Lecture Labour market economics: Chapter 6 - Dwayne Benjamin, Morley Gunderson, Craig Riddell

The topics discussed in this chapter are labour demand, nonwage benefits, and quasi-fixed costs. In this chapter, students will be able to understand: Nonwage benefits, hours of labour, payroll taxes, labour decisions in economic downturns, creating more jobs.

Chapter Six Labour Demand,NonWage Benefits, and QuasiFixed Costs  Created by: Erica Morrill, M.Ed           Fanshawe College © 2002 McGraw­Hill Ryerson Ltd Chapter 6­1 Chapter Focus  Nonwage benefits  Hours of labour  Payroll taxes  Labour decisions in economic downturns  Creating more jobs © 2002 McGraw­Hill Ryerson Ltd Chapter 6­2 Figure 6.1 Components of Total Compensation Total Compensation Wages and Salaries Nonwage Benefits (supplementary labour income) Pay for Time WorkedPay for Time Not Worked © 2002 McGraw­Hill Ryerson Ltd Chapter 6­3 Quasi-Fixed Labour Costs  Independent of the number of hours worked  Arise from:  hiring costs  training costs  dismissal costs  nonwage benefits © 2002 McGraw­Hill Ryerson Ltd Chapter 6­4 Quasi-Fixed Costs  Impact the employer's decisions on:  work schedules  part-time work  overtime work  hiring and Layoff decisions  unemployment © 2002 McGraw­Hill Ryerson Ltd Chapter 6­5 Nonwage Benefits and Total Compensation  Fastest growing components pension  legally required payments  © 2002 McGraw­Hill Ryerson Ltd Chapter 6­6 Nonwage Benefits vs Wages  Why wouldn’t employees prefer wages over nonwage benefits?  generally not taxed  economies of scale for group purchases  Perception that they are free  ease of purchase © 2002 McGraw­Hill Ryerson Ltd Chapter 6­7 Nonwage Benefits vs Wages  Employer’s benefits  planning of production process  reduce need for contingency plans for layoffs and accidents  alter employee behaviour in favor of production  reduce turnover © 2002 McGraw­Hill Ryerson Ltd Chapter 6­8 Nonwage Benefits vs Wages  Government’s benefit  reduce pressure for government expenditures public pension plans  unemployment insurance   increase social security © 2002 McGraw­Hill Ryerson Ltd Chapter 6­9 Quasi-Fixed Labour Costs  Variable  vary Labour costs with hours  Quasi-fixed  incurred per employee  independent of hours © 2002 McGraw­Hill Ryerson Ltd Chapter 6­10 Quasi-Fixed Labour Costs  Recurring  payroll taxes  Nonrecurring  hiring and orienting new employees  dismissing employees © 2002 McGraw­Hill Ryerson Ltd Chapter 6­11 Quasi-Fixed Labour Costs  Given the quasi-fixed costs:  firm is no longer indifferent in the way to increase labour input  increasing the number of employees becomes more costly © 2002 McGraw­Hill Ryerson Ltd Chapter 6­12 Quasi-Fixed Costs  Firms try to:  amortize these costs  encourage additional hours rather than hire employees © 2002 McGraw­Hill Ryerson Ltd Chapter 6­13 General Effect of Quasi-Fixed Costs the MC of hiring an additional worker relative to MC of working an existing worker longer hours  Discourage labour expansion away from employment and toward working more hours  Hiring continues until the present value of additional future revenues = the present value of additional costs  © 2002 McGraw­Hill Ryerson Ltd Chapter 6­14 Profit-Maximizing Employment Rule 6.1 H+T+ N t= 6.2 N t= Wt (1+r) N t = t= VMPt (1+r)t N Wt VMPt > t (1+r) (1+r)t t= © 2002 McGraw­Hill Ryerson Ltd Chapter 6­15 Phenomena Explained by Fixed Costs  Overtime  Temporary help agencies  Layoffs  Segmentation of labour markets  Resistance to worksharing © 2002 McGraw­Hill Ryerson Ltd Chapter 6­16 Figure 6.2 (a) Nonrecurring fixed Employment Costs and Changes in Labour Demand No fixed costs W W0 VMP VMP1 N10 N*0 N © 2002 McGraw­Hill Ryerson Ltd Chapter 6­17 Figure 6.2(b) Nonrecurring fixed Employment Costs and Changes in Labour Demand Fixed costs W VMP0 “Buff er” W0 VMP VMP1 VMP - (H+T) N0 N* N © 2002 McGraw­Hill Ryerson Ltd Chapter 6­18 Job Creation  Worksharing  Part-time work  Overtime restrictions © 2002 McGraw­Hill Ryerson Ltd Chapter 6­19 Reducing Barriers to Employment Sharing  Premiums based on hourly earnings with a ceiling based on hourly earnings  Prorating contributions according to hours worked  Subsidizing employment sharing © 2002 McGraw­Hill Ryerson Ltd Chapter 6­20 End of Chapter Six © 2002 McGraw-Hill Ryerson Ltd Chapter 6-21 ... © 2002 McGraw­Hill Ryerson Ltd Chapter 6 9 Quasi-Fixed Labour Costs  Variable  vary Labour costs with hours  Quasi-fixed  incurred per employee  independent of hours © 2002 McGraw­Hill Ryerson Ltd Chapter 6 10 Quasi-Fixed... © 2002 McGraw­Hill Ryerson Ltd Chapter 6 14 Profit-Maximizing Employment Rule 6. 1 H+T+ N t= 6. 2 N t= Wt (1+r) N t = t= VMPt (1+r)t N Wt VMPt > t (1+r) (1+r)t t= © 2002 McGraw­Hill Ryerson Ltd Chapter 6 15 Phenomena... Layoffs  Segmentation of labour markets  Resistance to worksharing © 2002 McGraw­Hill Ryerson Ltd Chapter 6 16 Figure 6. 2 (a) Nonrecurring fixed Employment Costs and Changes in Labour Demand No fixed