labour (from La to Lb) the
reduction in the demand for labour from an increase in wage rates can be
broken down into a substitution effect and a scale effect.
The substitution effect measures the effect of a change in an input price on
the amount of inputs used to produce a given output level (say Qa) in
Figure 4.6 the pure substitution effect from a n increase in the wage rate
from Wo to W1 is represented by the movement from point A to C to
produce the same output level Qa at the higher wage rate W1, the profit -
maximizing firm will use less labour (Lc) and more capital an increase in
wage rates from Wo to W1 has a pure (output constant) substitution effect
equal to La minus Lc the scale effect measures the effect of a change in
output levels (the scale of operation) on the amount of inputs used,
holding input prices constant.
In Figure 3.4 the scale e ffect is represented by the movement from point C
to B holding input prices constant, a reduction in output from Qa to Qb
results in less labour (Lb) and less capital used in the production process
an increase in wage rates from Wo to W1 has a scale effect equal to Lc
minus Lb both the substitution and scale effects reduce the quantity of
labour demanded when the wage rate increases; the long -run labour
demand curve unambiguously slopes down.
Since there is no substitution effect possible in the short run ( with a fixed
capital stock), the short -run demand for labour will be steeper than the
long-run demand for labour in the long run, the firm can respond to an
increase in wage rates by substituting capital for labour and thus the long -
run effect on the quant ity of labour demanded for a given change in the
wage rate will be larger than the short -run effect.
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Economics of Labour Markets
20 3.3 TYPES OF MARKETS
In labour markets, labour is supplied by households and demanded by
firms Labour Market in India can be classified into following ty pes:
1) National Labour Market:
A national labour market is one in which most job search by employers
and firms takes place on a national level. The markets for college
professors, top management positions in large corporations, and similar
occupations ar e national labour markets.
2) Local Labour Market:
Most job search takes place at a local level in a local labour market.
Secretaries, carpenters, truck drivers, electricians, and lathe operators are
employed through local labour markets. A national labou r market exists
only when there are few employers and employees in most geographical
regions. Local labour markets exist when there are many employers and
employees in most geographical regions.
3) Internal Labour Market:
An internal labour market is said to exist within a firm if the firm fills
higher level positions in the firm primarily by promotion from within the
firm
4) Primary Labour Market:
Jobs in the primary labour market are characterized by high wages and
stable employment relationships. Examp les of jobs in the primary labour
market include: accountant, lawyer, teacher, carpenter, and plumber.
5) Secondary Labour Market:
Workers employed in the secondary labour market receive low wages and
experience unstable employment relationships. Workers in fast -food
restaurants, gas station attendants, dishwashers, janitors, etc. are employed
in the secondary labour market.
3.4 INDUSTRY DEMAND FOR LABOUR
The demand for labour by an industry as a function of the wage rate. At
any given wage rate, industry demand for labour depends on output. If
wage rates fall, this can raise industry demand for labour in three ways.
First, labour may be substituted for other inputs; second, a reduction in
costs may lower price and increase demand for the industry's output; and
third, in the longer run a rise in profits may induce new firms to enter the
industry and take on additional workers. Industry demand for labour is
more elastic the better the opportunities for substitution between labour
and other inputs, the more el astic the demand for the industry's output, and
the more elastic the supply of potential entrants. munotes.in
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Labour Demand
21 3.5 DETERMINANTS OF LABOUR DEMAND
1. Product demand:
As seen earlier, the demand for labour is derived demand. It depends on
the demand for product for which the labour is used. For example, if the
demand for automobiles rises, the demand for labour in the automobile
industry will go up. So, in other words, changes in the product demand
will change the price of the product and hence the marginal revenue
produc t of the labour will change and hence the demand for labour will
change.
2. Productivity:
An increase in the marginal productivity of labour will increase the
demand for labour (if the price of product remains unchanged).
Conversely, a fall in marginal pr oduct will bring about a fall in the
demand for labour.
3. Prices of other inputs:
If the price of substitute to labour rises, the demand for labour will
increase and if the price of substitute input falls, the demand for labour
will fall (other things re maining the same). For instance, if use of
machines for a particular production process becomes cheaper, the
demand for labour for that product will fall.
4. Number of firms:
Generally, an increase in the number of firms or employers leads to an
increase in demand for labour. For example, if the number of educational
institutions increases, the demand for teachers will go up.
3.6 SUMMARY
1. Labour economics aims at understanding functioning and dynamics of
labour market.
2. Labour market has certain dis tinct characteristics and hence it is
different from other types of market.
3. Demand for labour is a derived demand.
4. There are different components of labour market.
5. There are two major variants of theories of demand for labour – short
run the ory of labour demand and long run theory of demand for
labour.
6. Marginal revenue productivity theory of labour is a short -run
explanation of demand for labour.
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Economics of Labour Markets
22 7. Long run demand for labour is explained with the help of isoquants.
8. There are many factors influencing the demand for labour.
3.7 QUESTIONS
Q.1 Explain the concept of demand for labour. State how the demand for
labour is different from any other demand.
Q.2 Explain the nature of demand for labour in the short as well as long
run.
Q.3 D iscuss the factors influencing the demand for labour.
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23 4
LABOUR SUPPLY
Unit Structure:
4.0 Objectives
4.1 Introduction
4.2 The Theory of Supply
4.3 Work -Leisure Choice in Indifference Curves
4.4 Budget Constraint
4.5 Utility Maximisation
4.6 Backward -Bending Labour Supply Curve and Its Applications
4.7 Summa ry
4.8 Questions
4.0 OBJECTIVES
To study the theory of supply.
To understand the work -leisure choice in indifference curves.
To study budget constraint and utility maximisation.
To study the backward -bending labour supply curve and its
applications.
4.1 I NTRODUCTION
The supply of labour signifies the number of workers of a given type of
labour which would offer themselves for employment of various wage
rates. The supply of labour may mean three things:
(i) Supply of labour to a firm,
(ii) Supply of labour to the industry, and
(iii) Supply of labour to the entire economy.
To a given firm, the supply of labour is perfectly elastic. That means, at a
given wage rate, a firm may be able to get as many workers as required.
This is because at the current wage rate, it can eng age as many workers as
it wants. A single firm’s demand would constitute only a negligible
fraction of the total supply of labour. But for the industry as a whole, the
supply of labour is not infinitely elastic. In other words, an industry may
not get as m any workers as it wants, at a given wage rate. If it wants to
employ more labour, it may have to attract it from other industries by
offering a higher wages. It can also work with the existing labour force
overtime which in effect will increase the labour supply for that industry.
The supply of labour for a particular industry is subject to the law of
supply, i.e., at lower wages, supply of labour will be low and at higher munotes.in
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Economics of Labour Markets
24 wages, supply of labour will be high. This makes the supply of labour
curve to be po sitive in slope. That is the supply curve of labour for an
industry rises upwards from left to the right.
The supply of labour for the entire economy depends upon many
economic, social and political and institutional factors. To mention a few
1. Attitude of women towards work,
2. working age of population
3. age of students for schooling and college education
4. Possibilities of part -time employment,
5. Size, age structure and composition of the population
6. Attitude to marriage,
7. Average size of the family
Concept of supply of labour under perfect and imperfect markets may be
considered differently. A given supply of labour under perfectly
competitive conditions gets distributed in various employments in such a
way as to make the marginal product ivity of labour in all the employment
the same. This is because, labour can move freely from one job to another.
But if there is no perfect mobility of labour, or labour cannot move freely
from one employment to another; the marginal productivity will be
different in different employments and wages will also be different even
for the same kind of labour.
Further, the supply of labour may be affected by trade union activity.
Working class may refuse to work for a certain period of time as a result
of a call by the trade union. In such a case, there will be reduction in the
labour supply. The workers may not accept wages offered by the employer
if such wages do not ensure the maintenance of the standard of living to
which they are accustomed. But it is only wh en higher wages are justified
by higher marginal productivity, that high wages will be paid. In the long
run, marginal productivity, wages and the standard of living tend to adjust
to one another.
On the whole it may be said that the number of potential wo rkers being
given, the supply of labour can be defined as the schedule of units of
labour to the prevailing rates of wages, which depends on the following
factors: (i) the number of workers who are willing and able to work at
different wages, and (ii) the number of working hours that each worker is
willing and able to put in at different wages.
Determinants of the supply of labour
Supply of labour in a market depends upon many factors. Following are
some of the –
(i) Other Wage Rates: An increase in the wages paid in other
occupations for which workers in a particular labour market are
qualified will decrease labour supply. In the case of a decrease in the munotes.in
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Labour Supply
25 wages paid in other occupations, there will be an increase labour
supply.
(ii) (Non -wage Income: An increase in income other than from
employment will decrease labour supply. On the other hand, a
decrease in such income will increase the labour supply.
(iii) Preferences for Work versus Leisure: A net increase in people’s
preferences for work relative to leisure will increase labour supply.
A net decrease in such preferences will decrease labour supply.
(iv) Non-wage Aspects of the Job: An improvement of the nonwage
aspects of job will increase labour supply. A worsening of the non -
wage aspects of job will decrease labour supply.
(v) Number of Qualified Suppliers: An increase in the number of
qualified suppliers of a specific grade of labour will increase labour
supply. A decrease in such suppliers will decrease the labour supply.
4.2 THE THEORY OF SUPPLY
In a competitive m arket, the supply of labour is determined by the rate of
wages. The higher the wage rate, the more workers are willing to come to
work, and the lower the wage rate, the lower the number of workers
willing to work. Due to such a direct relationship between the wage rate
and the supply of labour, the curve of the supply of labour in a competitive
market tends to be positive, that is, from left to right.
Figure No. 4.1
Aggregate Labour Supply Curve
Wage Rage
Labour Supply W
Q A
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Economics of Labour Markets
26 In a competitive market, in addit ion to wage rates, further factors lead to a
shift in the labour supply curve.
A. The size of the able -bodied population:
Generally, the working population is made up of people between the ages
of 16 and 60 who are willing to work and have the ability to w ork. The
working population is affected by factors such as retirement age, school
leaving age, and migration. If the size of the working population is large,
the labour supply curve shifts to the right.
B. Migration:
Migration has a huge impact on the labo ur market. There is a general
tendency to migrate from low -wage areas to high -wage areas, leading to
higher labour supply in high -wage countries and labour shortages in low -
wage countries.
C. People's preferences for work:
If people prefer work, the supply of labour increases. People's preference
for work is influenced by factors such as return on work, other forms of
work benefits, cost of living, and so on.
D. Non -financial benefits:
Non-financial benefits such as changes in the nature of work, financial
security, leave at work, the possibility of promotion, etc. can also change
the supply of workers in the market. The supply curve shifts to the right if
such non -financial benefits improve.
E. Ratio of direct taxes:
When direct taxes, such as income taxes, are higher, people prefer leisure
to work, which reduces the supply of labour.
F. Proportion of dependent population:
People prefer work if the dependent population, such as children, the
elders, etc., are more dependent on the working population. This
automatically increases the supply of labour. And the labour supply curve
shifts to the right.
4.3 WORK -LEISURE CHOICE IN INDIFFERENCE
CURVES
With adequate income, leisure is just as important to the worker.In the
case of workers after a certain income leve l, there is a conflict between the
time given for work and the time of leisure. In such a case, the worker has
to decide whether to work harder and earn more income or to use the time
left after fulfilling his usual responsibilities for leisure and recreat ion.
Here it is time for him to choose between the two variables. We will munotes.in
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Labour Supply
27 explain how workers make this choice with the help of indifference
curves.
Indifference curve analysis can be used to clarify a person's choice
between income and leisure and to show why higher overtime wage rates
need to be paid if workers want to get more working hours. One thing to
keep in mind here is that extra time is earned by giving some free time to
work. It means that extra income is earned by sacrificing leisure time. The
higher the amount of this leisure sacrifice, the higher the amount of work,
the higher the income.
Leisure time can be used for relaxation, sleeping, playing, listening to
music on the radio and television, and so on. All these things give
satisfaction to a person. Therefore, in economics, leisure is considered to
be a common thing, the use of which gives satisfaction to a person.
Income, on the other hand, represents the general purchasing power that
can be used to purchase goods and services to meet variou s needs. Thus,
income indirectly provides satisfaction. Therefore, we can draw the
indifference curve between income and leisure by assuming two common
objects.
Figure 4.2 shows aindifference curve map between income and leisur e.
This curve has all the properties of a regular indifference curve. These
properties are as follows.
1. Each indifference curve represents different alternative combinations of
income and leisure that provide the same level of satisfaction to the
individ ual.
2. The indifference curve is downward from left to right. L I C B A Figure No .4.2
Work -Leisure Choice in Indifference Curves
Incomee Leisure ICICICmunotes.in
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Economics of Labour Markets
28 3. The indifference curve is convex to the origin.
4. Two indifference curves never intersect each other.
5. The indifference curve on the right is more satisfying than the
indifference curve o n the left.
The slope of the indifference curve measuring the marginal rate of
substitution (MRS) between leisure and income represents the trade -off
between income and leisure. It means that if a worker wants to earn extra
income, he has to reduce his lei sure and if he wants to get extra leisure, his
income will decrease.
Figure 4.2 shows that the worker working on the indifference curve IC1 at
point B is ready to accept an income reduction of ∆I (= AC) for one hour
(∆L) or BC leisure. On the other hand, a t point A, the same working
person on the indifference curve IC1 is willing to give up one hour ( ∆L) or
BC for an incremental income of (I (= AC).
4.4 BUDGET CONSTRAINT
The person’s consumption of goods and leisure is constrained by her time
and by her inc ome. Part of the person’s income (such as property income,
dividends, and lottery prizes) is independent of how many hours she
works. We denote this “nonlabour income” by V. Let h be the number of
hours the person will allocate to the labor market during t he period and w
be the hourly wage rate. The person’s budget constraint can be written as
C = wh + V
In words, the dollar value of expenditures on goods (C) must equal the
sum of labor earnings ( wh ) and nonlabor income ( V ).
As we will see, the wage r ate plays a central role in the labor supply
decision. Initially, we assume that the wage rate is constant for a particular
person, so the person receives the same hourly wage regardless of how
many hours she works. In fact, the “marginal” wage rate (that is, the wage
rate received for the last hour worked) generally depends on how many
hours a person works. Persons who work over 40 hours per week typically
receive an overtime premium, and the wage rate in part -time jobs is often
lower than the wage rate in full-time jobs. For now, we ignore the
possibility that a worker’s marginal wage may depend on how many hours
she chooses to work.
Given the assumption of a constant wage rate, it is easy to graph the
budget constraint. The person has two alternative use s for her time: work
or leisure.
The total time allocated to each of these activities must equal the total time
available in the period.
We can then rewrite the budget constraint as -
C = w(T - L) + V (2 -8) or C = (wT + V) - wL munotes.in
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Labour Supply
29 This last equation is in t he form of a line, and the slope is the negative of
the wage rate (or – w ).
4.5 UTILITY MAXIMISATION
Utility maximisation refers to the concept that individuals and firms seek
to get the highest satisfaction from their economic decisions.
For example, w hen deciding how to spend a fixed some, individuals will
purchase the combination of goods/services that give the most satisfaction.
Utility maximisation can also refer to other decisions – for example, the
optimal number of hours for labour to supply thei r labour. Working more
increases income, but reduces leisure time.
Classical economics
Utility maximisation is an important concept in classical economics. It
developed from the utilitarian philosophers of Jeremy Bentham and John
Stuart Mill. Early economi sts such as Alfred Marshall incorporated utility
maximisation into economic theory.
An important assumption of classical economics is that the price
consumers are willing to pay is a good approximation to the utility that
they get from the good. If people are willing to pay £800 for an iPhone X,
then this suggests the consumer must get a utility of at least £800.
Diminishing marginal utility
Economists such as Carl Menger, William Stanley Jevons and Marie -
Esprit -Léon Walras. And Alfred Marshall developed id eas such
as diminishing marginal utility . The idea that after a certain point, extra
quantities of a good lead to a decline in the marginal utility. (For example
– The first car gives high utility, but the utility of a second is much lower.
Figure No. 4.3
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Economics of Labour Markets
30 Marginal utility shapes an individual demand curve, as the utility from
extra units declines, consumers are willing to pay a lower price – hence a
downwardly sloping deman d curve.
How individuals achieve utility maximisation
How much to consume?
A consumer will consume a good up to the point where the marginal
utility is greater than or equal to the price.
If you feel a sandwich gives you more utility than the cost of buyin g then
you will continue to buy
Figure No. 4.4
In this example, the optimal consumption of units is 2. A third one gives
you a utility equal to 50p – but this is less than the price.
When choosing between different goods, the Equi -Marginal principle
argues that consumers will maximise total utility from their incomes by
consuming that combination of goods where:
Another way of showing utility maximisation is through the u se of
indifference curves and budget lines
Indifference curves show different combinations of goods which gave
the same utility.
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Labour Supply
31 A budge line shows disposable income and the maximum potential
goods that can be bought
Indifference curves further to the ri ght are more desirable as they have
bigger combinations of goods.
Utility will be maximised at the furthest indifference curve still
affordable.
Optimal choice of goods for consumer
Figure No. 4.5
Limitations of utility maximisation
Ordinal utility :
Ordinal utility states consumers find it hard to give exact values of utility,
but they can order by preference – e.g. I prefer apples to bananas. This
theory of ordinal utility was developed by John Hicks and gives less
precise but rough guides to utility o f consumers.
Irrational behaviour . Classical economics generally assumes individuals
are rational and seek to maximise utility. However, in the real world, this
may not be the case. Other factors affecting choice
Impulsive behaviour – buying goods which ar e later regretted.
Loyalty, e.g. loyalty to local shops rather than buy cheaper from
supermarkets.
Sense of morality, e.g. not drinking alcohol. munotes.in
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Economics of Labour Markets
32 4.6 BACKWARD -BENDING LABOUR SUPPLY CURVE
AND ITS APPLICATIONS
Backward bending supply curve is a theorem that holds that as wage
increases, people substitute leisure for working and hence when wages are
very high, the supply of labour in the market is low.
Figure No. 4.6
As per the diagram above, if the wages go up from W1 to W2, the supply
of labour increases from L1 to L2. This is because the substitution effect is
stronger than the income effect. Increase in wages is accompanied by an
increase in hours of work and leisure is substituted for work. On the other
hand, as wages go up from W2 to W3, the supply of labour goes down
from L2 to L3. This is because an income effect is stronger than the
substitution effect. The working class is paid sufficiently high to sustain
their current standard of living.
4.7 SUMMARY
Labour market is a place that allocates jobs to the people and co -
ordinates employment related decisions.
The supply of labour signifies the number of workers of a given type
of labour which would offer themselves for employment of various
wage rates.
The supply of labour for the entire economy depen ds upon many
economic, social and political and institutional factors. munotes.in
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Labour Supply
33
Supply of labour in a market depends upon many factors such as Other
Wage Rates, Non -wage Income, Preferences for Work versus Leisure,
Number of Qualified Suppliers and Non -wage Aspec ts of the Job
India labour market has many peculiar features such as migratory
nature of workers, low levels of literacy, etc.
4.8 QUESTIONS
1. Explain the concept of supply of labour. How is the labour supply
determined in the labour market?
2. Write a note on backward bending supply curve of labour.
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35 MODULE 3: WAGE ISSUES IN LABOUR
MARKETS
5
WAGE ISSUES IN LABOUR MARKETS – I
Unit Structure:
5.0 Objectives
5.1 Introduction
5.2 Theories of Wages
5.3 Wages in Different Markets
5.4 Wage Structure and Components of Wages
5.5 Share of Wages and Distribution and Inequality of Wage Income
5.6 Male -Female Wage Differentials
5.7 Inter -Sectoral Wage Differentials
5.8 Summary
5.9 Questions
5.0 OBJECTIVES
To study the theories wages and wages in different markets.
To understand the wage structure and components of wages.
To study the share of wages.
To study the distribution and inequality of wage income.
To study male -female and inter -sectoral wage differentials.
5.1 INTRODUCTION
The issue of wages is considered to be important not only for raising the
standard of living of workers’ class but also as a tool to raise production.
The economic wellbeing of a worker, their efficiency, standard of living,
the wage cost as a part of cost of production and the competitive strength
of an industry, is all dependent on the w age-structure. So the problem of
wages has all economic, social and political implications. Wages are
looked upon differently by different segments of society.
1. Workers and trade unions look at wages as income and not as a price of
labour.
2. Management looks at wages as an item of cost and according to them.
profit is greatly dependent on the existing wage rate. munotes.in
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Economics of Labour Markets
36 3. For community, low wages may be uneconomical in the sense of social
cost. That means, low wages may lead many social evils like industrial
sickness, reduced efficiency of workers, slum dwellings, etc.
4. For an economy, wages like price of any commodity must perform the
function of allocation of labour among different industries.
The term wages is the price paid for the services rendered by the labour in
the process of production. Relative wages in different industries are the
important determinants of allocation of labour in different sectors. Wages
are important in many ways as they affect many macroeconomic variables
in the economy like sa vings, consumption, employment and price level.
Theory of wages has evolved through last two to three centuries and it has
undergone different stages of development reflecting the changes in
economic and social conditions of different periods of time. A hi storical
review of the wage theories distinguishes three broad divisions: -
i. The classical period (1870s)
ii. Marginal Productivity Theory of Wages (period of great depression -
1930s)
iii. Contemporary wage theory in the recent years
In this unit, we will first de fine and understand all the concepts related to
wages and wage determination. Then we will evaluate various wage
theories, then we will understand the process of wage determination in
competitive and non -competitive markets, we will understand the concept
and types of wage differentials and finally we will explain the wage
differentials in India.
5.2 THEORIES OF WAGES
5.2.1 Subsistence theory of wages
The main principle of the subsistence theory of wages is that the labourer
should be paid wages just suffi cient to maintain minimum standard of
living for him and his family. If they are paid more than minimum, their
families will become bigger and hence the supply of labour will go up in
the next generation. For mercantilists, subsistence amount of wages for
labourer was to allow traders and manufacturers to accumulate gold and
silver. This was because the aggregate amount of precious metal was
believed to be an indicator of richness of a country.
Both Adam Smith and Ricardo advocated the doctrine of subsisten ce
wages by restating that the natural price of labour is that price which is
necessary to enable the labourer to subsist or maintain minimum standard
of living and to perpetuate their race without either increase or decrease.
According to Adam Smith, “Ful l value of any commodity … to the person
who possesses it and who means not to use or consume it himself, but to
exchange it for the other commodities, is equal to the quantity of labour
which it enables him to purchase or command. Labour, therefore, is th e
real measure of exchangeable value of all commodities… labour was the munotes.in
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Wage Issues in Labour Markets – I
37 first price, the original purchase money that was paid for all things”.
According to him, masters, who enjoy better position, keep wages down to
the minimum possible level. Minimum lev el is that “in order to bring up a
family the labour of husband and wife together more than what is
precisely necessary for their own maintenance.”
To further develop subsistence theory of wages, David Ricardo wrote, “the
natural price of labour is that pr ice which is necessary to enable the
labourers, one with another to subsist and perpetuate their race without
either increase or diminution”. According to this theory, wages were
supposed to be settled at that level, just sufficient to maintain the workers
and his family at minimum subsistence. If wages rise above that level,
workers are encouraged to marry and have larger families. The larger the
supply of labour, the lower are the wages. If wages fall below subsistence
level, the marriages and births are discouraged, labour supply goes down
and wages come back to the level of subsistence.
It was the subsistence theory of wages that made economics a dismal
science. The theory was criticised on many grounds: -
1. Population is not indefinitely elastic to am ount of wages.
2. Trade union activities do not allow wages to remain at subsistence.
3. Higher wages may increase standard of living and this may infact
reduce the birth rates, reduce the size of families and not increase as
postulated by the theory.
4. It ignores the demand side of the market.
5.2.2 Residual Claimant Theory of Wages
This theory was put forward by American economist, Walker. The process
of production is carried on by four factors of production – land, labour,
capital and organisation – and each of them get their rewards in the form
of rent, wages, interest and profit respectively. According to Walker, rent,
interest and profit were determined by some definite laws but wages are
not determined in that way. Whatever remains after the paym ent to land,
capital and organisation, is paid as wages to the labourer. In other words,
the residual is paid to the labourer.
5.2.3 Wage Fund Theory
Wage Fund Theory was put forward by J.S.Mill. In his book “Principles of
Political Economy”. He stated th at wages depend upon the relationship
between supply of population and the capital available to employ workers.
In his words, “Wages depend on relative amount of capital and
population.” By population, he meant the number of people ready to work
and by cap ital he meant the amount to be used for the payment of wages.
Accordingly, wage level is determined by dividing total wage fund by the
number of workers. The wage fund depends upon the demand for labour
and number of workers is determined by labour supply. Wage fund
consists of those goods which are the means of subsistence for the munotes.in
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Economics of Labour Markets
38 labourer. Wage fund may also be defined as the part of working capital
that the capitalists have kept for the payment of wages.
According to the wage fund theory, demand for and supply of labour will
determine wage rate in the market. If actual wage rate is higher than the
one indicated by the wage fund analysis, there will be unemployment in
the economy. In other words, if wage rate is higher, the number of workers
that can be em ployed, given the wage fund, would be less. Thus wages
cannot rise unless either the wage fund increases or the supply of workers
decreases.
Main criticism against this theory was that it ignores the possibility of
increased wages accruing from greater pro ductivity of workers.
5.2.4 Marginal Productivity Theory of Wages
Marginal Productivity Theory of wages is one of the oldest explanations
for the determination of wages. It is also the most generally accepted
theory of wage determination. According to J.B. Say, the most important
proponent of this theory, wages paid to the workers are equal to additional
contribution to production from the last worker employed. That means,
wages are related to the marginal productivity of labour. Produce of labour
as a dete rminant of wage rate can be traced back to Adam Smith’s
writings. Since then, efforts were made to bring marginal utility analysis
in the wage determination. The marginal productivity theory of wages is
based on many assumptions such as: -
i. Homogeneity of la bour
ii. Mobility of factors of production
iii. Existence of perfect competition
iv. Law of diminishing marginal returns
v. Possibility of substitution of factors of production for each other
As per the theory, employers go on hiring the workers till the marginal
revenue from the worker is higher than the cost of employing the
additional workers. They will stop hiring the workers at that point where
MC = MR i.e. the payment to the workers (marginal cost) is just equal to
the amount of value added by the last worker of the firm (marginal
revenue). Hence all the workers get wages equal to the productivity of the
last worker employed.
Some of the limitations of the theory are – due to lack of perfect mobility
of labour, workers of the same skill and efficiency, may not rec eive the
same level of wages at two different places, productivity of workers is
determined by many factors like quality of capital, efficiency of
management, productivity is also a function of wages.
5.2.5 Exploitation Theory of Wages
A wage theory put fo rward by Karl Marx is known as Exploitation Theory
of Wages. According to this theory, labour was considered to be the only
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39 determined by the amount of labour used in production of that commod ity.
Hence anything that was retained by others (say profit or interest) in the
process of production was a surplus. A surplus would be created as a result
of exploitation of working class, according to Karl Marx.
5.2.6 Demand and Supply Theory of Wages
In perfectly competitive free market, wages will be determined on the
basis of demand for and supply of labour. Demand for labour basically
depends upon demand for a good or service that is produced with the help
of labour. But at the same time, demand for l abour and wages workers
receive is also influenced by the government policy towards the workers.
Social security measures like minimum wages act, pension schemes,
retirement benefits, safety requirements at work, rules and regulations
about working conditi ons, greatly influence the demand for labour. A
downward -sloping demand curve clearly indicates that when the wage rate
is high, demand for labour is low. It implies from the statement that any
government policy decision taken in favour of labour will lead to increase
in the cost of employing the workers and hencethe employment level will
come down. It is therefore, very essential to understand the economic
theory behind labour demand, characteristics of labour demand curves and
various factors influencing the demand for labour.
Supply of labour, on the other hand, is determined by the labour force
participation rate. It is positively related to the wage rate. Wage rate is an
opportunity cost of leisure. Through the price mechanism, supply is
brought in equa lity with demand. If demand for labour is high in relation
to supply of labour, price of labour will go up, i.e wages will be pushed
up. If demand for labour falls in relation to supply of labour, wages will go
down. The determination 65 of wages according to demand and supply
theory of wages does not go counter to marginal productivity theory of
wages. Demand for labour basically would be determined by marginal
productivity of labour and hence it will be an important factor in wage rate
determination.
5.2.7 Bargaining Theory of Wages
It was propounded by Thornton, Davidson, Maurice Dobb and Webb. As
per this theory, wages are determined by the bargaining power of the
employers and employees. Wages will be higher if bargaining power of
workers is high and v ice versa. Wages would be settled between the upper
and the lower limit. Employers would pay less and less considering the
productivity of labour cost of investment and borrowing and the degree of
competition in the market. Workers will demand higher and h igher wages
depending on cost of living and desire for improvement in standard of
living. The actual wage rate will be determined by bargaining power of
both the parties.
In non -competitive/imperfectly competitive markets, wage rate
determination will be d one by collective bargaining. Here both the trade
unions as monopolist supplier or employers’ association as monopolist
buyer, function in imperfect market. Inter -sectoral or inter -occupational munotes.in
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40 differentials in wage rates will be explained by different deg rees of
bargaining powers of respective trade unions.
It is maintained by the critiques of bargaining theory of wages that the
trade unions can only increase the nominal wages (wages in terms of
money) but they cannot raise real wages (purchasing power) be yond
marginal productivity of labour. This is because the employers would
always employ labourers up to the point where marginal productivity is
equal to wage rate. So of wages go up beyond marginal productivity of
labour, the employment level will come do wn.
5.3 WAGES IN DIFFERENT MARKETS
Under perfect competition, equilibrium wage rate is determined where
demand for labour is equal to supply of labour.
In other words, under perfect competition, a labourer will get wage equal
to its marginal revenue produc tivity in the long run.
In Fig. 5.1 units of labour have been measured on X -axis and wages on Y -
axis. DD and SS are the demand and Supply curves of labourers
respectively. Both the curves intersect each other at point E which
determines wage rate OP in the market.
Figure No. 5.1
At this level of wages, ON units of labourers will get employment. Now
suppose, wages go up to OP 1. At this price, demand is ON 1 and supply
ON 2. Since, the supply is more than demand; it will lead to competition
among labourers to get employment which in turn results in a decrease in
wage rate. On the other hand, if w age rate falls to OP 2, demand will be
more than the supply. This results in competition among the producers to
get the services of labour which in turn leads to an in crease in wage rate. munotes.in
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41 Therefore, we may observe that equilibrium will be restored at that point
where demand curve of labourers intersects the supply curve of labourers.
Time Periods to Study Firm’s Equilibrium:
The study of firm’s equilibrium can be studie d in the following two
time periods:
1. Short Run
2. Long Run
1. Short Run Period:
Short run refers to a period in which it is not possible for a firm to fully
equate the demand for and supply of a factor. Therefore, a firm in the short
run may face three situations.
Supernormal Profit:
If at OW wage rate, a firm provides employment to as much labourers
whose ARP is more than the prevailing wage, the firm earns supernormal
profits. In the Fig. 5.2 a firm at its equilibrium provides employment to
OX labourer s. Here ARP i.e. PX is greater than the wage rate EX. Thus,
firm earns EP as supernormal profits.
Figure No. 5.2
Normal Profit:
A firm enjoys normal profits, if ARP is equal to wage rate. In Fig. 5.3
when firm employs ON number of labourers, their ARP is EX which is
equal to prevailing wage rate OW. Thus, the firm gets only normal profits.
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Economics of Labour Markets
42 Figure No. 5.3
Losses:
A firm incurs losses, if at prevailing wage; a firm employs the number of
labourers at which their ARP is less than the prevailing wage rate. In Fig.
5.4 when firm employs OX labourers, their ARP = PX is less than their
wage rate OW. Thus, the firm has to incur losses equal to EP.
Figure No. 5.4
2. Long Run Period:
In the long run, a firm earns normal profit. A firm will be in equilibrium
wher e ARP is equal to MRP. In Fig. 5.5 when firm employs OX labourer
ARP is equal to MRP.
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43 Figure No. 5.5
Wage Determination under Imperfect Competition:
In the world of reality there exists imperfect competition rather than
perfect competition. Therefore, M rs. Joan Robinson and Prof. Pigou gave
the wage rate determination under the conditions of imperfect competition.
The wage rate determination can be explained fewer than two heads:
(a) Perfect competition in product Market and Monopsony in the Labour
marke t.
(b) Monopoly in the product Market and Monopsony in Labour Market.
(a) Perfect Competition in Product Market and Monopsony in
Labour Market:
When there is a single buyer of labour in the market, monopsony is said to
exist in the labour market. If there is an increase in monopolist’s demand
for labour, wage rate will follow the same path which in turn tends to
increase the average and marginal wage rate. It can be shown with the help
of a diagram.
In Fig. 5.6 units of labour have been measured on X -axis w hile wages on
Y-axis. ARP and MRP is the average revenue product and marginal
revenue product curves. AW and MW are the upward sloping average
wage and marginal wage curves indicating that if the monopolist wishes to
employ more and more labourers, he has to offer the higher wage rate.
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Economics of Labour Markets
44 Figure No. 5.6
The monopolistic firm is in equilibrium at point E. At point E both the
conditions of equilibrium are fulfilled i.e. marginal wage should be equal
to marginal revenue product and the marginal revenue prod uct curve must
cut the marginal wage curve from above and then lies below it. Thus, at
this equilibrium level, he will employ OX units of labour and OP wage
rate will be determined.
Since wages are less than marginal revenue productivity, means that the
monopolist exploits the labour. Thus, in this equilibrium the monopolist
earns the supernormal profits equal to the area PLMN. Therefore, it can be
concluded that imperfect competition in the labour market results in the
exploitation of labour.
(b) Monopoly in Product Market Monopsony in Labour Market:
When there exists monopoly in product market and monopsony in labour
market then there is difference between marginal revenue product and
value of marginal product. Value of marginal product refers to the produ ct
of MPP and the price of the commodity. It can be explained with the help
of a figure.
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45 Figure No. 5.7
In Fig. 5.7 MRP is the marginal revenue product curve and VMP is the
value of marginal product curve. The VMP curve is above the MRP curve.
The monopsonist is in equilibrium at point E. The monopsonist employs
ON units of labour and wage rate OP is determined in the market.
Monopoly in the product market and monopsony in the factor market
leads to the double exploitation of labour, i.e., monopoli stic exploitation
and monopsonist exploitation. At this equilibrium level monopolistic
exploitation is EL while the monopsonist exploitation is equal to EK.
5.4 WAGE STRUCTURE AND COMPONENTS OF
WAGES
5.4.1 Wage Structure:
Wage structure may be defined as t he internal pattern of varying job
ranking and basic wage rates and differentials of different categories of
employees in a company according to skill, qualifications and experience.
Together with this, wage structure may also be influenced by labour
marke t forces. But the outside market impinges only at certain points in
the company wage structure.
There is a great array of semi -skilled and unskilled production jobs that
are specific to a particular industry or even a particular company. Workers
are usuall y not recruited into these jobs from the outside, but work up
from within the company on a seniority basis. These types of jobs, if not
easily available elsewhere, wage rates become subject to inside market.
Factors Affecting Wage Structure:
The wage struc ture in a modern plant may be influenced by the following
factors: munotes.in
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46 Collective bargaining and labour relations
Management discretion and custom
Skill and production operation sequence
Job evaluation or job rating
Minimum wage legislation
Dearness allowance
Bonus
Wage incentives
Wage differentials
Company wage policy
Governmental wage fixation methods
Tripartite convention
ILO convention.
Wage structure may be industry based or there may be inter -industry wage
structure or Federation level wage structure. In India, wage structure for
different industries has been set on the basis of Government wage
regulation, and tripartite negotiation.
5.4.2 Component of Wages:
The components of wages are as follows -
basic pay
annual bonuses
tips
in-kind benefits
productiv ity and performance pay
allowances and premiums for non -standard work hours or
dangerous work.
The fact that total wages or earnings are made of different components
raises the question of which components should count towards compliance
with the minimum w age.
5.5 SHARE OF WAGES AND DISTRIBUTION AND
INEQUALITY OF WAGE INCOME
The Government of India appointed a committee in 1948 to determine the
wage policy. In order to recommend the principle on which the fair wage
rate should be based, this appointed comm ittee clarified the concepts of
the livelihood wage, the minimum wage and the fair wage.
1. Livelihood Wages:
The basic wage is the wage of a worker which can provide food, clothing,
shelter as well as education of children, sickness, amenities to the fami ly
and provision for future disaster relief. munotes.in
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47 2. Minimum Wages:
The minimum wage is a wage that can meet the general needs of a man in
a civilized society.The principle of minimum wage was widely
accepted.The main objectives of the minimum wages are to incr ease wage
rate in the industry, to reduce the exploitation of workers, to inspire peace
in the industry by guaranteeing wages that meet the minimum needs of the
workers.
3. Fair Wages:
A fair wage is slightly higher than the minimum wage and lower than the
livelihood wage. The committee also said that the strength of the industry
should be taken into consideration while deciding the fair wage. Where a
fair wage falls between the necessities of life and the minimum limits will
depend on other factors such as the productivity of the workers, the wage
rate in other industries. In an industry where the bargaining power of the
workers is large, that is, trade unions are strong, the current wage is
around fair wages.
5.6 MALE -FEMALE WAGE DIFFERENTIALS
There are tw o prominent forms of male -female or gender discrimination in
labour market. Firstly, the employers may pay less to women than men
with the same experience and to work under same conditions in the same
occupations. Secondly, women with same education and pr oductive
characteristics may be placed in lower paying occupations or with lower
responsibility jobs as compared to men. Thus, the labour market
differential is said to be present when wages paid by the employers to men
and women with equal productive char acteristics are not equal, even in the
same occupations. This trend may be due to many reasons. To mention a
few of them: -
1. Many of the women are married and hence they are not entirely
dependent on their own earnings. This may make them accept lower
wages.
2. The average wages of men are higher because the proportion of skill is
greater among men than women.
3. Much larger proportion of men tend to work harder than women
because they have dependents to maintain.
4. The absentee rate out of sickness i s less among the men as compared to
women.
5. Turnover or job -changing is more among the women than the men due
to many reasons like marriage, children, etc.
Royal Commission on Equal Pay (1946) published a Majority and
Minority Reports. Majority Report f avoured wage differentials between
men and women on the ground that men possess greater physical strength
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48 higher among women, that they are more likely than men t absent
themselves fro m work for trivial reasons, and that were generally less
ambitious than men and in crises showed less initiative. The Minority
Report admitted that where physical strength was concerned, men were
more capable than women, but it was claimed that with this e xception
women were equally as efficient as men, the fact that in the past women
had been promoted to few posts of responsibility being ascribed to the
prejudice of employers and the jealousy of employees. (A Textbook of
Economics – J. L .Hanson page 322)
5.7 INTER -SECTORAL WAGE DIFFERENTIALS
Since J.S. Mill, economic theorists have tended to explain occupational
wage differentials by differences in costs of training or other obstacles to
supply of labour. This however accounts for a long -run wage different ials.
In the short run, the number of persons in an occupation is fixed and
earnings are affected by the changes in demand and wage rigidities. The
wages basically vary between one occupation and other because there is
no single labour market. There are ma ny labour markets depending upon
different types of labour. For example, there may be deficiency of supply
of labour in the market for doctors but there may be surplus in the market
for engineers. Hence the wage rate in both these markets will differ. In t he
short -run, supply of labour of a particular kind (say doctors) cannot be
raised as special, rigourous training may be required, special aptitude is
required which may not be possibly accomplished in the short run. Hence,
the first and foremost reason fo r wage differential is lack of occupational
mobility.
5.8 SUMMARY
According to D.R. Gadgil, wage differentials in India are the characteristic
of unorganised labour market and personal differentials are because of
job-selling, individual bargaining and wag e discrimination. Wage
differentials by sex have also been very common in India. But the
tendency appears to have reduced on account of government interference
through the fixation of minimum wages, appointments of wage boards and
pressures from the unions . Inter -industry and inter – state differentials are
also on a continuous decline over years.
One of the Directive Principles of Indian Constitution is “Equal Pay for
Equal Work”. The Fair Wages Committee and other wage fixing
authorities in India have alw ays recommended equal pay to equal work for
men and women workers. But the things are difficult to implement
because even though conditions, processes and products are standardised
for the purpose of wage calculations, workpeople cannot be standardised.
That is, the workers may differ on the basis of their experience, efficiency
and hence the wages also may differ.
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49 5.10 QUESTIONS
Q1. Explain the following theories of wages -
a. Subsistence theory of wages
b. Residual Claimant Theory of Wages
c. Wage Fund Theory
d. Marginal Productivity Theory of Wages
e. Exploitation Theory of Wages
f. Demand and Supply Theory of Wages
g. Bargaining Theory of Wages
Q2. Write a note on -
a. Wages in Different Markets
b. Wage Structure and Components of Wages
c. Share of Wages
d. Distribution and Inequal ity of Wage Income
e. Male -Female Wage Differentials
f. Inter -Sectoral Wage Differentials
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50 6
WAGE ISSUES IN LABOUR MARKETS – II
Unit Structure:
6.0 Objectives
6.1 Introduction to Contract Labour
6.2 Properties of Contractual Wages
6.3 Labour Market Rigidities and Flexibilities
6.4 Summary
6.5 Questions
6.0 OBJECTIVES
To know the concept of contr act labour.
To study the properties of contractual wages.
To understand the concepts of labour market rigidities and flexibilities.
To study wage and output relations in India during pre and post -reform
period
6.1 INTRODUCTION TO CONTRACT LABOUR
Contract l abour is not recorded on the payroll. It is not directly paid by the
employer. The principal employer is not directly responsible for the
payment of wages or any other matter arising out of employment of
contract labour. The benefit of contract labour to t he principal employer is
in terms of cheap labour and avoidance of other attendant costs that may
arise out of regular employment such as provision of welfare facilities,
paid leave, social security, bonus, administrative costs, installation of plant
and m achinery which otherwise is provided by the contractor etc. Contract
labour can be divided into two categories, namely; persons employed in
job contracts and labour contracts. Big firms offer job contracts or certain
operations, for example, loading and un loading of material to contractors.
In this case, the contractor employs his own labour and also pays them.
In case of labour contracts, the contractor supplies only labour to the
principal employer for employment in various categories of work. The
contrac tor is responsible for payment of wages as determined by him to
the workers. Contract labour is employed as unskilled and skilled labour.
Unskilled labourincludes categories such as loaders, cleaners, sweepers,
helpers etc and skilled labour include catego ries such as turners, fitters,
electricians, gas cutters, carpenters, blacksmiths etc. Contract labour is
generally found in industries such as engineering, textile, carpet weaving,
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51 these, mining and building industries are found to be the major employers
of contract labour.
Contract labour was one of the most exploited forms of labour. Both the
contractor as well as the principal employer did not bother about contract
labour. The Go vernment of India therefore passed the Contract Labour
Act to prevent the exploitation of contract labour. The Contract Labour
(Regulation and Abolition) Act, 1970 provides for the regulation of the
conditions of work, health and safety, wages and other am enities for the
welfare of contract labour. A contractor is required to provide canteens,
rest rooms, latrines, urinals, drinking water, washing facilities and first aid
boxes for the use of contract labour. If a contractor fails to provide the
amenities o r to make payment of wages, the principal employer will be
liable to provide the amenities or to make payment of wages to the
contract labour and the principal employer can recover such expenses
from the contractor.
The objective of the Act is to prohibit the employment of contract labour
and wherever it is not possible to prohibit, conditions of work of contract
labour is sought to be improved. The Act is applicable to every
establishment employing twenty or more workmen as contract labour and
to every con tractor employing twenty or more workmen. The Act further
empowers the Central and State governments to apply the provisions of
the Act to any establishment or contractor employing less than twenty
workmen. The Central Government has prohibited employment of
contract labour in categories of work in coal, iron ore, limestone,
dolomite, manganese, chromite, magnesite, gypsum, mica and fire clay
mines, building industry, and railways. Contract labor is prohibited in the
Central Food Corporation of India godown s and Port Trust.
6.2 PROPERTIES OF CONTRACTUAL WAGES
Properties of the contractual wages are as below –
1. Illiteracy:
Indian workers are extremely illiterate compared to other countries. It
creates hinders to the workers in acquiring new technologies, s kills, etc. in
the industrial sector. As a result, their productivity and efficiency are
reduced, their wages are reduced and their appearance is inferior.
2. Absence of Workers and Migration Problems:
The mentality of Indian workers is not to leave their geographical location,
family and get a job outside. As a result, they get less salary in one place.
His salary does not even cover his family's needs. As a result, he often
avoids going to work.As India is an agricultural country, people earn by
working i n agriculture only.
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52 3. Traditional Teaching Methods:
As the education system in India is traditional, it is difficult for the
workers to get employment. It limits the development of workers.
4. Poor Health and Living Standards:
Due to the low wages of In dian workers, their per capita income is also
low, overty is high, even their basic needs are not being fulfilled. These all
things affect their health and quality of life. Lack of access to nutritious
and nutritious food degrades the health of the workers and reduces their
efficiency and productivity, which is not in the interest of the economy.
5. Salary Variation by Gender:
In India, men and women are discriminated against. Even today, women
are given a secondary place in society. Women are paid less tha n men.
6. Seasonal Nature of Work:
Many workers do not get work all year round. They get work a few
months out of the year. The rest of the month they have to stay
unemployed. For example, Sugar mill workers get work only during the
sugarcane crushing seas on. The factory closes at the end of the season,
leaving many workers unemployed until the next season.
7. Lack of Bargaining Power:
Workers' wages are determined by their bargaining power. Bargaining
power occurs between workers and employers when it come s to wage
determination. On whose side the bargaining power is greater; the right to
fix the salary/wages also goes to him. But due to various reasons, the
bargaining power of the workers is low and he cannot decide the wages of
his work. The wage rate, wh ich is set by the employer class, is very low
from the point of view of the workers.
8. Lack of Laws and Regulations:
The government has enacted various rules and regulations to provide
security and welfare to the workers. But still the owners exploit the
workers by evading it. They often violated laws and regulations. With the
adoption of privatization in the new economic policy of 1991, the scope of
private companies increased as government control and ownership
diminished. The existing laws and regulatio ns are proving to be ineffective
as such employers are exploiting the workers in the form of overtime
work, hiring child laborers, paying low wages to the workers etc.
9. Market Inadequacies:
Inadequacies in the market are the nature of the work that worke rs get,
where they get work, what are the rates of wages. It means not getting
proper information about it. As a result, many workers are deprived of
work. Due to illiteracy in the working class, they do not get the
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53 10. Industrial Backwardness:
The industrial sector in India has not developed much faster than other
countries. The industrial sector failed to provide employment to the
additional population, so even today about 51% of the population in India
is depende nt on agriculture.
11. Unsatisfactory Place of Work:
The health and safety of the factory workers is not very satisfactory.
Resting places at work, toilets, urinals, restaurants, nurseries for children
of female workers, etc. Facilities are not available i n adequate quantities.
Lack of first aid equipment to protect workers from accidents while
working. All of this has a detrimental effect on the health of the workers
and adversely affects their productivity and efficiency.
12. Conflict Between Employers an d Workers:
Due to the existence of trade unions in modern times, such unions have
increased the wages of workers, increased flood dividends, increased the
period of leave, etc. The owners take the matter to the class. If the working
class does not agree to the demands of the trade unions, the workers go on
strike and close the factories. This shuts down the manufacturing process
and has an adverse effect on the economy.
13. No Increase in Real Wages of Workers:
Although the government has taken measures to increase the wages of the
workers, it has not increased the actual wages of the workers.
14. Problems of Unorganized Workers:
After independence, many laws came into existence in our country for the
welfare of the workers. At the same time, trade unions em erged, so that
workers in the organized sector began to benefit from various schemes.
But workers in the unorganized sector do not get the benefit of such
government schemes. Unorganized workers are terribly exploited by the
employers and the capitalist, a nd so the exploited workers remain
exploited and these unorganized workers do not get the benefit of many
good labour laws that exist.
15. Lack of Training and Skill Centres:
Given the rising rate of unemployment, the number of skill centres set up
by the government are very low. As a result, many employment -oriented
youth are deprived from training and skills.
6.3 LABOUR MARKET RIGIDITIES AND
FLEXIBILITIES
Labour Market Flexibilities
Labour market flexibility refers to the market mechanism that enables
labour markets to reach a continuous equilibrium determined by the
intersection of the demand and supply curve. Labour market institutions
were seen to inhibit the clearing functions of the market by weakening the munotes.in
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54 demand for labour, making it less attractive to hire a worker by pushing up
the wage costs; by distorting the labour supply; and by impairing the
equilibrating function of the market mechanism i.e., by influencing
bargaining behaviour.
The most famous distinction of labour market flexibility is given by
Atkinson. Based on the strategies companies use, he notes that there can
be four types of flexibility.
1. External Numerical Flexibility:
External numerical flexibility refers to the adjustment of the labour intake,
or the number of workers from the ex ternal market. This can be achieved
by employing workers on temporary work or fixed -term contracts or
through relaxed hiring and firing regulations or in other words relaxation
of employment protection legislation, where employers can hire and fire
permane nt employees according to the firms’ needs.
2. Internal Numerical Flexibility:
Internal numerical flexibility is also known as working time flexibility or
temporal flexibility. This flexibility is achieved by adjusting working
hours or schedules of workers already employed within the firm. This
includes part time, flexi -time or flexible working hours/ shifts (including
night shifts and weekend shifts), working time accounts, leaves such as
parental leave, overtime etc.
3. Functional flexibility
Functional f lexibility or organizational flexibility is the extent employees
can be transferred to different activities and tasks within the firm. It has to
do with organization of operation or management training workers. This
can also be achieved by outsourcing acti vities.
4. Financial or Wage Flexibility :
Financial or wage flexibility is in which wage levels are not decided
collectively and there are more differences between the wages of workers.
This is done so that pay and other employment cost reflect the supply and
demand of labour. This can be achieved by rate -for-the-job systems, or
assessment -based pay system, or individual performance wages.
Other than the four types of flexibility there are other types of flexibility
that can be used to enhance adaptability. One way worth mentioning is
locational flexibility or flexibility of place. This entails employees
working outside of the normal work place such as home -based work,
outworkers or tele -workers. This can also cover workers who are relocated
to other offices within the establishment.
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55 6.4 SUMMARY
Labor market flexibility refers to the market mechanism that enables
labor markets to reach a continuous equilibrium determined by the
intersection of the demand and supply curve. The most famous
distinction of labo r market flexibility is given by Atkinson. Based on
the strategies companies use, he notes that there can be four types of
flexibility.
a) External numerical flexibility
b) Internal numerical flexibility
c) Functional flexibility
d) Financial or wage f lexibility
e) locational flexibility or flexibility of place
6.5 QUESTIONS
Q1. Write a note contract labour.
Q2. Write a note on labour market flexibility.
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56 MODULE 4: LABOUR MARKETS IN INDIA
7
LABOUR MARKETS IN INDIA – I
Unit Structure:
7.0 Objectives
7.1 Introduction
7.2 Role of Risk, Information and Incentives
7.3 Dualism and Segmentation in the Labour Market
7.4 Labour Market Flexibility
7.5 Employee Turno ver
7.6 Migrant Labour
7.7 State and Labour Markets
7.8 Summary
7.9 Questions
7.0 OBJECTIVES
To study the linkages in labour markets.
To study the role of risk, information and incentives.
To study the concept of dualism and segmentation in the labour
mark et.
To know the labour market flexibility.
To know the relation between state and labour markets.
To study the concept of employee turnover.
To study the concept of migrant labour.
7.1 INTRODUCTION
Labour markets or job markets function through the inter action of workers
and employers. Labour economics looks at the suppliers of labour services
(workers) and the demanders of labour services (employers), and attempts
to understand the resulting pattern of wages, employment, and income.
These patterns exist because each individual in the market is presumed to
make rational choices based on the information that they know regarding
wage, desire to provide labour, and desire for leisure. Labour markets are
normally geographically bounded, but the rise of the int ernet has brought
about a 'planetary labour market' in some sectors. munotes.in
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57 Labour is a measure of the work done by human beings. It is
conventionally contrasted with other factors of production , such
as land and capital . Some theories focus on human capital ,
or entrepreneurship , (which refers to the skills that workers possess and
not necessarily the actual work that they produce). Labour is unique to
study because it is a special type of good that cannot be separated from the
owner (i.e. the work cannot be separated from the person who does it). A
labour market is also different from other market s in that workers are the
suppliers and firms are the demanders.
7.2 ROLE OF RISK, INFORMATION AND INCENTIVES
The agricultural labor markets are incomplete. Risks are involved in
agricultural production. Risk arises due to weather uncertainties,
variabilit y in input availability and absence of a market for output
insurance.
There is a coexistence of casual laborers, hired on a daily basis and
permanent laborers, hired on the basis of long -term wage contracts. Two -
stage production process is involved in agri culture. Both buyers and
sellers of labor face risk since wages have to be paid and received at the
end of the crop cycle each year. This is ue to uncertainty in labor demand
in the second stage of production, which in turn occurs because of weather
uncert ainties in agriculture.
Permanent wage contracts are the outcome of a situation where efforts
cannot be monitored. Permanent workers are entrusted with
responsibilities that require judgment, discretion and care as if they were
family members. Permanent wo rker contracts are superior in comparison
to a series of casual labor contracts since the income differential serves as
a monitoring device, and any deviation from the required effort level can
lead to unemployment. The coexistence of regular and casual la bor is on
account of hoarding costs of maintaining a pool of regular labor
throughout the production period. Employers choose the size of permanent
and casual labor force in order to minimize production costs. A hoarding
cost to maintain a steady pool of r egular or permanent laborers becomes
necessary when resale of this input is not possible. Hoarding costs of
regular labor vary inversely with the farm size and faced with such a cost
farms may not only hire the regular laborers, they may also hire some
casual labor.
Landowners create tenancy contracts in order to have access to
unmarketable inputs like worker’s effort and to minimize production risks.
For example, when it is difficult to monitor the worker’s effort, the
landowner might lease his land at a f ixed rent to the tenant where all the
output goes to the tenant except the fixed rent. This kind of tenancy solves
the moral hazard problem. Another common form of tenancy is
sharecropping where both the tenant and the landowner share the output in
a pre -determined manner. It is argued that sharecropping is an inferior
system in comparison to the fixed rent system. In a situation where the
effort of the tenant cannot be monitored, the tenant has an incentive to munotes.in
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58 undersupply his effort as under this form of t enancy contract part of the
output produced by the tenant is handed over to the landlord. The same
reasoning can be applied to the less than optimal supply of all productive
inputs in sharecropping.
Due to the existence of risk, asymmetric information and incentive
problems, different labor markets exists in the rural areas. These are:
1. Subsistence Farming
Subsistence farming is small -scale and productivity is low due to low -
technology used in production. Subsistence farming provides the
household with th e primary source of food. Any excess food is likely to be
sold in local markets. However many poor households are in a vicious
circle that begins with low calorie intake and under -nutrition, which
directly affects productivity in what is highly physical wo rk. Even when
labourers can earn more from hiring out their labour to others they may
remain farming their plot of land because of the importance of producing
or providing food for the household given the uncertainty in agricultural
production. This decisi on can appear uneconomic or irrational but because
of no insurance markets, lack of credit markets, asymmetric information
and incentive problems, it is in fact not irrational. The risk of not having
food security for the household will in itself lead to d iversification of
income sources – importance of non -farm income and issue of
migration/remittances.
2. Sharecropping
Sharecropping is a way of providing incentives to workers by employers
so monitoring costs and screening costs are zero. Theoretically thi s model
is a way of overcoming market failures of asymmetric information and
incentives problems. It provides landless workers with access to land and
tools. The landlord is providing, land, tools, credit and loans. The
employer gains by having non -seasona l workers all year round. Landlords
will offer sharecropping to individuals/households he knows that reduces
transactions costs.
3. Tenant Farming
The tenant pays rent to the land owner, but there is little or no security in
tenure on the land. Hence ther e is poor incentive to invest in capital and
technology and no improvement in productivity. The tenant attempts to
maximise his utility subject to effort levels and the contractual agreement
with the land owner. The land owner tries to maximise his utility by
manipulating contractual terms with consideration of the tenant’s response
to them under the constraint of guaranteeing to the tenant ‘reservation
utility,’ meaning the utility the agent can obtain if he does not enter the
contract.
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59 4. Co -operative F arming
Small land -owners form larger areas to cultivate so can exploit economies
of scale in inputs and outputs. The issue of access to markets exists if any
surplus is produced. Transport infrastructure needs to be improved within
rural areas and between rural and urban areas, where the surplus will be
sold for more.
5. Commercial Farming
Commercial farming can lead to significant change in how rural labour
markets work. The employer contracts small landowners to produce crops
and provide them new technol ogy inputs. Contract farming is good if the
small landowner still retains some land for his own use and has other
sources of income. If he is solely reliant on contract farming income then
he will be exposed to the risk of obtaining poor wages. Work can be
casual (day or so), seasonal (month or two), or permanent (more than 3
months). The issue of what kind of employment contract to offer to
workers is based on type of work done. If easily monitored (e.g.
harvesting) then wages can be based on the market.
7.3 DUALISM AND SEGMENTATION IN THE LABOUR
MARKET
The labor market of less developed countries like India has dualistic
character. Dualism in the labor market is due to the following reasons:
1. Job Preferences of the Workers:
Workers prefer to work in pa rticular sectors even when better wages or
more employment opportunities are available in other sectors. For
instance, rural workers may prefer to stay back rather than migrate to
urban areas where wage rates and employment opportunities are
comparatively better. Thus unemployment in the rural areas and labor
shortage in urban areas may be due to lack of geographical mobility of
labor.
2. Indivisibilities in Labor Supply:
The working hours are indivisible. However, the workers in countries like
India are n ot fully urbanized and hence have a dual nature which can best
be described as rural -urban. Workers may like to work both in the factory
as well as the farm as a matter of routine. However, such a system may not
be permitted by the factories. The desire to work on the farm and
sometime to go back to the farm during the agricultural season is an
important cause of labor turnover and absenteeism in India.
3. Formal and Informal Labor Markets:
The formal labor markets are protected by labor legislation and th ey are
also unionized. The wage rates and working conditions in the formal labor
market are determined by legislation. In contrast, the informal labor munotes.in
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60 markets are not governed by labor legislation and hence the wage rates
and working conditions are very po or and there is a wide gap between the
wage rates of the formal and informal sector workforce.
7.4 LABOUR MARKET FLEXIBILITY
Labor market flexibility refers to the market mechanism that enables labor
markets to reach a continuous equilibrium determined by the intersection
of the demand and supply curve. Labor market institutions were seen to
inhibit the clearing functions of the market by weakening the demand for
labor, making it less attractive to hire a worker by pushing up the wage
costs; by distorting t he labor supply; and by impairing the equilibrating
function of the market mechanism i.e., by influencing bargaining
behavior.
The most famous distinction of labor market flexibility is given by
Atkinson. Based on the strategies companies use, he notes tha t there can
be four types of flexibility.
1. External Numerical Flexibility:
External numerical flexibility refers to the adjustment of the labor intake,
or the number of workers from the external market. This can be achieved
by employing workers on tempor ary work or fixed -term contracts or
through relaxed hiring and firing regulations or in other words relaxation
of employment protection legislation, where employers can hire and fire
permanent employees according to the firms’ needs.
2. Internal Numerical Flexibility:
Internal numerical flexibility is also known as working time flexibility or
temporal flexibility. This flexibility is achieved by adjusting working
hours or schedules of workers already employed within the firm. This
includes part time, flexi -time or flexible working hours/ shifts (including
night shifts and weekend shifts), working time accounts, leaves such as
parental leave, overtime etc.
3. Functional flexibility
Functional flexibility or organizational flexibility is the extent employees
can be transferred to different activities and tasks within the firm. It has to
do with organization of operation or management training workers. This
can also be achieved by outsourcing activities.
4. Financial or Wage Flexibility :
Financial or wage flexi bility is in which wage levels are not decided
collectively and there are more differences between the wages of workers.
This is done so that pay and other employment cost reflect the supply and
demand of labor. This can be achieved by rate -for-the-job sys tems, or
assessment -based pay system, or individual performance wages. munotes.in
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61 Other than the four types of flexibility there are other types of flexibility
that can be used to enhance adaptability. One way worth mentioning is
locational flexibility or flexibility of place. This entails employees
working outside of the normal work place such as home based work,
outworkers or tele -workers. This can also cover workers who are relocated
to other offices within the establishment.
7.5 EMPLOYEE TURNOVER
Employee turnover refers to the shifting of workforce in and out of an
organization and hence it is also referred to as the interfirm mobility of
labor. Employee turnover may be defined as “the rate of change in the
working staff of a concern during a definite period”. Emp loyee turnover
measures the extent to which existing employees leave and new
employees enter into services of an organization in a given period.
Employee turnover is also defined as the measurement of inarticulate
laborunrest because strikes are articulate d expressions of labor unrest.
Employee turnover measures the morale of the employees and their
efficiency. The higher is the rate of turnover the lower is the morale and
efficiency. These two aspects are central to the success of a organization
and hence needs to be seriously addressed.
Statistically, employee turnover is expressed as the ratio of yearly or
monthly separations to the average number of full time employees for that
period. It is assumed that the total number of jobs available in a concern
are constant. Employee turnover is measured in the following ways:
1. According to the total replacements formula, employee turnover is
expressed by the formula:
R
T = --------- × 100
W
Where, R is total replacements and W is average work ing force.
2. According to total avoidable separations like quits, discharges etc,
employee turnover is expressed as:
S - U
T = --------- × 100
W
where S stands for separations, U stands for unavoidable separations
(retirements, deaths etc ) and W is the average work force.
3. According to total accession plus separations, employee turnover is
expressed by the formula:
(P1 + P2) 365
T = A + S ÷ ---------------- × ----------
2 M
munotes.in
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62 Where A stands for accession, S for separation, P1 and P2 for total
number of employees at the beginning and at the end of the month
respectively and M stands for the number of days in the month for which
the figures were obtained.
4. Normally, employee turnover is computed in terms of percentage of the
number of terminations of employment to the number employed during
the period for which measurement is desired. Thus, employee turnover is:
S
T = --------- × 100
F
Where T represents turnover, S stands for total separation during the
period and F for average labor force during the period.
Causes of Employee Turnover
Retirement, resignation, lay -offs and dismissals are the common causes of
employee turnover. Out of the se, retirement is the inevitable cause.
However, both resignation and dismissals can be reduced by implementing
employee retention policies in the organization. Unavoidable turnover
which is also called Natural Turnover arises because of factors like death ,
retirement, lay -offs and frictional unemployment. Employees may be laid
off due to reduction in work on account of recession, seasonal variation
and competition. Resignations and dismissals are found to be the main
causes of turnover. Resignation may be due to dissatisfaction about the
working conditions, poor wages, bad health, sickness, family
circumstances etc. Dismissals may occur due to participation in strikes,
misconduct, insubordination, disciplinary action in cases of inefficiency
etc. The badli system in the textile industry was found to be an important
cause of employee turnover. Employee turnover is also high amongst the
highly paid managerial staff because of the belief that the more you shift
from one organization to the other, the higher you will be on the growth
ladder. Employee turnover is high amongst new employees, unattractive
jobs, less skilled workers and young persons.
Consequences of Employee Turnover
Employee turnover lowers the efficiency of employees and they are not in
a position to enjoy the benefits of loyalty. Employee solidarity is adversely
affected by high turnover. The employers also lose on account of turnover.
The productivity of employees during the learning period is low which
means the cost of learning is borne by the employer. Once the employee
becomes sufficiently skilled in his work and he or she leaves the
employment, it is clearly a loss to the employer. However, if employee
turnover is equally high across the industry, loss of skilled staff may be
made good by acq uiring skilled staff coming from other firms in the
industry. However, acquisition of new employees is always at a higher
cost. High employee turnover, however, prevents optimum utilization of
resources in the country.
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63 Remedies to Reduce Employee Turnover
In order to reduce employee turnover across the industry, a scientific study
of the problem needs to be made to assess the extent of turnover across the
industries and across the plants within industries. The recruitment or
placement policy of the firm sh ould be scientific enough to place the right
person in the right place at the right time. There is a great likelihood of a
misfit to leave the firm in a short period of time. Recruitment, placement
and training policies of the firms must be correct to redu ce the problem of
employee turnover. Job specifications and man specifications should be
matched before selection and placement is done. Finally, enlightened
employee supervision, good working conditions, better standard of wages,
a good system of career a dvancement, good separation benefits and an
empathetic management can definitely reduce the problem of employee
turnover.
7.6 MIGRANT LABOUR
Urbanization and industrialization are simultaneous processes. The
process of industrialization and urbanization in any country would involve
migration from rural areas to urban areas. Migration of rural labor to
industrial areas continues as the industrialization process continues. This
migration becomes insignificant once the industrialization process is
complete and the country is transformed into a predominantly industrial
country from a predominantly agricultural country. Rural to urban
migration in an industrializing country takes place under compulsive
conditions. Compulsive conditions involve the near absence of well-
paying employment opportunities or the near absence of any employment
opportunity in rural areas and the availability of endless employment
opportunities in urban areas which are growing in size along with growing
industrialization.
In India the migr ation of rural labor force to urban areas began with the
destruction of village and cottage industries and the establishment of large
factories in the big cities. The people who worked in the village and
cottage industries, both landed and landless agricul tural laborers and small
and marginal farmers belonged to the fourth order of Caste Society known
as Shudras, now known as Other Backward Classes (OBCs). This class of
people also suffered from various religious, social and economic
disabilities. However, they were located inside the villages and positioned
above the outcastes or the ati -shudras. The people in the lowest order of
the caste system i.e. the outcastes now known as Scheduled Castes who
lived on the outskirts of Indian villages and suffered vari ous types of
religious, economic and social disabilities found the cities not only as
centers of employment opportunities but also as opportunity to liberate
oneself from the exploitative and inhuman caste system prevailing in
Village India. The bulk of th e industrial labor force in Indian cities was
drawn from these two lowest rungs of the Indian caste society. While the
pull and push of industrialization attracted hordes of low order people, the
ones who belonged to the upper castes were also attracted to the cities
because only the cities could provide employment opportunities to the munotes.in
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64 educated labor force which was largely drawn from the upper castes in the
early years of industrialization in India.
The causes of rural to urban migration can be summarized as follows:
1. Decline of village and cottage industries, rising pressure of village
population on agricultural land and the resultant exodus.
2. Small and marginal farmers and the landless agricultural laborers found
the new cities not only providing ec onomic opportunities but also
liberating from the rigid social hierarchy in villages.
3. Persons belonging to the scheduled or backward castes living on the
outskirts of Indian villages and eking out a sub -human existence found
the cities as liberating ag ents and immediately took to the cities as fish
to the water.
4. Indebtedness in rural India amongst the laboring classes was chronic in
nature. The cities provided an escape route to the highly indebted
laboring classes.
Social scientists like McDonald, Jansen and McGee have earlier advocated
the push and pull theory of migration. While the factors responsible for
migration in different countries may assume different combinations, there
is no denying the fact the rapid growth of cities all over the world since
the beginnings of industrial revolution could not have been possible
without the Great Pull the cities could exert on village populations.
Demerits of Rural to Urban Migration
The demerits of rural to urban migration are suffered by the migrants and
the host cities and also the villages from which out migration takes place.
These demerits or problems faced by the migrants, the cities and villages
as a result of migration are as follows:
1. Problems of Adjustment to Urban Way of Life : The new village
migrant into the city continues to have a rural mindset and attitudes.
To him the city appears to be a hotchpotch of people coming from
different parts of the country, speaking different languages and
following different customs and practices. Unsatisfactory working
conditions, poor living environment and a mechanical way of city life
with impersonal relations is not something the new migrant had
imagined before living his village. Adjustment to the urban way of life
becomes a difficult issue to him. Those who continue to work and live
in the cities make their adjustments over a period of time, those who
fail to adjust go back to their villages and those who live, propagate
and permanently settle down in cities become urban in their life and
living.
2. Poor Healt h and Efficiency of Migrants: The migrants who lived on
the margin of existence in the villages are the worst sufferers in the
cities. They are forced to find shelters in shanties constructed along the munotes.in
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65 railway lines and in other slums and blighted areas of the cities. Slums
are generally constructed by the cities’ underbelly consisting slumlords
and unscrupulous local politicians. The rural poor who are fresh
migrants to the cities are forced to take refuge in these slums. Life and
living in slums is open a nd exposed. There is little or no open space.
The conditions are sub -human and degrading. The industrial workers
working in the unorganized sector live in these slums, earn poor wages
and barely manage to keep their and their family members’ body and
soul together. In the absence of any health and welfare facility in their
work places, their health and efficiency becomes poor over a period of
time.
3. Absence of Family Life: The rural poor who migrate to the cities are
generally single. Migrants who are marri ed with children are forced to
leave their families in the villages for the absence of proper shelter in
the cities. Loneliness and absence of a healthy sex life push these
migrants to visit prostitutes on a regular basis. The poor village
migrant visits t he poor prostitute who also lives in sub -human
conditions. These migrants suffer from sexually transmitted diseases
(STDs) and they pass on these diseases to their wives either when they
go back to their villages or when they get back their wives to live i n
the slums and shanties of the cities. While the incidence of STDs was
very high amongst the slum population in the early years of
industrialization, it is HIV and AIDS whose incidence is found to be
the highest amongst the slum population.
4. Uneducated an d illiterate Industrial Workforce: The first
generation industrial workforce is the migrants from the villages who
are generally drawn from the lowest and the poorest strata of the
village society. They are undoubtedly illiterate and uneducated. Lack
of literacy and education amongst these workers make them entirely
dependent on professional trade unionists. The problem of outside
leadership in the trade union movement in India is because of the
problem of illiteracy amongst industrial workers. These profes sional
trade unionists many a times exploit the poor and illiterate industrial
workers by provoking them to create industrial unrest so that they can
blackmail the exploitative employers.
5. Poor Labor Commitment and High Labor Turnover: Since the
new rural migrants have not fully adjusted to the industrial life, they
frequently tend to visit their native villages leading to the problem of
absenteeism. Further those who fail to adjust to the industrial life
return back to their villages causing high labor tur nover. Labor
turnover is the ratio of yearly separations to the average number of full
time workers employed in the given period. Thus if the labor turnover
is 5 per cent, it means that out of the 100 workers employed in a given
year, 5 workers have termin ated their services. While poor
commitment reduces the efficiency of the workers, high labor turnover
results in loss of trained manpower and the training expenses by the
establishment. munotes.in
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66 6. Poor Labor Commitment and High Labor Turnover: Since the
new rural mig rants have not fully adjusted to the industrial life, they
frequently tend to visit their native villages leading to the problem of
absenteeism. Further those who fail to adjust to the industrial life
return back to their villages causing high labor 151 tu rnover. Labor
turnover is the ratio of yearly separations to the average number of full
time workers employed in the given period. Thus if the labor turnover
is 5 per cent, it means that out of the 100 workers employed in a given
year, 5 workers have termi nated their services. While poor
commitment reduces the efficiency of the workers, high labor turnover
results in loss of trained manpower and the training expenses by the
establishment.
7. Emergence and Growth of Women Headed Families : In many parts
of the country on account of men migrating to cities both within the
country and outside the country for employment, the women are left
behind to run the family affairs. Husbands as a result have become
visiting husbands once in a year. Single parent women headed families
definitely are not suitable for the healthy growth of family members.
Such arrangement also affects the emotional health of women left
behind in villages to look after the families. The problem of single
parent women headed families is enormous i n States like Kerala,
Punjab, Uttar Pradesh and Bihar.
8. The Problem of Over -urbanization: Both push and pull factors
operate to cause rural to urban migration. Overurbanization is the
result of the excess of push over the pull factor. The pull factor
deter mines the actual labor force that the cities demand and the push
factor determines the actual labor force that villages supply to the
cities. Thus if the push is greater than the pull, there will be excess
labor supply in the urban areas. This excess labor supply constitutes
the industrial reserve army in cities. The industrial reserve army exerts
a downward pull on wage rates and other welfare facilities on the one
hand and raises land and shelter prices on the other. This demand
supply mismatch only contr ibutes to all kinds of urban problems
manifested in the form of mushrooming slums in the most
unimaginable places in the cities, overcrowding, poor moral
environment, undesirable exposure, petty crimes and what not.
Merits of Rural to Urban Migration
Some of the benefits of rural to urban migration that cities and villages
may enjoy are as follows:
1. Productive Utilization of Unemployed Rural Labor Force :
Employment opportunities are few and far in villages. The village
economy is not big enough to employ th e expanding labor force.
Industrial centers and cities provide gainful employment to the
expanding and excessive labor force in villages. Industrialization is a
continuous process and to feed this process, an ever expandinglabor
force is required. This lab or force can be provided only by the villages munotes.in
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67 in the early years of industrialization. Once the industrial society is
stabilized and the first generation urban bred labor force emerges, the
need for rural labor force diminishes. However, able bodied, hard
working and sturdy manual labor that is required in the cities and
urban areas is continually supplied by villages to the cities.
2. Availability of Cheap Labor to Cities: Unemployed village labor
force continues to migrate to the cities in large numbers the reby
creating an industrial reserve army. Wage rates are pushed down by
excessive labor supply thereby bringing down the labor cost of
production in cities. Thus migration helps to bring down the cost of
production. However, if the benefit of reduced cost of production is
not passed on to consumers, it will not help to control inflationary
pressures in the economy.
3. Cultural Assimilation and Change in Rural Attitudes: Culture is
what we do twenty four hours a day. The migrants who live in cities
and make th em as their homes over time become urban in attitudes and
culture. When these migrants go back to their villages on periodic
visits, they perform the role of change agents in the social and personal
sphere. The regular and personal interaction between the villagers and
the visiting migrants bring about changes in village attitudes, norms
and culture through a process of assimilation and acculturation.
4. Paying Back to the Villages: Successful migrants and particularly
emigrants have the potential to pay back to their native villages in
terms of taking up developmental activities like building schools and
colleges, establishing health centers, creating awareness about health,
particularly maternal and child health care, setting up village
enterprises and contr ibuting to the growth of rural industries, setting
up micro credit institutions and helping the growth of small
entrepreneurs in the villages etc. In village India, quite a few
successful migrants and emigrants have started developmental
activities thereby bring about perceptible changes in rural society.
Trends in Rural to Urban Migration
The process industrialization and concomitant urbanization in India is now
more than 150 years old. It began with the setting up of the first textiles in
Bombay in the se cond half of the 19th century. Since then the process
have consolidated and strengthened. But India continues to be a
predominantly agricultural country with more than 65% of the population
being directly dependent upon agriculture. Only 25% of the populat ion
lives in the cities with the industry and services sector contributing to 75%
of the national income. Rural to urban migration of people is therefore
here to continue for some more time to come. Today we have urban
settlers ranging from the sixth gener ation fully urbanized settlers to the
first generation neo -urban settlers. Although every urban Indian citizen
has a foot in the village, he is no more a villager. He goes back to his
native village only to relax and relate to his people and not to work on his munotes.in
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68 farm to earn some money. In fact most of them do not own any land in the
village for they had already sold it bidding a final good bye to village life.
Today we have industrial societies which are fully urbanized and
accustomed to the urban ways of li fe. The industrial and urban workforce
today is greatly aware its rights, labor laws, strength of unionization and
are politically conscious. The organized workforce although miniscule in
terms of percentage of the actual workforce, its absolute size amoun ting to
about 30 million workers is about 7% of the workforce in the country. In
order to consolidate and strengthen the process of urbanization and
industrialization, the organized workforce needs to be expanded. This is
possible through unionization of t he workforce on the one hand and
voluntary compliance of labor laws by firms and establishments across the
country.
7.7 STATE AND LABOUR MARKETS
State intervention in wage determination in India is based on the
assumptions that it is socially desirable for wage earners to live on a
healthy and decent plane and to participate freely in industrial governance
and that the State should intervene in the economic relationship of its
citizens whenever these achievable ideals are not achieved. The
considerations th at are important in the context of State regulation are as
follows:
1. Wage regulation is necessary because labor markets are imperfect and
exploitation of labor occurs.
2. The workers have poor bargaining strength in those markets in which
there is an e xcessive supply of labor. Hence they are open to
exploitation and sweating of labor has prevailed. State regulation is
capable of abolishing such sweating of labor.
3. State intervention is essential to regulate wages to maintain economic
stability. Lack of aggregate demand in the economy is the direct
outcome of concentration of economic wealth in the hands of a few.
Hence there must be redistribution of income in favour of the poor. A
high wage economy is germane to greater productivity, better industria l
relations, greater stability of demand and prices, better profits, higher
investment, better utilization of resources and other benefits.
4. State regulation of wages is in keeping with the objective of
establishing a Welfare State.
5. State regulation may raise the efficiency of the workers by ensuring
improvements in health, productivity and income distribution.
6. State regulation of wages is essential because of the gap between
marginal productivity of labor and actual wages.
State regulation of wa ges may assume several forms. Wage rates may be
fixed directly by legislation, by statutory bodies set up by the Government, munotes.in
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69 by wage boards, by industrial tribunals or by a process of arbitration,
conciliation and adjudication. The State may also seek to r egulate wages
in the private sector by fixing wages in public enterprises, extending
collective agreements to other enterprises and by arranging a fair wage
clause in public contracts in order that the contractors could be forced to
pay minimum wages to th eir workers. It may also be in the form of fixing
a ceiling on a wage rise or the fixing of a minimum.
7.8 SUMMARY
1. Employee turnover refers to the shifting of workforce in and out of an
organization and hence it is also referred to as the interfirm mobi lity of
labor.
2. Retirement, resignation, lay -offs and dismissals are the common causes
of employee turnover.
3. Employee turnover lowers the efficiency of employees and they are not
in a position to enjoy the benefits of loyalty. Employee solidarity is
adversely affected by high turnover. The employers also lose on
account of turnover. The productivity of employees during the learning
period is low which means the cost of learning is borne by the
employer.
4. In order to reduce employee turnover across the industry, a scientific
study of the problem needs to be made to assess the extent of turnover
across the industries and across the plants within industries. The
recruitment or placement policy of the firm should be scientific enough
to place the right person in the right place at the right time.
7.9 QUESTIONS
1. Explain the concept of employee turnover and examine the causes,
consequences and remedies to employee turnover.
2. Explain the concept of migration and examine the causes of rural to
urban mi gration in India.
3. Explain the merits and demerits of rural to urban migration.
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70 8
LABOUR MARKETS IN MARKETS – II
Unit Structure:
8.0 Objectives
8.1 Introduction
8.2 Impact of Trade Unions on Productivity and Wages
8.3 Minimum Wages
8.4 Social Security
8.5 Occupational Safety and Security
8.6 Wage and IncomePolicy in India
8.7 Impact o f Liberalization and Globalisation
8.8Questions
8.0 OBJECTIVES
To see the impact of trade unions on productivity.
To see the impact of trade unions on wages.
To study the concept of minimum wages.
To study the concept of social security.
To study occupa tional safety and security.
To study wage and income policy in India.
To know the impact of liberalization and globalization.
8.2 IMPACT OF TRADE UNIONS ON PRODUCTIVITY
AND WAGES
8.2.1 Impact of Trade Unions on Productivity:
Understanding of unions’ effe cts on productivity is critical to the
assessment of labour unions, performance and labour law. Productivity
means output for given levels of inputs. A firm that is more productive
than another can produce more output using the same combination of
inputs o r, equivalently, produce the same output using fewer inputs.
Increase in productivity attributable to union, mean a real shift in the
marginal product schedule, and not just a movement up the labour demand
curve (implying a higher capital -labour ratio) in response to a higher
wage. If collective bargaining in the workplace were systematically to
increase productivity and to do so to such an extent that it fully offset
compensation increases, then a strong argument could be made for
policies that facilitate union organizing. Productivity increases, it was munotes.in
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71 argued, are affected through the exercise of collective voice along with an
appropriate institutional response from management. According to this
view, unions lower turnover and establish in workplaces more efficient
governance structures that are characterized by public goods,
complementarities in production, and long -term contractual relations. The
thesis that unions significantly increase productivity has not held up well.
Subsequent studies were as likely to find that unions had negative as
opposed to positive effects upon productivity. A large enhancement of
productivity because of unionization is inconsistent with evidence on
profitability and employment. Attention has focused on the dynamic effect
of un ionization and the negative effects of unions on growth in
productivity, sales, and employment. Effects upon productivity tend to be
largest in industries where the union wage premium is most pronounced.
This pattern is what critics of the production funct ion test predict that
union density coefficients in fact reflect a wage rather than a productivity
effect. These results also support a "shock effect" interpretation of
unionization, whereby management must respond to an increase in labour
costs by organiz ing more efficiently, reducing slack, and increasing
measured productivity. Positive effects by unions upon productivity are
typically largest where competitive pressure exists and these positive
effects are largely restricted to the private, for -profit, s ectors. Notably
absent are positive effects of unions upon productivity in public school
construction, public libraries, government bureaus, schools, law
enforcement and hospitals. This interpretation of the productivity studies
has an interesting twist: t he evidence suggests that a relatively
competitive, cost -conscious economic environment is a necessary
condition for a positive effect of unions upon productivity, and that the
managerial response should be stronger, the larger the union wage
premium or th e greater the pressure on profits. Yet in such competitive
environments that there should be relatively little managerial slack and the
least scope for union organizing and wage gains. Therefore, the possibility
of a sizable effect by unions upon productiv ity across the whole economy
appears rather limited.
Evidence for other countries is far more limited. British studies, although
few in number, show a negative relationship between union density and
productivity levels. Evidence for Canada based on an aggr egate
manufacturing time -series data for the period from 1926 to 1978, suggests
initially positive union "shock" effects on productivity, although slower
productivity growth due to unionization offsets the positive effects within
5 to 8 years. German evide nce is particularly difficult to sort out owing to
the widespread presence both of unions with national or centralized
bargaining and of mandatory works councils in union and sometimes in
non-union settings. Brunello (1992) finds that unions, except those
working for small suppliers facing competitive pressure, tend to have
negative effects on productivity (and profits) in Japan. Although
international evidence is limited, that which exists is broadly supportive of
our interpretation of the American evidenc e. (Ref: Unionization and
Economic Performance: Evidence on Productivity, Profits, Investment, munotes.in
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72 and Growth by Barry T. Hirsch Professor of Economics, Florida State
University).
8.2.2 Impact of Trade Unions on Wages:
The study of the impact of unions on the economic performance of firms
and the competitiveness of the economy is important in the context of
Government policy and the design of labour law. It provides the rationale
for either strengthening or weakening labour legislation governing
bargaining righ ts and the organizing of unions. Professor Barry T. Hirsch
has conducted a study to research into the effects of unionization on
productivity, profitability, investment, and employment growth. Barry’s
study is based on United States, Canada, Japan and Brit ain. He concludes
that the effects of unions upon productivity and productivity growth are
small. They do not offset the cost increase resulting from higher union
wages. The evidence presented in his study clearly indicates that
unionization leads to lower profitability. The impact of unions on
profitability at the level of the industry or the firm is such that unionized
firms have profits that are 10 percent to 20 percent lower than the profits
of non -union firms. Further, the evidence from Britain also su ggests that
closed -shop unions have a stronger negative impact on profitability.
Recent research also shows that union monopolies reduce investment in
physical capital and in research & development and other forms of
innovative activity.
In a study conduct ed by Professor Hirsch of 500 publicly traded American
manufacturing firms, the capital investment of an average unionized firm
was 6 percent lower than that of a comparable non -union firm. Hirsch also
found that the average unionized firm made 15 percent lower annual
expenditure on R&D. A Canadian study using aggregate data also finds
that unions reduce investment in physical capital by a significant margin.
The wage rates are higher in unionized firms. Given higher wages and
lower levels of profitability and investment in unionized firms, the
employment growth is lower. Studies from Canada, the United States, and
Britain on the effects of unionization upon employment show the negative
impact of unionization upon employment growth. In the case of Canada, a
study conducted in 1993 by Professor Richard Long confirms the
international evidence. This study examined the performance of 510
manufacturing firms during the period from 1980 to 1985 and found that
the median growth rate of non -union firms during this p eriod was 27
percent while the growth rate of unionized firms was zero. After making
adjustments in his analysis to account for the fact that unionized firms tend
to be larger than non -unionized firms and found in declining industries, he
concluded that un ionized manufacturing firms grew 3.7 percent slower
than comparable non -unionized firms; and unionized firms in the non -
manufacturing sector grew 3.9 percent slower than their non -union
counterparts. In sum, the evidence from research indicates that unions tend
to increase wages but not productivity, reduce profitability, reduce
investment in physical capital and R&D, and, most importantly, lower the
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73 8.3 MINIMUM WAGES
According to the Fair Wages Committee appointed by the Governme nt of
India in 1949, a minimum wage must provide not merely for the bare
sustenance of life but for the preservation of the efficiency of the worker.
In order to ensure the efficiency of the worker, the minimum must be
sufficient enough to provide for educ ation, health and some amenities. The
minimum wages thus provides the workers those comforts and decencies
which can promote better habits, self respect and better citizenship. A
minimum wage may therefore be defined as one which may be sufficient
to enabl e a worker to live in reasonable comfort having regard to all
obligations to which an average worker would ordinarily be subject to –
Fixation of minimum wages is of great significance to industrial workers
because it affects their health, strength and mor ale. In the interest of social
justice, wages of workers must be sufficient to ensure the worker a
reasonable and fair standard of living. It is important to provide a
sufficient living wage to the worker to maintain social stability. Minimum
wages are imp ortant to maintain industrial peace and harmony. The
workers are partners in the production of wealth and hence have a rightful
share in the fruits of the industry. Further, the efficiency and productivity
of the workers depend on good living and in order to live a good living, a
fair amount of wages are required. Finally, the fixation of minimum wage
prevents exploitation of the workers and would secure for them wages
according to the value of work done, corresponding to the productive
capacity of the work ers.
The objectives of minimum wages according to the Fair Wages
Committee were as follows:
1. To prevent sweating in industry and to raise the wages in those
industries where they are extremely low and inadequate.
2. To prevent exploitation of workers a nd to secure a wage according to
the value of the work done, corresponding to the productive capacity
of the workers; and
3. To promote peace in industry by keeping he workers happy with the
guarantee of a wage rate which may enable them to meet their
minimum requirements.
In accordance with the Minimum Wages Advisory Committee and the
decisions of various Industrial Tribunals, certain general principles have
been evolved by the Government which are to be kept in mind in fixing
wages under the Minimum Wage s Act.
The Need based Minimum Wages
The Labor Conference held at New Delhi in July 1957 laid down that the
minimum wage should be need based and should ensure the minimum
human needs of the industrial worker. The following norms were accepted munotes.in
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74 as a guide f or all wage fixing authorities including the minimum wage
committees, wage boards, adjudicators etc:
1. In calculating the minimum wage, the standard working class family
should be taken to comprise three consumption units for one earner, the
earnings of women, children and adolescents being disregarded.
2. Minimum food requirements should be calculated on the basis of a net
intake of calories as recommended for an average Indian adult of
moderate activity.
3. Clothing requirements should be estimated on the basis of a per capita
consumption of 18 yards per annum which would give the average
workers family of four, a total of 72 yards.
4. The rent corresponding to the minimum area provided for under
Government Industrial Housing Scheme should be taken int o
consideration in fixing the minimum wage.
5. Fuel, lighting and other miscellaneous items of expenditure should
constitute 20 per cent of the total minimum wage.
The conference laid down that wherever the minimum wage fixed was
below the norms recommend ed above, it would be incumbent on the
authorities concerned to justify the circumstances which prevented them
from following the norms. The Wage Boards in India followed the norms
while fixing wages for industrial workers.
The Living Wage
The Committee o n Fair Wages stated that living wages represented the
highest level of the wage and it would include all amenities which a
citizen living in a modern civilized society was entitled to expect when the
economy of the country was sufficiently advanced and the employer was
able to meet the expanding aspirations of his works. The committee
observed that the living wages should enable the male earner to provide
for himself and his family the bare essentials of food, clothing and shelter
but a measure of frugal co mfort including education for the children,
protection against ill health, requirements of essential social needs and a
measure of insurance against the more important misfortunes including
old age. However, national income and capacity to pay of the indus try
must be taken into account while fixing the living wage. The committee
set the living wage standard as the upper limit of wage fixation, the lower
limit being the minimum wage.
Fair Wages
The Industrial Truce resolution passed in 1947 for improving rel ations
between labor and management provided for the payment of fair wages to
labor. Subsequently, the Government of India appointed a Fair Wages
Committee in 1948 to determine the principles of fair wages and measures
to implement fair wages. The Fair Wag es Committee in its report
submitted in 1949 observed that the minimum wage is less than the living munotes.in
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75 wage. Fair 158 wages should be above the minimum wage and below the
living wage. However, the upper limit of the fair wage should be
determined by the capac ity to pay, productivity of labor, prevailing rates
of wages, the level of national income and the place of the industry in the
economy. The family unit may be considered to be comprised of three
consumption units.
The Minimum Wages Act of 1948
The statut ory minimum wages are fixed according to the Minimum Wages
Act, 1948. The Act was passed by the Government of India subsequent to
the ILO Convention on minimum wages passed in the year 1921. The Act
applies to the employment that are included in Parts I an d II of the
Schedule to the Act. Once the minimum rates of wages are fixed
according to the procedure prescribed by law, it is the obligation of the
employer to pay the said wages irrespective of the capacity to pay. The
main provisions of the Minimum Wage s Act, 1948 are as follows:
1. It provides for fixing minimum wages in certain employments where
sweated labor is prevalent or where there is a great chance of
exploitation of labor.
2. The Act provides for the fixation of (a) minimum time -rate, (b) a
minimum piece rate, (c) a guaranteed time -rate and (d) an overtime
rates appropriate to different occupations and different classes of
workers. The minimum wage fixed or revised by the appropriate
Government will include the following: (a) a basic rate of wa ge and
special allowance at a rate in which adjustments will be made at such
intervals and by those methods as directed by the appropriate
Government, (b) a basic rate with or without a cost of living allowance
and the cash value of the concessions in resp ect of supplies of essential
commodities at nominal rates, (c) a rate in which the basic rate, cost of
living allowance and cash value of concession etc all are included. The
Act lays down that wages should be paid in cash and empowers the
appropriate gove rnment to pay wholly or partly in kind.
3. The appropriate government shall review the rates at an interval of not
more than five years and revise or amend the minimum wage rates.
8.4 SOCIAL SECURITY
The ILO defines social security as the security that s ociety gives though
appropriate organizations against certain risks to which its members are
exposed. These risks are essentially contingencies against which the poor
people cannot effectively provide on their own singly and collectively.
These risks are s ickness, maternity, invalidity, old age and death. These
risks disable the working person to support himself and his dependents in
health and decency. According to this definition only such schemes of the
State which provide the citizen with benefits desig ned to prevent or cure
diseases to support when unable to earn and to restore him to gainful
activity may be regarded as schemes of social security. munotes.in
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76 Sir William Beveridge defines social security “as a scheme of social
insurance against interruption and des truction of earning power and for
special expenditure at birth, marriage o death. It is an attack on five giants
namely wants disease, ignorance, squalor and idleness”. According to
Beveridge, an adequate level of employment, a comprehensive health
service and a scheme of children’s allowances are essentially required for
the success of social security plan.
According to an ILO/Norway National Seminar held in New Delhi in
1977, social security was defined as “the protection furnished by the
society to its m embers through a series of public measures against
economic and social distress that are caused due to absence of earnings or
substantial reduction or stoppage of earnings resulting from sickness,
maternity, employment injury, occupational diseases, unempl oyment,
under employment, invalidity, destitution, social disability and
backwardness, old age and death land further to provide health care and
prevention measures”. According to this definition of ILO, social security
measures would include social insura nce, social assistance, family
benefits, and health care and related social welfare services.
Social security measures have a twofold significance for every developing
country. First, social security is an important step towards the goal of a
Welfare State in which the living and working conditions of the people are
improved and are protected against the uncertainties of the future. Second,
social security is important in strengthening the industrialization process.
It enables workers to become more efficie nt and reduces wastage on
account of industrial disputes. Person -days lost on account of sickness and
disability is also reduced. Lack of social security hinders production and
prevents the formation of a stable and efficient labor force. Social security
is therefore a wise investment which gives good dividends in the long run.
8.5 OCCUPATIONAL SAFETY AND SECURITY
Occupational hazards are a risk associated with employment. More than
1.8 lac workers die every year due to occupational accidents and diseases
and 110 million workers are affected by employment related injuries.
Prevention is always better than cure. Occupational health is a preventive
measure taken to prevent and pre -empt all possible accidents and diseases
that workers may otherwise go through i n employment. The International
Labor Organization vide its recommendations has influenced governments
across the world to enact legislation on occupational health services. In
1981, the ILO adopted a convention and recommendation on occupational
safety an d health and the working environment which defines a national
policy and action to be developed at the level of the industrial units.
The objectives of occupational safety are as follows:
1. Ensure protection to workers against health hazards arising out of work
and the work environment.
2. Ensure the physical, psychological and mental welfare of the workers. munotes.in
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77 The functions of occupational health services are as follows:
1. Identification of occupational hazards and diseases and suggest
preventive as wel l as controlling measures.
2. To ensure safe exposure limits to hazardous work processes by rotating
the workers periodically so that no single worker is exposed to his or
her own detriment.
3. To impart health education to all workers.
Occupational hea lth and safety is greatly neglected in India due to the
relative backwardness of the Indian economy. This is very true of the
unorganized sectors of the economy where the workers are thoroughly
exposed to all kinds of hazards without any kind of protection at the work
place or any kind of compensation to the workers if they suffer from
accidents or diseases. The National Commission on Labor, 2002 has
recommended a comprehensive legislation for the workers working in the
unorganized sector. Once the legislat ion is put in place, occupational
health and safety will be greatly improved in Indian industries.
8.6 WAGES AND INCOMES POLICY IN INDIA
Wages perform two important functions in an economy. Firstly, they
distribute the products of the industry among wageea rners in the form of
income. Secondly, they influence the cost of the output. Wages determine
price level and employment. The problems of wage policy have three
dimensions. At the national level, it is a matter of resolving the conflicting
objectives of be tter standard of living of workers, expanding employment
and increasing capital formation. At the plant level, the problem is that of
evolving a system which provides incentives for better productivity. The
other important dimension is that of evolving a w age structure which is
conducive to economic development. An important objective of planned
economic development is raising the standard of living of the people. A
vast majority of the working population in a developing country is poor
and hence the benefi ts of planned economic development must go to them.
A national wage policy would therefore help the planners in the country to
realize the most important objective. A national wage policy must aim at
establishing wages at the highest possible level which t he economic
conditions of the country permit and it also ensures that the wage -earner
gets a fair share of the increased prosperity of the country as a whole
resulting from economic development.
The term ‘wage policy’ in India refers to legislation that af fect the level or
structure of wages or both for the purpose of achieving specific objectives
of social and economic policy. The social objectives of a wage policy may
include the elimination of low wages, the establishment of fair labor
standards and the protection of wage earners from rising prices. Increasing
the economic welfare of the wage earning community as a whole is an
important objective of wage policy. According to the ILO, the objectives
of a wage policy in a developing economy should be as fol lows: munotes.in
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78 1. To abolish malpractices and abuses in wage payment.
2. To set minimum wages for workers whose bargaining position is weak
and to promote the growth of trade unions and collective bargaining.
3. To obtain for the workers a just share in the fruit s of economic
development and insulate them from inflation.
4. To bring about a more efficient allocation and utilization of labor power
through wage differentials and where appropriate through systems of
payments by results.
Importance of National Wage P olicy in India
The problem of wages is one of the most important labor problems
because it is related to every workers and it is a solution to the many of the
problems faced by the average Indian worker. Increased individual real
incomes mean greater econ omic welfare. The problem of wage constitutes
the major source of friction between the employers and the workers.
Industrial workers in India have low literacy levels. They are unorganized
and have a weaker bargaining position. In India, the relative stren gths of
the workers and the employers have determined wage agreements and
decisions. Industrial wages in India have remained low and in many
occupations of sweating of labor prevailed for quite some time and it
prevails to this day in certain pockets acros s the country. Wage policy and
wage regulation therefore becomes essential to ensure fairness to the
workers. Wage policy and wage regulation is an integral part of the labor
market even in free market economies because justice cannot be left to the
market forces and the benevolence of the employers.
8.7 IMPACT OF LIBERALIZATION AND
GLOBALISATION
Impact of Liberalization:
With the liberalization of Indian economy in 1991 a number of private
players started carving a major role in the economic output and
simultaneously governments both at the centre and state levels started
assuming a smaller role in running businesses. Increased domestic and
foreign competition resulting from the economic reforms induced
domestic manufacturers to improve efficiency and bring into use advanced
technologies on a larger scale. This is supported by the fact that during the
period 1991 -98 there were about 3250 technical approvals in India with
the top five technical collaborators. The subsequent break down of trade
barriers, globa lization, advancements in Information and Communications
Technology (ICT) and well accepted management ideas such as TQM on
quality, JIT, Computer Integrated Manufacturing (CIM) & Lean
Production (LP) have served to magnify the impact of technology on
empl oyment relationship globally and India in particular.
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79 Technological Change and Employment
Labour employment is affected by many factors, two major directly
relevant factors are per unit labour requirement for a product (man hours
per unit ) and the total demand for the product. It is likely that
technological improvement leads to reduction in per unit labour
requirement but at the same time because of the increased demand made
possible by the lesser cost of the technologically advanced product, it can
lead to rise in overall demand for labour . This expected rise in demand for
labour has however not been equally true for all sectors/industries . In a
study of employment in organized manufacturing sector in India, it was
found that even though real gross va lue added has grown at 7 .4 percent
per year during 1981 -2002, employment of workers increased only by 4 .3
and most of this growth happened in the early part of the 90s while the
latter half of 90sand early part of the current decade have shown a
reducing trend in organized manufacturing sector employment.
At the same time, employment in Organized Services sector has been
picking up in the latter half of last decade and early part of this decade
.Organized manufacturing sector seems to have shown a sharp d ecline in
employment post 1996 while services have gained during this period.
As a consequence of technological modernization of banks it was found
that though there was an overall increase in employment, this growth has
been made possible by an emerging v olume of employment in previously
new areas such as systems analysts, console operators etc . In a case of
technology transfer to an Indian engineering MNC from its foreign parent
company during the period 1974 -1984 ,even though the fixed capital
increased by about 400 percent.
Further even within the same industry, there seems to be a shift in the
occupational and work profile of the employees decreased by 8 percent
whereas the total employment increased by 3to 5 percent, indicating.
A shifting of workforc e from workers to supervisory and executive squads
and a corresponding shift in the skill requirements. In an aggregate study
of the organized manufacturing sector for the period 1982 -2002, it was
found that the increase in gross value added is accompanied by greater
employment of employees in the supervisory unit as against the worker
cadre. Further there has been a change in demand for the type of
employees within the same occupational group, from operatives and
labourers to professional and technical wor kers in many of the industries
such as Banking ,Software Services and Textiles.
Impact on Skill Profile
As the manufacturing and service technologies continuously develop like
in the case of just -in-time inventory, manufacturing cells, robotics and
servic e quality concepts etc, there is an increasing pressure on the
organizations to the largest contributor after agriculture to the employment
providing jobs to about 21 million people. When new types of
technologically advanced looms were introduced in texti le firms, the skill munotes.in
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80 requirements changed to those of monitoring and troubleshooting of the
production process instead of directly getting involved in the production.
This is because with the introduction of new automated machinery, the
technologies are no more separate from each other and detection of faults
requires a thorough understanding of the production process and
familiarity with different equipment’s used. Hence the skill required for
the job, which previously emphasized manual dexterity, physical strength
in manual and repetitive tasks has been taken over by the need for
machine trouble shooting and process handling skills. The roles and
responsibilities of the senior workers were more flexible in the
modernized mill sand they were expected to hand le a higher number of
departments compared to rigid and specific allocations along different
categories of work within department in the non -modernized mills.
The impact of new technology on skill requirement in the textile industry
has been widely reporte d. Textile industry in India has a special place with
4 percent contribution to the GDP and 12 percent of the world's textile
production (GOI 2009). The cotton mill workers account for 20 percent of
the total employment in the manufacturing sector and the textile industry
introduction of new production processes but may be related to even
initiation of new management ideas.
For instance, at the beginning of the nineties, when Motorola started
measuring workers performance against quality & outputs instead o f
measuring against a time clock, it became necessary for its workers to
know their equipment and production process, and be able to initiate any
trouble shooting process themselves which were previously not in their
ambit . This required the worker to unl earn deeply held attitudes and
values when they were just responsible for working on individual
machines to those of understanding the production process as a whole .
However, the effect of increased investment in technology on wages has
not always been po sitive. Study of the Indian subsidiary of a MNC found
that the wages as a proportion to valueadded remained at about twelve
percent and has not changed significantly with the introduction of new
technology over the years. Further, in a study of sixty selec t MNCs, found
that the aggregate rise in wages and salaries was much lower than the
aggregate increase in operational expenses, suggesting that the growth rate
of wage bills has not kept pace with investment in operations.
Impact On Wages
The impact of tec hnological change on wages has been mixed. Budhwar
(2003) in his study of 137 Indian firms in six manufacturing sectors in
India found that collective bargaining and 56 provisions of labour laws
have a significant influence in determining the basic wages a nd bonuses of
blue-collared employees , hence indicating that the wages are still
determined by factors not directly related to individual/firm performance
and technological change . However, this is also sector specific . In a study
by Singh & Nandini (19 99) in the software industry, it was found that
technological change does have a significant effect on salaries paid to munotes.in
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81 employees. Chakravarty (2002) in her study of spinning mill workers
found that the modernized mills required `unusual skills' from worke rs
compared to the traditional ones.
The impact on wages because of technology change is also influenced by
the political process .Betcherman (1991 ) argues that there is a positive
correlation between wage levels and introduction of advanced technology
but how the pie is distributed will depend on the balance of power
between the negotiating parties . In the Canadian context, he found that
skilled blue -collared workers, both unionized and non -unionised, could
bargain a higher pay compared to those doing ma nual work. Further, the
union' s bargaining power was lower for technology innovators than
among non -innovators . In a similar vein, in the case of modernized textile
mills in India there is an emergence of distinct and firm specific skills
which require h igher cost and time investments (Chakravarty 2002) .
Hence companies are willing to pay higher wages in these mills as
contrasted to non -modernised mills . This necessitated decentralized
bargaining in the case of modernized firms while the non -modernised ones
went in for industry wide bargaining. In the latter case since the skills are
not specific to an organization but rather are generic to the industry they
required support of the wider political base .Nagaraj (2004) in his study of
employment in organi zed manufacturing sector notes that while real
wages of workers have roughly stagnated during 1981 -2002, the real
emoluments of supervisors have gone up by 77 percent during the same
period indicating that the increase in wages due to technology change has
not been favourable to the workers in general .
Worker Acceptance
The reasons for introducing new technology vary from one organisation to
another. New production system in a plant is brought in by the
management typically in response to the change in ma rket conditions,
which require more `efficient' technologies to be adopted (Datta 1996).
Studies have indicated that the technological improvements/changes lead
to improved productivity, lower costs and better work environment (eg
:Virmani 1990, Datta 1990 ) . The improvement in productivity seems to
hold for varied sectors from Heavy Electricals (Virmani 1990), Software
(Singh &Nandini 1999), Textiles (Chakravart y2002, 2006, Dhanaraj
2001) and Banking (Datta 1990, 1996) . Studies indicate that after a time
lag major technological changes have always induced significant changes
in the organisation processes.
The unions and the employees into confidence before introduction of
automation. This was done through a free flow of information, education
and training of employees in terms of what computerization means and
what changes it can bring in. The transformation of Bank of Baroda from a
large public sector bank with a legacy culture to a highly customer centric,
technology driven bank through a variety of init iatives including
implementation of Core Banking solutions is credited to clear and
transparent communication with the employees (Khandelwal 2007).
Studies in the Indian context have shown that attitudes in terms of job munotes.in
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82 satisfaction and freedom and autonom y at the work place were found to be
significantly positively related to technology acceptance (Gurtoo &
Tripathy 2000, Venkatachalam &Velayudhan 1999) .Venkatachalam &
Velayudhan (1999) in their study of a steel plant found significant and
positive correl ation between meaningful, interesting job and technology,
indicating that new technology introduction does have an influence on
how the employees feel at work . Unlike in the West Indian employees
rarely differentiate the work and develop a feeling of "we -ness" if policies
and practices instil among employees the feeling of acceptance and
belonging.
8.8 QUESTIONS
Q1. Explain the Impact of Trade Unions on Productivity and Wages.
Q2. Explain the Impact of Liberalization and Globalisation.
Q3. Write a note on –
a) Minimum Wages
b) Social Security
c) Occupational Safety and Security
d) Wages and Incomes Policy in India
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