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The Labour Market Demand and Supply

The Indian labor market can be categorized into three sectors


Rural workers , who constitute about 60% of the workforce Urban Organized or the formal sector, that constitutes about 8% of the workforce; and Urban unorganized or informal structure which represents the

32% of the workforce

Labour market structure


Two-third of Indias workforce is employed in agriculture and rural industries. One-third of rural households are agricultural labor households, subsisting on wage employment. Only about 9 percent of the total workforce is in the organized sector; the remaining 91 percent are in the unorganized sector, self-employed, or employed as casual wage laborers.

Labour market structure

Organized and Unorganized Labor


In India, a major chunk of labor force is employed in the unorganized sector. The unorganized / informal employment consists of causal and contributing family workers; self employed persons in unorganized sector and private households; and other employed in organized and unorganized enterprises that are not eligible either for paid, sick or annual leave or for any social security benefits given by the employer. About 7 % of the total work force is employed in the formal or organized sector (all public sector establishments and all nonagricultural establishments in private sector with 10 or more workers) while remaining 93% work in the informal or unorganized sector.

Organized and Unorganized Labor


The largest numbers of informal workers are in agriculture. In fact, 98.84 percent of the employment in agriculture is informal. In the non-agricultural sector, the highest numbers of informal employees are in retail trade, construction, land transport, textiles etc. Thus, the unorganized sector plays a vital role in terms of providing employment opportunity to a large segment of the working force in the country and contributes to the national product significantly. In the matter of savings the share of household sector in the total gross domestic saving mainly unorganized sector is about three fourth. Thus unorganized sector has a crucial role in our economy in terms of employment and its contribution to the National Domestic Product, savings and capital formation.

Demand for labour Demand for labour is a derived demand Factors of production are not wanted as an end product but rather for what they can produce The number of workers a firm wishes to employ depends mainly on the demand for the output they produce Aggregate (total) demand for labour depends principally on the level of economic activity If the economy is growing and firms are confident that it will continue to grow employment levels will tend to increase

Derived demand - occurs when the demand for a factor of production arises from the demand for the output it produces

Demand for labour


The individual firms demand for labour (in addition to levels of demand) is determined by the following factors The price of labour a rise in wage rates which exceeds any rise in labour productivity will raise unit labour costs and will lead to a contraction in demand for labour Productivity as output per worker per hour increase the more attractive labour becomes The price of other factors of production if capital becomes cheaper firms may seek to substitute some of their workers with machines Supplementary labour costs e.g. if National Insurance contributions increase this will lead to a fall in demand for labour The first will cause a movement along the demand curve The last three will cause a shift in the demand curve

Marginal productivity theory This is the key theory underpinning the demand for labour The theory states that demand for workers depends on their marginal revenue product MRP is the value of the physical addition to output arising from hiring one extra unit of a factor of production Where the marginal cost of taking on an additional unit of labour equals its marginal revenue product the equilibrium quantity of labour employed will be established

Marginal productivity theory


the table below assumes that there is a constant market price of Rs.5 per unit and a constant wage rate of Rs.100 per worker per week After the employment of the second worker right up until the 9th worker each one adds more revenue than cost After the 9th this is reversed Profit is maximised when 9 people are employed At this point the gap between total revenue and total cost is greatest (Rs.1700 - Rs.900 = Rs.800)

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Marginal productivity theory


In the short run as a firm takes on more workers output rises at first - because there is division of labour This leads to an increase in marginal product At a certain point the marginal product will start to fall due to diminishing marginal returns The marginal revenue product is calculated
MRP = MP x MR
Marginal product of labour the change in total output arising from hiring one worker MRP = MP x MR (Marginal Product x Marginal Revenue)

With perfect competition the firm is a price taker so the MR will be equal to the price The firm will be able to sell all of its output at the market price If there is perfect competition in the labour market firms can recruit workers at a constant labour rate

Shifts in the demand curve for labour


If the MRP of labour increases the demand curve for labour will shift out to the right The MRP of labour will increase if marginal product of labour increases and/or marginal revenue increases The demand for car assembly workers will increase if the productivity of the workers rises (perhaps as a result of training or if the price of their output increases due to an increase in demand for cars) We draw the demand curve for labour in the same way as we drew demand curves at AS level downward sloping Working out MRP can be difficult in reality

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Marginal productivity theory


The marginal revenue product of labour curve shown below shows the quantity of labour demanded at each wage rate The MRP of labour curve is the demand curve for labour A firm will demand labour at the point where MRP equals marginal cost (the wage rate) When the wage rate is W1 the firm will thus demand Q1 units of labour If the wage rate rises to W2 the firm will demand Q2 units of labour (less)

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Marginal productivity theory assumptions


All factors of production other than labour are fixed in quantity Workers are homogeneous and have the same level of aptitude for a job The labour market is perfectly competitive There may be a perfectly competitive product market In reality most of these assumptions dont hold but it does not alter the fact that the MRP curve as drawn below does broadly describe what happens in the real world when increasing quantities of labour are added to fixed stock of capital

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The supply of labour


The labour supply consists of those that are economically active those who are either in work or who are searching for work (unemployed) The labour supply is known as the labour force or the working population Those that are economically inactive are not part of the labour supply E.g. those that are not old enough to work; Students in full time education; Housewives; Those who have retired early; Prisoners; Disabled

The supply of labour to a particular occupation


The number of people willing and able to work in a particular occupation is influenced by monetary and non-monetary factors Monetary wages/salary, commission, bonus Non-monetary non financial rewards e.g. job satisfaction (see later) The higher the wage rate the more people are likely to want to do the job e.g. a large number of people seek to be a lawyer because of the potential for earning high wages Non-monetary factors Convenience and flexibility long or unsociable hours will deter potential workers. Choosing what hours to work will attract people to that occupation Status people are attracted to high status occupations such as doctors

The supply of labour to a particular occupation


Promotion prospects people may be willing to work for relatively low wages when they start knowing that may be the opportunity for promotion into high paid jobs Working conditions workers will be attracted to jobs with good working conditions. Holidays/Leisure time teachers and civil servants Perks and Fringe benefits company cars, expense accounts, private health care etc Job satisfaction a combination of all of the above plus other intangible features such as making a difference, enjoying colleagues company etc

The supply of labour to a particular firm


In addition to the factors influencing the supply of labour to a particular occupation some additional factors influence the supply of labour to particular firms Availability of training high quality and quantity of training will attract workers Location firms in cities (with good transport links) will have a higher supply of labour Level of unemployment when the level of unemployment is low there may be skills shortages making it difficult for firms to fill vacancies Opportunities for overtime overtime is paid at higher rates - this may attract workers

The industry labour supply curve


A change in the wage level in an industry causes a movement along its labour supply curve An industry labour supply curve is generally upward sloping like the diagram below This is even though the labour supply curves of individuals may be backward bending This is because a higher wage is likely to attract new workers into the industry

The elasticity of supply of labour


This measures the responsiveness of the quantity of labour supplied to a change in the real wage rate and will vary from industry to industry The formula is
% change in quantity of labour supplied % change in wage rate

The elasticity depends on The skills and qualifications required firms that require highly qualified workers will find it more difficult to attract workers with wage rises since the supply is low. Elasticity is higher for lower skilled jobs

The elasticity of supply of labour


The length of the training period jobs with long training periods will have low elasticities. Workers may be put off by the time to train and even if they are attracted it will take them a long time to become qualified. Sense of vocation e.g. teachers or nurses the reward is not wholly financial therefore changes in wages may not affect supply significantly Time period in the long run supply of labour tends to be more elastic due to notice periods and training etc

Unemployment
Unemployment is a state of joblessness in an economy Unemployment is usually measured in terms of unemployment rate where the number of unemployed individuals will be divided by the total number of employed individuals According to International Labor Organization definition, public aged 16 and above will be called as unemployed if they are out of work, need a job, have vigorously wanted work in the last four weeks and are available to start work in the next two weeks, have found a job and are waiting to join the job in the next two weeks.

Important Causes For Unemployment In India


Increasing population of India is increasing day by day and is
crossing all the boundaries. Today, India is the second largest country in population after china and it is expected that the rate of population may be doubled in the next coming decades. This is one of the major reasons that is leading to huge unemployment.

Programs for family planning to restrict the population have so far


not yielded desired results Technological advancements will lead to some jobs becoming outdated as people will be replaced by machines

Important Causes For Unemployment In India


Many big corporations try to maximize their profits and reduce the costs by outsourcing people to well developed countries at cheaper workforce. The work pressure in such countries will be more and many people come back, leaving the job because of the heavy work pressure Even in India, many companies make workers to work for long hours or overtime instead of hiring new employees. This way they try to save money. This will lead to a state that the average salary stays the same and no new jobs will be produced.

Rising Rate Of Unemployment in India


Financial experts have implemented different measures for bringing stability in the inflationary condition of the country. They have also designed programs for boosting the overall economy of the country. As per the reports, the Indian unemployment rate 2011 has also remained a cause of concern among the people. The latest reports indicate that the unemployment rate of the country is at 9.4 percent this year which is quite high. According to the reports, forty million people are still unemployed in the country and more employment opportunities are required for balancing the condition.
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Types of unemployment
(1) Voluntary unemployment In this type of unemployment a person is out of job of his own desire doesn't work on the prevalent or prescribed wages. Either he wants higher wages or doesn't want to work at all. (2) In voluntary unemployment In this type of situation the person who is unemployed has no say in the matter. It means that a person is separated from remunerative work and devoid of wages although he is capable of earning his wages and is also anxious to earn them.

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In voluntary unemployment
Cyclical unemployment - This is the result of the trade cycle which is a part of the capitalist system. In such a system, there is greater unemployment and when there is depression a large number of people are rendered unemployed. Since such an economic crisis is the result of trade cycle, the unemployment is a part of it. Sudden unemployment - When at the place where workers have been employed there is some change, a large number of persons are unemployed. It all happens in the industries, trades and business where people are employed for a job and suddenly when the job has ended they are asked to go.
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In voluntary unemployment
Unemployment caused by failure of Industries - In many cases, a business a factory or an industry has to close down. There may be various factors responsible for it there may be dispute amongst the partners, the business may give huge loss or the business may not turn out to be useful and so on. Unemployment caused by deterioration in Industry and business - In various industries, trades or business, sometimes, there is deterioration. This deterioration may be due to various factors. In efficiency of the employers, keen competitions less profit etc. are some of the factors responsible for deterioration in the industry and the business.
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In voluntary unemployment
Seasonal unemployment - Certain industries and traders engage workers for a particular season. When the season has ended the workers are rendered unemployed. Sugar industry is an example of this type of seasonal unemployment.

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Measures To Control Unemployment

Measures To Control Unemployment


1. Heavy Investment in Basic Industries: Investment in heavy and basic industries and consumer goods industries should be increased. They provide more employment along with the supply of consumer goods 2. Development of Cottage and Small-scale Industries: As they provide more employment by adopting labour intensive techniques. 3. Change in Educational System: More emphasis should be given to vocational education. 4. Checking of Population Explosion: Rapidly rising population should be checked by adopting family planning and welfare schemes

Measures To Control Unemployment


5. Modernization of Agriculture: Modernization of agriculture should be done. Wastelands should be utilized. 6. Introduction of Rural Works Programmes: Rural works programmes should be increased. 7. Developing Infrastructure of Economy: Infra-structure of the economy should be developed. 8. Subsidies to Private Sector: Subsidies and other incentives should be given to private sector 9. Stress on Self-employment: Young entrepreneurs should be financed for self-employment

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