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# DETERMINANTS OF

## DEMAND FOR LABOUR

Wage Rate
Productivity of Labour
Price of Output
Substitutability of Labour
with other factors of
production

DETERMINANTS OF SUPPLY FOR LABOUR

The Number of births
The number of deaths
The number of people
migrating in and out of the
area
The number of people who
choose to stay at home and
look after for their families
The Number of people at
school
The number of people in
further education
The number of people who
are retired
Production Function
Q = f (K, L)

Demand for Labour : Derived
Demand
The substitution Effect of
Labour : if the wage rate falls,
employers will employ more
labour because it is cheaper
The Income Effect of Labour:
if the wage rate falls,
employers will employ more
labour because it leaves more
budget to spend
Wage Rate Determination In the
Labour Market
Demand
Supply
Equilibrium Wage Rate
Disequilibrium Wage Rate
Equilibrium Wage Rates
Is the wage rate at which the quantity of labour
demanded equals the quantity of labour supplied
Disequilibrium Wage Rate
The market wage is greater
than the equilibrium wage
The market wage is lesser
than the equilibrium wage
Reasons ( excess supply of labour,
workers will be unemployed
because of the excess number of
workers thus wage rate will fall)
Workers realizing they are or
may become unemployed, will
accept lower wage rates, in an
effort to make their services
more attractive to employers
Employers, realizing there are
unemployed workers, will offer
to employ workers at a lower
wage rate
Reasons ( excess supply of labour,
workers will be highly sought
after, because there is shortage of
workers)
1. Employers finding themselves
unable to employ as many
workers as they would like, will
offer to employ workers at
higher wage rates in an attempt
to attract more workers
2. Workers, realizing they are
being sought after by employees,
will begin to ask for higher wage
rates for their services

The market wage is lesser than the
equilibrium wage

Only when the market wage
rate equals to the equilibrium
wage rate is there neither
excess demand for labour nor
excess supply of labour.
Hence there are neither
unemployed workers or
shortage of workers
LABOR FORCE and
UNEMPLOYMENT

Labour Force- Population 15 years old and
over who contributes to the production of
goods and services in the country
Includes either employed or unemployed;
and those who are neither employed or
unemployed
Participation Rate- The percentage of the
entire labour force population that makes
up the labour force

Participation rate = Labour Force x
100
Labour Force Population

Ex. In 1993 labour force was 13.946 million
and the labour force population was 21.392
million
65.2% = 13 946 000 x 100

21 392 000

The Official Unemployment
Rate- The number of
unemployed people in the
labour force as a percentage of
the entire labour force

Ex. The 1993 Labour force of
13.946 people was composed of
12.383 million people who were
employed and 1.562 million
people who were not.
Unemployment Rate = UELFR/Labour
Force x 100
11.2%= 1 562 000 x 100
13 946 000

Drawbacks

Because of how the unemployment rate is calculated, it may
underestimate or overstate the true level of unemployment in the
economy. Critics point to the factors: underemployment, discouraged
workers, and dishonesty.
Underemployment- The problem of workers being underutilized,
either as part-time workers or by working at jobs not appropriate to
their skills or education. It is sometimes argued that the official rate
understates unemployment by ignoring the underplayed workers.
Discouraged Workers-
-Unemployment statistics do not take into account unemployed people
who have given up looking for work.

Dishonesty- Some people responding to Labour Statistics market
survey may state that they are actively looking for work, when they
really are not. This makes it possible for the official rate to overstate
employment
UNEMPLOYMENT :
ISSUES, DIMENSIONS, AND ANALYSES

UNEMPLOYMENT
An involuntary idleness
on the part of those who
have failed to find
employment or who have
lost their latest jobs, but
are able to work, and are
looking for work

Types of Unemployment

1. Normal Unemployment- Unemployment
due to low or no demand for workers.
2. Frictional Unemployment-
Unemployment due to being temporarily
between jobs or looking for a first job. It is a
permanent feature of labour markets,
represents about 3% of the labour force at all
times.
3. Structural Unemployment-
Unemployment due to a mismatch between
people and jobs. This type of unemployment
occurs because of gradual changes in the
economy. Long term adjustments in what,
how, and where products are produced cause
such unemployment.
4. Technological Unemployment-
Unemployment due to technology
5. Cyclical Unemployment- Unemployment
due to the ups and downs of economies and
businesses, causing unemployment to rise and
fall.
6. Seasonal Unemployment- Unemployment
due to the seasonal nature of some
occupations and industries

Effects of Unemployment

It creates depression and
psychological effect on the part
of the male worker
Loss of wages and temporary or
permanently lowered plane of
living
Women and children enter into
the labor force in the desire to
help the family
In many instances it breeds
general unrest of the existing
economic order
Unemployment creates
unemployment
It creates more social problems

Full Employment
It is the highest reasonable expectation of employment for the
economy as a whole, as is defined in terms of the Natural Employment
Rate

Natural Employment Rate- which is the unemployment rate that
defines full employment. Includes frictional unemployment, but
traditionally excludes cyclical and seasonal unemployment.
Increases over the past few decades in both the actual and the natural
unemployment rates represent worrisome trends, which can be
explained by the following factors:
1. Structural Change
2. Changing Participation Rates
3. Minimum Wage

Five Forms of Labor Underutilization

Open Unemployment - both voluntary & involuntary
Underemployment people working less than they
would like to work
Visibly Active but underutilized-people who would not
normally be classified as either employed or
underemployed
Disguised underemployment
Hidden unemployment
Premature retirement
The impaired- people who may work full time but whose
intensity of effort is impaired by malnutrition
The unproductive

A general increase in the price of goods
and services in an entire economy over
time.

TYPES OF INFLATION

1. DEMAND PULL INFLATION
2. COST PUSH INFLATION
3. STRUCTURAL INFLATION
formula for INFLATION RATE

Yearly = [ cpi current year/cpi previous year-1]100
Monthly=[ cpi current mo/cpi previous mo-1]100
Quarterly= [ cpi qtr of current yr /cpi previous of
same qtr of previous yr-1]100
EFFECTS OF INFLATION

1. It will result to hoarding or illegal storing of
product
2. It will aggravate poverty conditions
3. Investment is very risky
4. Lenders of Money or creditors lose during
inflation while debtors benefit from it because of
the decrease in the purchasing power of peso

Inflations Effect.
If household but Inflation at a higher rate, then households
If household and inflation rate proportionally, then
Cost of living adjustment clauses (COLA) Provisions for
income adjustment to accommodate changes in price level,
which are included in wage contracts.
Fully Indexed Incomes Nominal incomes that automatically
increases by the rate of inflation.
Partially Indexed Incomes Nominal incomes that increases by
less than the rate if inflation.
Fixed Incomes Nominal incomes that remain fixed at some
dollar amount regardless of the rate of inflation.
Nominal Interest rate: The interest rate expressed in money
terms.
Real interest rate: The nominal interest rate minus the rate if
inflation.

INFLATION RATES
(2000 = 100)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Average 6.7 7.5 5.6 9.3 5.9 4 6.8 3 3.5 6 7.6 6.2 2.8 9.3 3.2 3.8 4.4

January 5.8 8.5 5.6 6.5 10.5 2.2 7.5 3.7 2.8 4.1 8.4 6.7 3.9 4.9 7.1 4.3 3.6
February 5 8.7 5.3 7.6 9 2.5 7.4 3.2 3.2 4 8.5 7.6 2.6 5.4 7.3 4.2 4.3
March 5.6 8.7 5.4 8.1 7.7 2.8 7.6 3.5 3 4.2 8.5 7.6 2.2 6.4 6.4 4.4 4.3
April 5.6 8.9 5.1 8.3 7.1 3.3 7.4 3.5 3.3 4.3 8.5 7.1 2.3 8.3 4.8 4.5 4.3
May 6.3 8 5 9.7 5.8 3.4 7.4 3.5 3.4 4.5 8.5 6.9 2.4 9.5 3.3 4.3 4.5
June 6.6 8 5.6 10 4.9 3.8 7.2 2.9 3.9 5.4 7.6 6.7 2.3 11.4 1.5 4 4.6
July 6.4 7.8 5.4 10.1 4.8 4.2 7.4 2.6 3.7 6.6 7.1 6.4 2.6 12.3 0.2 3.9 4.6
August 6.8 7.3 5.3 9.9 4.7 4.4 7 3 3.4 6.8 7.2 6.3 2.4 12.4 0.1 4.1 4.3
September 8.8 5.3 5.8 9.9 4.9 4.2 6.8 2.7 3.6 7.2 7 5.7 2.7 11.8 0.6 3.5 4.6
October 8.8 5.4 5.9 9.8 5 4.6 6.1 2.6 3.6 7.7 7 5.4 2.7 11.2 1.6 2.8 5.3
November 8.1 6.5 6.4 10.7 3.6 5.7 5 2.4 3.9 8.2 7.1 4.6 3.2 9.9 2.8 3.1 4.7
December 8.1 6.9 6.2 10 3.9 6.5 4.5 2.5 3.9 8.6 6.7 4.3 3.9 8 4.3 3.1 4
Note: Monthly inflation rates when averaged do not tally with the annual inflation rates computed from the
Consumer Price Index in the Philippines.
Starting January 2012, National Statistics Office (NSO) will no longer issue the 2000 based Consumer
Price Index and Inflation Rates.
Source: National Statistics Office
(NSO)
ECONOMIC POLICY TOOLS
Monetary Policy
Fiscal Policy
MONETARY POLICY TOOLS
Reserve Ratio
(RR)
Rediscounting
Rate (ReR)
Open Market
Operation
Low Ms; Inc Ms= Dec.
RR
High Ms; Dec. Ms=Inc
RR
Low Ms; Inc Ms= Dec.
ReR
High Ms; Dec. Ms=Inc
ReR
Low Ms; Inc Ms= Sell
bond
bond
FISCAL POLICY TOOLS
Borrowings
Spending
International
Financial Institution
Other Countries
Local
Low Ms; Inc Ms=
Inc. Borrowings
Infrastructure Porjects
Low Ms; Inc Ms= Inc.
Spendings