Why do we study the labour market?
To gain economic insight and the ability to answer policy questions.
Many questions concerning labour and the economy do not only relate to facts but also to
normative questions. Value judgments are required from those involved because many such
questions cannot be simply answered by looking at “the facts”.
Making good value judgments requires that one has as much information as possible and in order to
make informed decisions, trade-offs arise when attempting to address normative questions. Facts
help to crystallise the different trade-offs. Studying the labour market helps to make an informed
opinion in such matters.
Acquiring knowledge about the labour market will also help to avoid unintended consequences of
certain policy decisions and therefore the need to revise policies only a short time after being
introduced.
The difference between positive and normative economics (refer to pages 2 of the textbook)
Positive questions Normative questions
Look the narrow Look at the broader
e.g. What is? What should be?
Unique characteristics of labour market:
Labour Market- is an imaginary marketplace where labour is bought and sold. Although
governed by the same principles of supply (Ss) and demand (Dd) that govern other goods
markets, this market is quite unique.
The first difference between the labour market and goods market is that the worker is a
person and not a product. Principles of fairness or equity and humanness are therefore
essential elements of the labour market.
An employer (purchaser of labour) buys the services of the worker and not the worker. But,
the services and the worker cannot be separated. A contractual relationship, which differs
from what would be found in the product market, comes into being between the buyer and
seller of labour.
Personality traits are also important when the employer “buys” the product. These
characteristics cannot always be determined beforehand. Changes pertaining to the worker’s
skills, experience may occur.
Unlike some product markets, there is also more than one market or clearing house.
The price of labour also tends to be complex, influenced by inflation, personal tax, standard
of living, health and safety standards and so on. This is unlike the product market.
Important functions of labour markets:
They allocate human resources among the alternative users;
They distribute incomes, either wages or salaries, as incentives and as rewards to workers.
,Labour markets should, by their functioning, contribute to the following objectives:
Efficiency – This means maximum output and maximum income.
Equity- This implies equity of opportunity for all in access to jobs, training, treatment at
work in payment.
Growth- Labour market operations should increase employment in the future and
contribute to- not hinder- higher productivity and incomes.
Social justice- This refers to the extent to which society acts to minimise any negative effects
the labour markets may have on workers’ welfare, and to redress harm that may have been
done.
Why a theory with unrealistic assumptions?
The assumptions help us to understand better the key issues that are under discussion.
The assumption of a perfectly competitive market is a theoretical norm, against which
performance of the actual labour market can be measured. This falls within the neoclassical
theoretical framework.
A perfectly competitive market is characterised by the following assumptions:
- There is full and perfect knowledge of the market
- Workers and employers are rational
- Both workers and enterprises have no influence over the market wage
- There is perfect competition
- Workers are perfectly mobile.
- See boxed section in prescribed textbook (Yu and Roos: 2018 4-5)
Graphical analysis of the Labour Market. Figure 1.1 ( Yu and Roos, 2018: 5)
A supply (S) and demand (D) curve is an indication of the basic decisions regarding the
labour market of the major market actors.
Figure 1.1 plots the number of workers supplied and demanded against wages.
X-axis represents the number of workers (quantity of labour).
Y- axis represents price or wage rate.
S- Labour Market supply- represents the relationship between quantity and price.
The higher the wage rate, the higher the quantity of labour supplied
This means that the S curve is UPWARD SLOPING to the right
The market D curve is DOWNWARD SLOPING.
This is due to the fact that as wage increases, employers try to reduce cost by
employing less workers.
In a perfectly competitive labour market, the equilibrium would be where the quantity
supplied of labour equals quantity demanded for labour (or number of employed workers)
This is at point e on figure 1.1
,Characteristics of the South African Labour Market:
A sharp increase in the Labour S which can be due to a rapid increase in the labour force
participation rates of women and Africans.
Low increase in the D for unskilled and semi-skilled workers.
Labour D has been most impacted by development within and between sectors
Unemployment, specifically among the black population and among females.
High labour costs and low productivity.
Labour market segmentation
Extensive income inequality which continuously increases.
See page 6-7 of the prescribed textbook for details
The Labour Force- the population of working-age people that is working or wants to work
The total Labour Force (LF) or Economically Active Population (EAP)- is the total number of
working-age people or potential labour (between ages of 15- 64 years) who present their
labour for the production of economic goods and services, whether employed or not.
Factors determining the supply of labour:
The individual’s decision to work or not to work, and the number of hours to work.
The most important determinant of this decision is the wage rate.
Individuals’ decisions to work or not to work are measured by the labour force
participation rate (i.e. the percentage of working age population that is working or
wanting to work).
The size of the labour force is also determined by the size of the population.
Population size is in turn determined by factors such as fertility rates, mortality rates and net
migration flows.
Labour supply is not only a matter of quantity but also quality. The skills level of the labour
force is also significant.
See Figure 2.1 for an illustration of the various determinants of the total labour force (Yu and
Roos, 2018: 13).
, The Labour Force Participation Rate (LFPR)
LFPR – this is the percentage of the working-age population that supplies its labour for the
production of economic goods and services, whether employed or not.
It is the percentage of the working age population that participates in the labour market.
See page 17 of the prescribed textbook.
One of the most notable features of the South African labour market is the very low rate of
participation by adults.
The LFPR in SA is about 55% and this is much lower than most countries
The low LFPR is often attributed to SAs social welfare that is believed to discouraged people
from looking for work.
On the other hand, there is contradictory evidence showing that social grants may have
increased the labour participation rates for women. The access to cash allowed women to
leave their children with relatives and seek work.
LFPR by gender – The LFPR of women has increased relatively more rapidly over time. However,
the male LFPR remains higher.
Factors causing the rapid increase in female labour force participation:
Social grants make some money available for transport
The increasing relative wages because of reduced discrimination greater demand for female
workers
The rising levels of education among women
Declining birth rates
Changes within the household such as; decreasing proportion of women living with
employed men because of the increasing number of unemployed men; a decline in the
number of women living with men suggesting a decrease in the proportion of married
women.
Population and population growth:
Population growth is a function of three demographic factors:
Fertility
Mortality
Migration
Population growth rate = Total fertility rate - mortality rate + net migration.
The difference between fertility and mortality rates is called the natural rate of population
increase.
Total Fertility Rate (TFR):
TFR is the average number of children born alive to a woman in her reproductive years (15-
49 year of age).
To gain economic insight and the ability to answer policy questions.
Many questions concerning labour and the economy do not only relate to facts but also to
normative questions. Value judgments are required from those involved because many such
questions cannot be simply answered by looking at “the facts”.
Making good value judgments requires that one has as much information as possible and in order to
make informed decisions, trade-offs arise when attempting to address normative questions. Facts
help to crystallise the different trade-offs. Studying the labour market helps to make an informed
opinion in such matters.
Acquiring knowledge about the labour market will also help to avoid unintended consequences of
certain policy decisions and therefore the need to revise policies only a short time after being
introduced.
The difference between positive and normative economics (refer to pages 2 of the textbook)
Positive questions Normative questions
Look the narrow Look at the broader
e.g. What is? What should be?
Unique characteristics of labour market:
Labour Market- is an imaginary marketplace where labour is bought and sold. Although
governed by the same principles of supply (Ss) and demand (Dd) that govern other goods
markets, this market is quite unique.
The first difference between the labour market and goods market is that the worker is a
person and not a product. Principles of fairness or equity and humanness are therefore
essential elements of the labour market.
An employer (purchaser of labour) buys the services of the worker and not the worker. But,
the services and the worker cannot be separated. A contractual relationship, which differs
from what would be found in the product market, comes into being between the buyer and
seller of labour.
Personality traits are also important when the employer “buys” the product. These
characteristics cannot always be determined beforehand. Changes pertaining to the worker’s
skills, experience may occur.
Unlike some product markets, there is also more than one market or clearing house.
The price of labour also tends to be complex, influenced by inflation, personal tax, standard
of living, health and safety standards and so on. This is unlike the product market.
Important functions of labour markets:
They allocate human resources among the alternative users;
They distribute incomes, either wages or salaries, as incentives and as rewards to workers.
,Labour markets should, by their functioning, contribute to the following objectives:
Efficiency – This means maximum output and maximum income.
Equity- This implies equity of opportunity for all in access to jobs, training, treatment at
work in payment.
Growth- Labour market operations should increase employment in the future and
contribute to- not hinder- higher productivity and incomes.
Social justice- This refers to the extent to which society acts to minimise any negative effects
the labour markets may have on workers’ welfare, and to redress harm that may have been
done.
Why a theory with unrealistic assumptions?
The assumptions help us to understand better the key issues that are under discussion.
The assumption of a perfectly competitive market is a theoretical norm, against which
performance of the actual labour market can be measured. This falls within the neoclassical
theoretical framework.
A perfectly competitive market is characterised by the following assumptions:
- There is full and perfect knowledge of the market
- Workers and employers are rational
- Both workers and enterprises have no influence over the market wage
- There is perfect competition
- Workers are perfectly mobile.
- See boxed section in prescribed textbook (Yu and Roos: 2018 4-5)
Graphical analysis of the Labour Market. Figure 1.1 ( Yu and Roos, 2018: 5)
A supply (S) and demand (D) curve is an indication of the basic decisions regarding the
labour market of the major market actors.
Figure 1.1 plots the number of workers supplied and demanded against wages.
X-axis represents the number of workers (quantity of labour).
Y- axis represents price or wage rate.
S- Labour Market supply- represents the relationship between quantity and price.
The higher the wage rate, the higher the quantity of labour supplied
This means that the S curve is UPWARD SLOPING to the right
The market D curve is DOWNWARD SLOPING.
This is due to the fact that as wage increases, employers try to reduce cost by
employing less workers.
In a perfectly competitive labour market, the equilibrium would be where the quantity
supplied of labour equals quantity demanded for labour (or number of employed workers)
This is at point e on figure 1.1
,Characteristics of the South African Labour Market:
A sharp increase in the Labour S which can be due to a rapid increase in the labour force
participation rates of women and Africans.
Low increase in the D for unskilled and semi-skilled workers.
Labour D has been most impacted by development within and between sectors
Unemployment, specifically among the black population and among females.
High labour costs and low productivity.
Labour market segmentation
Extensive income inequality which continuously increases.
See page 6-7 of the prescribed textbook for details
The Labour Force- the population of working-age people that is working or wants to work
The total Labour Force (LF) or Economically Active Population (EAP)- is the total number of
working-age people or potential labour (between ages of 15- 64 years) who present their
labour for the production of economic goods and services, whether employed or not.
Factors determining the supply of labour:
The individual’s decision to work or not to work, and the number of hours to work.
The most important determinant of this decision is the wage rate.
Individuals’ decisions to work or not to work are measured by the labour force
participation rate (i.e. the percentage of working age population that is working or
wanting to work).
The size of the labour force is also determined by the size of the population.
Population size is in turn determined by factors such as fertility rates, mortality rates and net
migration flows.
Labour supply is not only a matter of quantity but also quality. The skills level of the labour
force is also significant.
See Figure 2.1 for an illustration of the various determinants of the total labour force (Yu and
Roos, 2018: 13).
, The Labour Force Participation Rate (LFPR)
LFPR – this is the percentage of the working-age population that supplies its labour for the
production of economic goods and services, whether employed or not.
It is the percentage of the working age population that participates in the labour market.
See page 17 of the prescribed textbook.
One of the most notable features of the South African labour market is the very low rate of
participation by adults.
The LFPR in SA is about 55% and this is much lower than most countries
The low LFPR is often attributed to SAs social welfare that is believed to discouraged people
from looking for work.
On the other hand, there is contradictory evidence showing that social grants may have
increased the labour participation rates for women. The access to cash allowed women to
leave their children with relatives and seek work.
LFPR by gender – The LFPR of women has increased relatively more rapidly over time. However,
the male LFPR remains higher.
Factors causing the rapid increase in female labour force participation:
Social grants make some money available for transport
The increasing relative wages because of reduced discrimination greater demand for female
workers
The rising levels of education among women
Declining birth rates
Changes within the household such as; decreasing proportion of women living with
employed men because of the increasing number of unemployed men; a decline in the
number of women living with men suggesting a decrease in the proportion of married
women.
Population and population growth:
Population growth is a function of three demographic factors:
Fertility
Mortality
Migration
Population growth rate = Total fertility rate - mortality rate + net migration.
The difference between fertility and mortality rates is called the natural rate of population
increase.
Total Fertility Rate (TFR):
TFR is the average number of children born alive to a woman in her reproductive years (15-
49 year of age).
