Chapter 3
In this chapter, McConnell, Brue and Macpherson focus on population and hours of work as determinants of supply supplied on weekly or annual basis. Authors used Becker’s time allocation model to examine and explain the effect of participation rates on labour supply. This model perceives individuals in the house providing utility-yielding commodities through the combination of goods and time. They assert that house members dedicate their time to labour market work, production in the house, and consumption. This is according to comparative advantage. The chapter defines what labour force participation rate is. The authors outline that labour force participation rate is the real labour force as a fraction of latent or age-eligible populace. Data from the post-world war II time indicates that the average participation rate has increased by almost 59% in the 1950 to approximately 66% in 2008. This is because of increased participation rates of women who are married. In this case, the women counterbalance the reducing participation rates of men.
The chapter also shows that elderly men are responsible for the larger percentage of declining participation rates. The following factors explain why men are less interested in participation towards the labour force market:
- Increased real wages and salary
- Availability of both public and private pensions
- Increased access to disability benefits
- Age salaries profiles that indicate that the cost of free time may reduce for older workers
Alternatively, increased participation rates by women are because of:
- Increased comparative wage rates for women
- Formidable female preferences for labour market jobs
- Elevated productivity in the household
- Reduced birth rates
- Widespread marital instability
- Attempts to sustain standards of living for families
The next level of the chapter undertakes a research in the labour force participation of African-Americans. From the findings, the authors note that the African-American male participation rates decline over time. They approximate that their participation is currently at 6-7% lower as compared to the white males. This is because of demand-side effects like labour market segregation, inferior educational chances, and regional inaccessibility of work. Additionally, reduced participation is a result of the supply-side effects. For instance, the impact of accessibility of community support and illegitimate activities explain this variation. As a result, cyclic changes in participation rates show the ultimate effect of the added-worker and discouraged-worker impacts. The added-worker impact recommends that the moment the principal breadwinner of the family lose work, the rest of the family members labour force participants to maintain the family earnings. On the contrary, the discouraged-worker impact shows that during economic turndown, a number of unemployed people become uncertain about their future for reinstatement and as a result withdraws from the labour market.
A lot of evidence from research propose that the discouraged-worker impact is central, resulting into the cumulative labour market participation rate varying contrariwise with the unemployment rate. The chapter sums up by identifying the workweek and the work year. It indicates that the two variables decreased during the 1910-1940 time. The results suggest an exception since the World War II, whereby both variables remain substantially stable. The income effect’s ascendancy of the substitution effect as actual wage rates rose historically, explaining the decrease in labour force for the earlier workweek and work year. Authors of this book attribute the post-WW II steadiness of the workweek and work year to increase in education among other factors.
Chapter 4
This chapter focuses on labour quality. The central theme of the authors at this level is investing in human capital. Human capital investment in this chapter is from a wide range of factors. The initial stage as indicated in the chapter is directing monetary resource on education and training. This move increases an individual’s productivity and prospective wages in the labour force. The book brings this out as a wise decision in the event of a country focusing on increased labour market and better living standards for its people. A further discussion in this chapter reveals that the choice to invest in a college education involves not only direct or out-of-pocket costs but also it requires forgone earnings. This improves people’s prospective earnings.
The next stage involves the provision of two techniques utilised to compare benefits and costs linked to a human resources outlay. The first one is the net present value method that utilises a discounting technique to draw a comparison between the present rate of the costs and benefits. In case the net present value is positive, it is reasonable to carry out the investment. At this level, the chapter provides a definition of internal rate of returns as being the rate of return of discount where the net present value of the investment is zero. When the internal rate of returns is more than the interest rate, it is reasonable to invest. Many researchers show that the rate of return on investing in education ranges from 10 to 15. To explain this further, authors use the college salary premium. This is the percentage variation in the salary of college and high school graduates. The graph used in the chapter indicates that this premium varies greatly over time, rising significantly since 1979. To explain the change in the college salary premium, they use variations in the supply and demand for college and high school graduates.
The book then identifies in this chapter that human resource decision excludes public subsidies to education, puts into consideration after-tax salaries, and assumes social benefits linked to education. This is according to the private perspective. According to the social perspective, community subsidies and external benefits as well as before-tax salaries are imperative. The chapter proposes a combination of the need for human capital curve and the supply investment funds curve to explain why a number of individuals put in varying human resources. Ability variations, segregation, and fiscal resource differences help explain variations in education and salaries among people. Based on this, the money market may offer financial support for human resource investment on unfavourable terms as opposed to investing in physical asset, giving the rational for public subsidisation of human resource investment.
The chapter finalises by proposing the significance of differentiating between general and specific training on the job. It suggests that general training provides worker expertise that is vital in all companies and industrial perspectives. On the contrary, specific training is crucial only in a particular corporation that offers that training. Because of competition in the labour force, workers opt to pay for general training offered by a company through accepting reduced salaries during the period of training. However, this may not apply in the case where a firm should pay a minimum salary provided by the law. When employers want to retain workers, they decide to pay for specific training. In very few incidences, employers and workers decide to share the cost for training. Increased revenue resulting from the training, however, benefits both parties. Ultimately, the chapter looks at the human capital theory and it criticism. Critics of this theory propose the following:
- By failing to identify that a section of education costs is consumption as opposed to investment, experiential investigations understate the rate of return on education
- Experimental evaluations understate the rate of return on a college education by failing to consider that the jobs of college graduates are better in comparison to those of high school graduates. This goes along with better extreme benefits for college graduates.
- Increase earnings for college graduates are as a result of their elevated capability as opposed to the level of education. This overstates the rate of return on college education.
- If a section of the elevated salaries of college graduates is attributable to vetting, the social rate of return is overstated.
Chapter 5
In this chapter, the authors focus on the demand for labour as well as factors that affect demand for labour. The factors are independent. As indicated in the first section of the chapter, demand for labour is derived and as a result depends on the trivial output of labour and the market cost of the product. The section of the trivial output or marginal product curve that appears positive and is below the aggregate product curve is the foundation for the short-run labour demand curve as seen in the graph below.
McConnell, Brue and Macpherson propose the use of MRP 5 W rule to the organisation’s marginal income product information to determine the short-run demand curve for labour. All factors kept constant, the demand for labour curve of an aggressive seller is more variable as compared to a defectively aggressive seller. This variation happens since the defectively competitive seller should reduce product rate to sell more units of yield as opposed to a perfectly competitive seller who does not. From the graph, it also implies that the defectively competitive seller’s marginal revenue product curve is to the left of the equivalent value of marginal product curve. On the contrary, marginal revenue product and the value of marginal product are the same for the competent seller.
McConnell, Brue and Macpherson go ahead to compare the long-run and short-run labour curves for a firm. They suggest that a company’s long-run labour demand curve is more resilient as compared to its short-run labour demand curve. This is because a firm’s long-run labour demand curve has enough time to alter non-labour activities like capital. They assert that the short-run wage change produces just an input impact; whereas the long-run additionally generates a substitution impact. Factors like product demand elasticity, interaction of labour and capital, and technology add to the elevated long-run wage resilience. From this discussion, it is notable that the market demand for a specific type of labour is less resilient when comparing to an undemanding horizontal computation of the short and/or long-run demand curves of particular employers. This is because as employers in a group hire more employees and increase the product output, “product supply” increases notably causing a decline in the product price.
The next section of the chapter looks at how to measure resilience of labour demand. Authors suggest that the measurement of the resilience labour demand entails comparing the change in percentage for labour needed with a specific percentage transformation in the rate of wage. During the comparison, if the resilience coefficient is more than 1, demand is reasonably resilient. The coefficient being less than one indicates some level of rigidity. When demand is flexible, changes in wage rate alters that total wage bill in the opposite direction. In the event of rigidity, the total wage bill moves in the same direction. The chapter reveals that demand for labour is more resilient:
- The higher the flexibility of product demand
- The bigger the ratio of the cost of labour to the total cost
- The greater the substitutability of labour inputs
- The higher the flexibility of other input supply
Another salient point from this chapter is that the location of the demand curve is dependent on:
- Product demand
- The trivial output of labour
- The number of employers
- The rate of other inputs
Labour and capital be substitutes to some level or remain entirely harmonized in production. Authors further explain that in case they are substitutes, they can be either gross substitutes or gross complements. The moment there is a change in the price of gross substitute, the demand for the other variable changes in the same direction. This is unlike the gross complement where change in price causes change in the opposite direction. This chapter has many real world applications as noted.
Chapter 6
This chapter takes a quantitative form of analysis for wage determination and the allocation of labour within a competitive labour market. McConnell, Brue and Macpherson point out that in such a case, the demand for labour is a price-adjusted computation of labour supply demand by selectively operating individual employers. On the other hand, the supply of labour is a total of the reactions of specific workers to various salary rates. This implies that the market supply and demand affect a balance salary rate and the level of employment. For the purpose of this analysis, the authors have used a market labour supply curve as shown below.
The moment any of the variables changes the curve shifts to either the right or left changing the balance salary and employment levels. According to the writers of this book, a company operating in a faultlessly aggressive labour market is a wage taker. The graph indicates that the supply of labour is perfectly resilient. This requires that for a company to maximise its profitability, it should employ the amount of labour at a point L2 or W1. The chapter shows that an effective allocation of labour happens when the VMPs of a specific kind of labour balance in a wide range of utilities. These factors should also be equal to the opportunity cost of that labour. Aggressive product and labour markets cause allocative efficiency. Such a graph establishes monopoly in the product market. This makes trivial revenue to fall faster compared to product price rate since more employees are hired and the output is increased. The ultimate outcome is less employment and an under allocation of labour assets in relation with absolute competition in the product market. To get more labour supply, an employer should increase the bid of wages. However, when all factors are kept constant, it means that an employer hires fewer workers as opposed to competitive factors. This will result into payment of a salary below the MRP of labour. According to allocation of labour assets, this cuts down on the total level of output in the market.
The chapter finalises by looking at the cobweb model. This model traces labour supply alterations to changes in labour demand and salary levels in the market associated with long-term training periods. The balance salary rate entails only after a time of oscillating salary rate changes resulting from frequent labour deficiencies and surpluses. The key objective in the cobweb model according to the authors is to offer an explanation as to why prices are likely to fluctuate frequently in particular markets. This model explains cyclical supply and demand in a market where the production should be preferred to prices.
The cobweb model
In this model, expectations of producers concerning prices are dependent on trends of the previous rates. Notably, if the supply curve S is steeper than the demand curve D, fluctuations decline in amount with each cycle. Plotting the prices and quantities over time appears like an inward spiral. The converse is also true when the slope of the supply curve is less than the perfect value of the demand curve slope.
