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13th July 2011

LABOUR ECONOMICS HRM 201 The central theme of economic science relates to the optimum utilization of resources to achieve maximum consumer satisfaction through the production processes. There are four factors of production: 1. Land 2. Labour 3. Capital 4. Entrepreneurship Of all the four factors of production labour is very special. Some amount of labour is absolutely necessary to compliment other factors of production. Labour not only generates income but also consumes the output. Labour economics may be desired as a body of systematic knowledge which deals with the pricing, allocation and development. Labour economics analyses and seeks to understand in detail labour market situations in a manner that economics as a whole cannot afford to. The term labour means any work whether mental or manual done by human beings for some monetary consideration.


Man power planning Labour organisation Labour relations and public policy Wage and employment theory Collective bargaining theory Practice of social security and welfare

Concepts of Labour
1. Commodity Labour during this time labour was affected by law of supply and demand. 2. Machinery concept during this time labour was regarded as operating organisms 3. Goodwill concept during this time there was a more liberal approach. 1

4. Humanitarian concept during this time some basic rights were recognized 5. Citizenship phase here workers or employees are recognized with a right to be consulted 6. Concept of Industrial Democracy here the employee and the employer consider themselves as partners

Industrial Evolution Stages

1. Hunting and fishing stage during this time there was no economic, political or social system hence there were no labour problems. 2. Pastoral stage - this was marked by some economic acting leading to conflicts among hard owners 3. Agricultural stage this brought about the class systems of the have (s) and havenots 4. Handicraft stage this marked the beginning of labour problems as merchants accumulated wealth 5. Workshop stage during this time there was production in large scale leading to strains between employees and employers. 6. Modern factory system this led to an exodus from country to town creating new labour problems. 7. Industrial revolution this began in England and brought an end to the closed economy creating enumerable problems which have not been satisfactory solved.

Peculiarities (Features)







1. Labour cannot be stored 2. Labour cannot be separated from the labourer 3. The worker sales the efforts but retains the ownership 4. Bargaining power of labour is weak 5. Labour is not only a factor of production but also an end to production 6. Only labour can object to working conditions and disrupt production 7. Labour is not so mobile 8. Rapid adjustment to the supply of labour to its demand is not possible

9. Labour is a human factor and therefore not only economic but moral and social consideration should be taken into account.

In production not all factors are fixed usually land is a fixed factor and the others are variables. If one input is variables and all other factors fixed, the firms production functions exhibit the law of variable proportions. As you increased the unit of the variable factors keeping other factors constant total product will increase at a decreasing rate. As more and more units of variable factor are used holding the quantities of the fixed factor constant a point is reached beyond which the marginal product then the average product and finally the total product will diminish. i. Total Product (TP) This is the maximum amount of output that can be produced from a given set of input or the final goods and services produced from a given set of input. ii. Average Product (AP) This is a total output per unit input AP = TP = out put L input iii. Marginal Product (MP) MP = Change in TP Change in L Example: a) 8 - 1 = 8 1-0 b) 20 8 = 12 21 c) 36 20 = 16 32

No of Total Work Product ers (TP) 1 2 3 4 5 6 7 8 8 20 36 48 55 60 60 54

Average Product (AP) 8 10 12 12 11 10 8.6 7

Marginal Product (MP) 8 12 16 12 7 5 0 -7

STAGES OF PRODUCTION Stage One Marginal Product is increasing due to increasing marginal product, total product and average product also increased. At this stage the cost of production decreases as output increases because firms enjoy economies of scale or increasing returns to scale. Stage Two It is also called the stage of diminishing returns at this stage Total Product increases and reaches maximum both Marginal Product and Average Product decreases but are still positive. It is logical to continue producing at this stage Stage Three This is also known as negative return to scale the Total Product and Average Product decrease. Marginal Product is negative it is illogical to produce at this stage. Returns to Scale

IR Increasing Return CR Constant Return DR Diminishing Return 4

NR Negative Return 1. Increasing Return (IR) occur when inputs are double output increases but more than double 2. Constant Return (CR) occurs when inputs are double output is also double 3. Decreasing Return (DR) occurs when inputs are double output increases but less than double 4. Negative Return (NR) occurs when inputs are doubled output is negative


3rd August 2011

The splitting of tasks into various smaller units and entrusting each unit to particular individual or groups of workers for execution depending on their areas of expertise skills and experience. In this way a small part of the work is undertaken by one person and the whole job is completed by different persons. TYPES OF DIVISION OF LABOUR I. Complicated / Process Division of Labour This is where one job is subdivided into different smaller parts and each part is given to a separate set of workers. II. III. Occupational / Professional Division of Labour Geographical / Territorial / International Division of Labour This is where different people adapt different occupations This where different geographical / region / countries specialize in the production of different groups of services. Advantages of Division of Labour 1. Promote Efficiency this is because tasks are divided into specialized units and assigned to individuals with specific skills those areas. 2. Reduced Supervision workers are easily supervised since they have been assigned specific tasks which they are directly accounted for.

3. Responsibility workers develop a sense of responsibility towards their tasks. 4. Easy Management Management of the organisation becomes easy because work is divided into specialized task. 5. Specialization it is highly increase by division of labour as a given individual repeated does the task. 6. Increased Output division of labour leads to increase in output since workers are specialized in the task which they know best. 7. Reduction in Cost division of labour promotes cost effectiveness since the workers becomes efficient and thereby perform their given tasks in minimum cost. 8. Time Saving division of labour reduces time wasting since workers know their tasks and therefore perform their tasks in a shorter time period. 9. Employment Creation when work is divided in different occupation there is a chance that most people will get employment. 10. Increase in Skills by reducing every work business to a single operation skills are increased through repeated performance. 11. Less Fatigue because of subdivision into smaller units. 12. It Encourages Team Work 13. It Promotes International Trade through international trade each country is left to specialize into goods and services that they produce best. Disadvantages of division of labour 1. Monotony 2. De motivation 3. Over specialization it may lead to unemployment. 4. Increased cost of production people who are highly skilled may hold the producer at ransom 5. Case of absenteeism 6. The case of minimum supervision workers may take advantage of the minimum supervision and make the whole process counter productive. 7. Increased fatigue

8. High degree of interdependence if work is affected in one area or unit the whole process is affected. 9. lack of identity 10. Reduces mobility of labour Limits to Division of Labour 1. The extent of the market if the market is small then there is no need for division of labour. 2. The extent to which exchange and distribution networks are developed because division of labour is associated with large scale the exchange and distribution network should be develop. 3. Size of the labour force if there is only one worker then there is no need for division of labour 4. Nature of goods and services some goods by their own nature cannot be produced by divisions of labour example gold, alarm, making of money. EFFICIENCY OF LABOUR This is the quantity and quality of any commodity produced by labour. If a worker produces goods and services of greater quantity and superior quality then the worker will be regarded to be more efficient and if a worker produces goods and services of lesser quantity and inferior quality then the worker will be regarded to be less efficient. An efficient worker is a great entrepreneur and national assets. Efficiency is a powerful and effective instrument for economic growth and development. An efficient worker does not waste time or material and uses machinery with a lot of care. Efficient worker require less supervision, work more intelligent and show greater initiative and sense of responsibility. Efficiency leads to increase output at reduced cost which increases the competitive strength of an industry.

Factors Determining Efficiency of Labour 1. Physical and Mental well being of the worker 2. Education and Training it improves efficiency 3. Industrial Organisation e.g. trade union, welfare etc. 4. Tools and Equipments availability and quality 5. Efficiency of other factors of production if the other factors of production are not efficient then the others like labour will not be efficient. 6. Specialization increasing efficiency 7. Working conditions poor working condition will lead to inefficiency. 8. Wage level low / poor, wages affects efficiency 9. Climates when you have adverse or extreme weather will not be efficient. 10. Social and Cultural factors some cultures affect efficiency example religion 11. Political factors during peace workers can be efficient during war workers can be inefficient. 12. Working hours - during long hours and due to fatigue work become inefficient. Short hours 13. De motivation

10th August 2011

Mobility of Labour

This means movement of labour from one place to another or from one house to another.
Types of Mobility of Labour i.

Geographical mobility this refers to the geographical movement of labour from one location to another. Occupational mobility this is the movement of labour from one professional / occupation to another. Horizontal mobility movement of labour from one employment to another employment in the same capacity.




Vertical mobility movement of labour from a lower grade to a senior grade.

Importance / Significance of Mobility of Labour a. It increases employment opportunities

b. Higher wage levels c. It increases production d. It creates a sense of international community e. It eliminates wage differentials
Factors Hindering Mobility 1. Lack of education and training 2. The length of schooling or training 3. High transport cost 4. Lack of developed transport network 5. Family ties 6. Lack of accurate information 7. Man made barriers 8. Wars conflicts and regional animosity 9. Cultural and social inclinations 10. Climate Policies that can be adapted to boost mobility of labour 1. 2. 3. Improve infrastructure 4. The government should provide employment bureau 5.

PRODUCTIVITY It means different things to different people some of the more commonly used definitions include the following: 1. Productivity is the relationship between output and input used to

create that output.

According to this definition high productivity means producing more with the same amount of resources or achieving higher output in terms of volume and quality for the same input Productivity is therefore the efficient and effective use of resources Productivity =Output Input 2. Productivity is the relationship between results and time taken to accomplish them. According to this definition the less time it takes to achieve the intended results the proactive the system is. Time is often a good denominator since its a universal measurement and it is beyond human control. 3. Some people also view productivity as a more intense use of resources This definition has been criticize by many The essence of product improvement is working more intelligently or smarter and not harder 4. Productivity is also defined as a concept of the mind which is match to perfection. It is assumed that workers who have experience are more productive. IMPORTANCE OF PRODUCTIVITY IN ECONOMIC DEVELOPMENT 1. Improved productivity leads to economic growth 2. Productivity determines how competitive a company products are internationally 3. Its a comparative tool for managers and economist since it compares production with the resources used. 4. Productivity is used as a guide by employers 5. Through productivity a wide variety of goods and services are made available at affordable prices 10

6. Higher income are enjoyed 7. Surplus wealth and value is created 8. Investment in social services such as education and health is made possible. 9. Foreign exchange generation 10. Inflation control (demand pool inflation) 11. Employment generation / creation PRODUCTIVITY MEASUREMENT It can be measured on a national / industry basis / company It can also be measured for departments / one person Measurement of productivity involves an estimation for both output and input The major problem faced in this estimation is: The nature Availability Reliability of data

There are two types of ratios that are used in productivity measurement. 1. Total Factor Productivity TP = Total output Total input In total factor productivity all the four factors of production are considered 2. Partial Factor Productivity PFP = Total input Partial output In partial factor productivity one of the factors of production is considered In measuring productivity ratios whether TFP / PFP two approaches are generally used: a) Input output approach b) Value added approach


17 August 2011
A. Input output Approach This is generally used in manufacturing and non service sectors. According to this approach productivity is arrived at by dividing the volume of output by the amount of input used in producing that output. Productivity = Output Input B. Value Added Approach This is mainly used in the service sector. In this approach the same method of comparing output with input still applies. However since quantitative measurement of output in a service sector is difficult value added approach is used. The value added is the difference between turn over and the cost of intermediate input. WAYS TO IMPROVE PRODUCTIVITY 1. Organisational restructuring 2. Rationalization of the product of service range. 3. Introduction of bonus or incentives 4. Staff right sizing 5. Research and development 6. Automation and computerization 7. Product or process redesign 8. Conducting productivity audit 9. Staff training LIMITATIONS TO PRODUCTIVITY IMPROVEMENT i. ii. iii. iv. v. In ability to understand what productivity rarely means The focus is on reducing input rather than increasing output. In ability to isolate the basic cause from the symptoms Technical issues such as automation and computerizations are over emphasized while human issues are neglected. There is no productivity measurement system in place.


vi. vii. viii. ix. x.

Unclear productivity improvement goals. Sharing of productivity gains among the various share holders is not properly defined. Lack of productivity improvement skills and expertise In effective leadership and management for productivity improvement strategies. Lack of ownership among the stake holders.

BOTTLENECKS / HINDRANCE / IMPEDIMENTS / OBSTACLES TO PRODUCTIVITY IMPORVEMENT IN DEVELOPING COUNTRIES 1. Shortage of capital due to low capital formation 2. High population growth rate. 3. Ineffective labour management practices 4. Low wages and inferior terms and conditions of employment 5. Low levels of education and training 6. Poor infrastructures 7. Political instability and civil wars 8. HIV AIDS and other diseases 9. Cultural factors and practices 10. Absence of a national integrated and institutional frame work for productivity promotion measurements 11. Lack of knowledge on productivity measurements techniques and bench marking. LABOUR PRODUCTIVITY This is the output per worker per given period of time It is a measure that relates output to the labour resources used in producing that output. It is also a measure of the efficiency and effectiveness with which labour is being utilized in the production process. Labour productivity tells us how many units of outputs we can obtain from a unit of labour input. If output per unit labour input increases then we can rightly say that labour productivity has risen and if output per unit labour input decreases then we can rightly say that labour productivity has reduced.


Labour Productivity = Total output Total input Total man- days /man-hours = Total output Wage bill = Total output No of workers DETERMINANTS OF LABOUR PRODUCTIVITY 1. Salaries and wages adequate , poor (key words) 2. Staff motivation motivated and demotivated 3. Level of skills highly skilled workers / less skilled workers 4. Computerization availability of the system makes workers to be more efficient. 5. Professionalism people who are professional in their work are more productive than those who are not. 6. Specialization 7. Job rotation 8. Availability of resources 9. Training , coordination 10. Working conditions poor , conducive 11. Attitude and mind set 12. Hours of work 13. Absenteeism 14. Health and physical well being 15. Effective communication 16. Social and cultural factors

24th August 2011

LABOUR MARKET STRUCTURES There are basically to broad labour market structures 1. Perfect 2. Imperfect


1. Perfect Market competitive conditions are assumed to exist. Features of Perfect Labour Markets i. ii. iii. iv. v. vi. vii. Large number of buyers and sellers Homogeneity of labour Free entry and exit of firm in the market Profit maximization is the only goal being pursued by all employers There is no government regulation or intervention Perfect mobility of labour exist Perfect knowledge about market conditions i. ii. iii. iv. v. vi. vii. Small number of buyers and sellers Heterogeneity of labour Limited entry and exit of firm in the market Profit maximization is not the only goal being pursued by all employers There is government regulation or intervention Imperfect mobility of labour exist Imperfect knowledge about market conditions

2. Imperfect Market

Demand for Labour It refers to the quantity of labour that firms are willing and able to employ at a given period of time. It is concerned with the level of employment desired by business firms during a given period of time. Labour is demanded by firms because it is one of the factors of production. Determinants of Demand for Labour 1. Cost of labour or the wage rate the higher the cost the lower the demand. 2. Productivity of labour force the higher the demand for labour the lower the rate of production. 3. Level of technology - with improved technology will use more machine than labour 4. State of the economy when the economy is stable the demand is higher with inflation the demand is low


5. The price of the product if the price of product is high then the demand will also be high 6. Demand for the product of labour if the demand for the product increases demand for labour also increases 7. Government policy capital intensive if the government uses then the demand for labour will be high. labour intensive 8. Labour efficiency 9. Number of employers when there are more employers the demand for labour decreases. 10. Supply of other factors when the supply is high the demand for labour is high Elasticity of Demand for Labour It means responsiveness of quantity of labour demanded to change in wage rate It is a measure of the extent to which the quantity demanded for labour response to changes in one of the influencing factors. Determinants of Labour 1. The share of labour in total cost The higher the proportion of total cost accounted for by labour the higher will be the elasticity of demand, if the wage bill accounts for high proportion of total cost an increase in the wage rate will lead to a substantial right in total cost. As a result firms will reduce production and hire few workers. 2. Demand for the final product The higher the price elasticity demand for final production will be the decline in output associated with a given input in price and the greater the loss of employment. 3. The supply of other factor Employers attempts to substitute other factors of production for labour when wage rate rises may result in the prices of such factors rising substantially consequently making firms hope for substitution. 4. Availability of substitute / substitutability of labour If labour can easily be substituted then elasticity for demand for labour is high so when it is not easily substituted elasticity for demand is low. 16

Supply of labour The labour supply refers to the total number of hours that labour is willing and able to supply at a given wage rate. It can also be defined as the number of workers willing and able to work in a given occupation or industry for a given wage rate. Determinants of labour supply 1. Average number of hours the longer the hours the higher the supply 2. Participation rate it refers to the number of person to the labour force and not just the number of persons employed. The labour force participation depends on gender, age, religion, culture etc. 3. Population growth the higher the population the higher the supply 4. Other wage rates when wages decrease in other occupation supply of labour also decreases.

7th September 2011

TRADE UNIONS AND COLLECTIVE BARGAINING Different countries use the term trade union differently but generally it refers to association employees organisation employers association. A trade union or labour union is a continuous association of workers for the purpose of maintaining or improving the conditions of their employment. It can also be defined as a body of workers organized into a voluntary association or union to further their mutual interest respect to wages hours of work, working conditions and other matters of interest to the workers. EFFECTS OF INTRODUCING TRADE UNION IN A PERFECT

LABOUR MARKET 1. They ensure good health and safety at work 2. They enable the worker to get economic security 3. They restrain management from taking any action which is irrational, illogical, discriminatory or prejudicial. 4. They act as channel of workers to air grievances and ideas 5. They secure protection during emergency


6. They promote cordial relationship 7. They provide a chance to get employment Conditions under Which Trade Unions Can Raise Wages and Terms and Conditions in A Perfect Labour Market 1. By ensuring that the workers are paid in line with there marginal productivity 2. By improving the productivity of workers through there welfare activities 3. By restricting the supply of labour 4. By raising the standard wage rate 5. By studying market conditions and advising appropriately both parties FACTORS DETERMINING THE EFFECTIVENESS OF TRADE UNION 1. Availability of funds 2. Efficient management of the unions by competent individuals 3. Support from the union members 4. United workforce 5. Lack of interference from political figures 6. Support from the government and employer 7. Clear objectives 8. Sound internal organisation IMPACT OF TRADE UNIONS ON ECONOMIC ACTIVITIES 1. Trade unions resist any attempts by firms to reduce wages. 2. Trade unions enable workers to get economic security 3. They help to increase the productivity of workers through their welfare activities 4. They help in providing employments 5. They also help in small saving schemes NEGATIVE OF TRADE UNION ON ECONOMIC ACTIVITIES 1. They can cause inflation 2. They also reduce production when they call for strikes 3. They can also cause unemployment when they ask for higher wages more than the employers can afford.


COLLECTIVE BARGAINING There are negotiations between employers and workers about working conditions and terms of employments. Conditions Necessary / Essential / Requirements / Pre Requisite / Pre Requirement for the Success of Collective Bargaining 1. Clear objectives 2. Spirit of give and take 3. Unreasonable demand should be avoided 4. Parties should rely on facts and figures to support their views. 5. Strong union leadership 6. Progressive management the managers should be supportive 7. The agreement should be embodied in a document 8. Incase of an agreement the agreement should be honoured IMPORTANCE OF COLLECTIVE BARGAINING 1. Effecting social change 2. Establishing peace between the two parties 3. Promoting good relationship 4. Opens of channel of communication 5. Promotes a sense of job security 6. Creates a peaceful industrial climate nationally which increases economic and social development. FORMS OF COLLECTIVE BARGAINING 1. Single employer bargaining this is where the problem is unique 2. Multiple employers bargaining this means there is a common problem.


14th September 2011

EMPLOYMENT AND UNEMPLOYMENT Employment means effective utilization of resources in the production process. TERMINOLOGIES USED IN: 1. Labour force These are all members of a countrys population who are physically fit, mentally alert and able to work. According to International Labour Organisation (ILO) the age ranges from 16 64 years in Kenya its 18 64yrs. The size of active labour force however depends on customs, traditions, religions, beliefs, education and training. 2. Labour force participation rate This is the proportion of population which is in work or seeking for a job. Its the proportion of a countrys population that is in wage employment, self employment or unemployed but is actively looking for work. Its influenced by the availability of jobs, wage rates, performance of the economy, levels of education and training, culture, attitude etc. 3. Full employment In ordinary usage it means that situation when all those persons who are willing and able to work are fully employed however in strict economic terms it means, that situation when there is no demand deficiency and unemployment. This will mean demand = supply. 4. Search period This is the period during which unemployed individuals look for jobs. It can either take too long for a person to get a job or just a short time. Such period is determined by the wage rate, availability of jobs, level of education and training, willingness of the unemployed to take up jobs, mobility of labour, information flow etc.


THEORY OF EMPLOYMENT 1. Classical Theory / Traditional Free Market Its based on wages and employment. According to this theory wages and employment are determined by the market forces of demand and supply. The theory states that labour is demanded so long as marginal product is greater than wage rate. It also considers that workers are ready to work so long as wage rates are high. The classical were also of the opinion that wages should be reduced to increase employment. LIMITATIONS OF THE THEORY i. ii. iii. iv. v. The theory assumes that wages are flexible which is not the case wages are only flexible when being adjusted upwards but sticky downwards. Many people in developing countries are willing to work at less than market wage rate because of unemployment and poverty. The theory recommends a wage cut to cheat employment which does not automatically lead to increased demand of labour. It assumes that a fully employment condition can be attained which is not realistic. Its based on competitive market situation which is not attainable in the real world. According to Keynesian employment is a function of the national income. The higher the national income the higher employment and vice versa National income depends on natural resources, quality and efficiency of labour and other factor inputs such as technology and capital. Keynesian also states that effective demand determines the level of employment. Employment is further boosted by savings and investment.

2. Keynesian theory of income and employment


LIMITATIONS OF KEYNESIAN THEORY i. The theory assumes that firms can respond quickly and effectively to increased demand by expanding outputs and hence employment. In developing counties the major bottleneck to increase output is not insufficient demand by structural and institutional constrains on the supply side e.g. shortage of capital, raw materials and deficiencies in management of human resources combined with poorly functioning and inefficiently organized commodity and labour markets.

21st September 2011

UNEMPLOYMENT It means that situation when people who are ready and able to work at the prevailing wage rate and other terms and conditions of employment are not able to secure a job. It is a major social economic and political problem for all countries. Developing countries experience it more than the developed. TYPES OF UNEMPLOYMENT 1. Frictional Unemployment - This is caused by labour turnover 2. Structural Unemployment - This is caused by structural changes in the economy 3. Seasonal Unemployment - This usually happens in the agricultural and tourism sector which are affected by the weather and season. 4. Cyclical / Demand deficient / Keynesian Unemployment - This occurs when there is no demand for goods and services leading to closure of factories. 5. Disguised / Hidden Unemployment This occurs when there is no sufficient work to effectively occupy a given number of workers. In this case even if some workers are withdrawn work will not be affected. CAUSES OF UNEMPLOYMENT 1. Shortage of corporate factors of production land and capital 2. Use of inappropriate technology there are two methods of production. (Labour intensive/ capital intensive)


3. Distortion of factor of production prices (rewards) when the rewards are fixed the minimum prices 4. Rapid population growth / High population it should grow as the same as job creation. 5. Nature of education system. 6. Seasonality in production structure. 7. Limited product market the products have no market, there is no demand for Kenyan market 8. Casualisation of employment 9. Presence of expatriates 10. Mobility of labour like the rural urban migration also known as urban unemployment. MEASURES TO CONTROL UNEMPLOYMENT 1. The government can avail loans 2. Labour intensive the government can use machine 3. Fixing of the wages all the three parties can be involved 4. Should have education that is appropriate to your country. 5. Can go to manufacture instead of relying on agriculture 6. Deny work permits or close boarders 7. Decentralization 8. Mismanagement of resources HUMAN CAPITAL