WAGES & THE COST OF LABOUR

DETERMINATION OF WAGES
Perfectly competitive labour market Contract of employment (sectors or enterprises not covered by bargaining council or trade unions) Employment and wage levels are determined by the equilibrium between the supply and demand of labour

If demand for labour is in excess (increase in production) : wage rates & supply for labour until

Monopsony labour market

Employer is a wage setter and can set the wages by adjusting the number of workers

Segmented labour market Labour market is divided into segments of characteristics or mode of operation E.g. Medical doctors and lawyers

Entry barriers to market are high due to collective bargaining structures

Dual Labour market

Primary Segment High earnings Good working conditions Employment stability

Secondary Segment Little or no job security Little prospect for promotion Poor conditions of employment

WAGES AND INFLATION

Inflation? Annual rate of increase in the general price level Measured using Consumer Price Index (CPI) Basket of goods and services of atypical households in major urban areas Inflation rate is the result of Money wage level

Wage level determines the buying power

Unions do not appear to be the basic cause of inflation Unions do appear to keep existing inflation rates at a constant Unions increase the difficulty of reducing inflation once it has began When inflation is high, things cost more and people spend less.

WAGE DIFFERENTIALS
Wage differentials = Competitive labour market Different wage rates between industries, different classes of employees in the same industry or geographical areas

DISCRIMINATION Difference in wages due to sex or race does not indicate discrimination by employer Differences may be due to occupation, education, experience and similar factors

EDUCATION
Level of education is an important reason for differential especially grade 12 and tertiary Differences exist (actual or perceived) in the quality of tertiary qualification Demand of a particular degree or diploma

WAGE DIFFERENTIALS (continued) Size of the enterprise Smaller enterprises are usually more labour intensive than larger ones Serve to increase production in relation to costs (labour cost competition) This is possible due to non-existence of bargaining councils

Age or Experience More experience = Higher wages Seniority = Higher wages Years of service = Higher wages

Working environment Night work (nite shift) Unpleasant physical working condititions (municipal workers earning more than some teachers in the public sector) Hazardous work (mining industry)

Strategies for Managing Capacity to Match Demand

DEMAND TOO HIGH

ALTER CAPACITY

DEMAND TOO LOW

Stretch time, labour, facilities Cross train employees Hire part-time employees Request overtime work from employees Rent or share facilities Rent or share equipment

Performance maintenance, renovations Schedule employee training Lay off employees

W1 is initial wage rate If wages increase to W2 more people will be willing to work due to the increase Its every organisations goal to operate at the equilibrium At W2 the organisation needs L2 but ready and willing to work is L3 Creates the A-B gap A-B gap is oversupply of labour and needs to be closed to establish equilibrium Some people will be willing to work for less than W2 but not lower than W1