Topic 4: Labour Markets

Demand for and Supply of Labour

This section looks at the fundamental forces that determine wages and employment levels in
the economy.

●​ The demand for labour by individual firms

○​ Labour as a derived demand: This is a core concept. Firms don't demand
labour for its own sake, but rather because labour is needed to produce goods
and services that consumers demand. If consumer demand for a product
increases, the firm's demand for the labour to produce that product will also
increase.
■​ Example: If there's a surge in demand for smartphones, Apple will
increase its demand for software engineers, assembly line workers, and
marketing staff to produce and sell more iPhones.
○​ Factors affecting demand: These are the key variables that influence how
much labour a firm wants to hire.
■​ Output of the firm: This is directly linked to derived demand. If a firm
expects to sell more of its product, it will need more labour to produce it.
This is influenced by general economic conditions (e.g., strong economic
growth generally leads to higher firm output and thus higher labour
demand).
■​ Example: During an economic boom, construction companies will
demand more builders and tradespeople as more houses and
infrastructure projects are commissioned.
■​ Productivity of labour: This refers to the output per worker per unit of
time.
■​ Increased labour productivity: If workers become more
productive (e.g., through better training, technology, or
management), a firm might need fewer workers to produce the
same output, or it can produce more output with the same number
of workers. In the short term, this might reduce demand for labour,
but in the long term, it can lead to lower production costs, higher
output, and potentially increased demand for labour as the firm
expands.
■​ Example: The introduction of automated machinery in a factory
might mean fewer workers are needed for a specific task, thus
reducing the demand for manual labour in that area. However, it
might increase the demand for engineers to maintain the
machines.
 ■​ Cost of other inputs: Firms have a choice between using labour and
other inputs like capital (machinery, technology).
■​ Relative cost of labour vs. capital: If the cost of labour (wages)
increases relative to the cost of capital, firms might substitute
capital for labour. Conversely, if capital becomes more expensive
(e.g., higher interest rates on loans for machinery), firms might
prefer to use more labour.
■​ Example: If minimum wages rise significantly, a fast-food
restaurant might invest in self-ordering kiosks (capital) rather than
hiring additional counter staff (labour).
●​ The supply of labour This refers to the willingness and ability of individuals to offer their
labour for a wage.
○​ Factors affecting the supply of labour:
■​ Pay/remuneration: This is the most direct factor. Higher wages generally
incentivize more people to enter a particular labour market or work more
hours, assuming all else is equal. This is why the supply curve for labour
is typically upward-sloping.
■​ Example: If salaries for cybersecurity specialists increase
significantly, more university students might choose to study
cybersecurity, increasing the future supply of labour in that field.
■​ Working conditions: Beyond pay, the non-monetary aspects of a job are
crucial. Favourable working conditions (e.g., flexible hours, good work-life
balance, safe environment, positive company culture) can attract more
workers, even if the pay is not the absolute highest. Conversely, poor
conditions can deter potential employees.
■​ Example: A job offering a good work-life balance and
opportunities for professional development might attract more
applicants than a higher-paying job with very long hours and high
stress.
■​ Human capital, skills, experience, education/training levels: The
quality and quantity of a country's human capital determine its labour
supply. Higher levels of education, specialized skills, and accumulated
experience increase an individual's value in the labour market and can
influence their choice of occupation. Government investment in education
and training can boost the overall supply of skilled labour.
■​ Example: A country with a strong vocational training system will
have a higher supply of skilled tradespeople like electricians and
plumbers.
■​ Occupational and geographic mobility of labour:
■​ Occupational mobility: The ease with which labour can move
between different occupations. This depends on the transferability
of skills and the availability of retraining opportunities. High
occupational mobility means a more flexible labour supply.
 ■​ Geographic mobility: The ease with which labour can move
between different locations (cities, regions, or even countries) to
find work. This is influenced by factors like housing costs,
transport, family ties, and information about job vacancies.
■​ Example: A retail worker has higher occupational mobility than a
brain surgeon. A worker in a regional town might have lower
geographic mobility than a young, unattached professional.
■​ Participation rate: This is the percentage of the working-age population
(usually 15 and over) that is either employed or actively looking for work.
An increase in the participation rate (e.g., more women entering the
workforce, people delaying retirement) increases the overall supply of
labour.
■​ Example: Government policies that support childcare can
increase the participation rate among parents.
●​ The Australian workforce
○​ Definition of the workforce: The Australian workforce consists of all employed
people plus all unemployed people who are actively seeking work. It excludes
people who are retired, full-time students not seeking work, people performing
unpaid domestic duties, or those who are institutionalised.
○​ Employed: A person is considered employed if they work for at least one hour
per week for pay, profit, commission, or payment in kind, or are working without
pay in a family business.
○​ Unemployed: A person is considered unemployed if they are not employed, are
actively looking for work, and are available to start work.
○​ General characteristics of the Australian workforce: This would involve
discussing demographic trends, such as an aging population, increasing
casualisation, growth in part-time work, increasing participation of women, and
the shift from manufacturing to services.

Labour Market Outcomes

This section focuses on the results of the interactions between the demand and supply of
labour.

●​ Differences in incomes from work: Why do some people earn more than others?
○​ Wage outcomes for all persons by income groups, occupational groups,
age, gender and cultural background:
■​ Income groups: There's a wide dispersion of incomes, often influenced
by education, skills, and industry. High-income earners typically have
specialised skills, higher education, or are in professions with high
demand.
■​ Occupational groups: Different occupations command different wages
based on factors like required skills, training, risk, and demand. Doctors
 and lawyers generally earn more than retail assistants or cleaners due to
the human capital investment and nature of their work.
■​ Age: Incomes tend to rise with age and experience during an individual's
prime working years, peaking before retirement. Young workers often
earn less due to lack of experience, while older workers may see a
decline if their skills become outdated.
■​ Gender: Historically, and still to some extent, a gender pay gap exists
where women, on average, earn less than men, even for similar work.
This can be due to factors like occupational segregation (women
concentrated in lower-paying industries), career interruptions for
child-rearing, and discrimination.
■​ Cultural background: Some studies suggest that individuals from certain
cultural backgrounds or minority groups may face disadvantages in the
labour market leading to lower incomes, often due to discrimination,
language barriers, or lack of recognition of overseas qualifications.
○​ Trends in the distribution of income from work over time:
■​ Generally, there has been a trend towards increasing income inequality in
many developed economies, including Australia, over recent decades.
This means the gap between high-income earners and low-income
earners has widened. Factors contributing to this include globalisation,
technological change (skill-biased technological change), decline in union
membership, and changes in wage-setting mechanisms.
○​ Non-wage outcomes for different occupations: These are the benefits and
costs associated with a job that are not directly part of the wage. They are crucial
in determining the overall attractiveness of a job.
■​ Examples:
■​ Fringe benefits: Company car, health insurance, superannuation
contributions above the minimum, subsidized meals, gym
memberships.
■​ Leave entitlements: Annual leave, sick leave, long service leave,
parental leave.
■​ Work-life balance: Flexibility in hours, remote work options,
ability to manage personal commitments.
■​ Job security: The likelihood of retaining employment.
■​ Career progression and training opportunities: Chances for
promotion, professional development courses paid for by the
employer.
■​ Job satisfaction: The enjoyment derived from the work itself,
positive workplace culture.
■​ Working conditions: Safety, comfort, stress levels.
■​ Example: A university professor might earn a lower base salary
than a corporate lawyer, but they might have better job security,
more intellectual freedom, and greater flexibility in their working
hours (non-wage outcomes).
 ○​ Arguments for and against a more equitable distribution of income from
work:
■​ Arguments for more equitable distribution (reducing income
inequality):
■​ Social cohesion: Reduces social unrest, crime, and division
within society.
■​ Economic efficiency (long-term): Can lead to a healthier and
more educated workforce, as lower-income individuals have better
access to opportunities. It can also boost aggregate demand as
lower-income earners have a higher marginal propensity to
consume.
■​ Fairness and social justice: Based on ethical principles that
everyone deserves a decent standard of living and opportunities.
■​ Reduced poverty: Direct impact on alleviating poverty.
■​ Better health outcomes: Income inequality is linked to poorer
health outcomes for the population.
■​ Arguments against a more equitable distribution (or for allowing
some inequality):
■​ Incentives for innovation and effort: Inequality can act as a
motivator for individuals to work harder, acquire more skills, and
take risks if there's a greater reward for doing so. Without this,
there might be less entrepreneurial activity and innovation.
■​ Economic efficiency (short-term): Allowing the market to
determine wages without significant intervention can lead to
optimal allocation of resources.
■​ Reward for risk-taking/human capital: High incomes can be
seen as a legitimate reward for significant investment in education,
skills, and for taking on entrepreneurial risks.
■​ Difficulty in defining 'fair': What constitutes an "equitable"
distribution can be subjective and difficult to achieve without
market distortions.

Labour Market Trends

These are the significant shifts and patterns observed in the labour market over time.

●​ Unemployment/underemployment:
○​ Unemployment: The situation where individuals are actively seeking work but
cannot find it. Measured by the unemployment rate (number of unemployed /
total labour force).
○​ Underemployment: The situation where individuals are employed but wish to
work more hours or have work that does not fully utilise their skills. This is a
growing concern as it indicates underutilised labour resources.
 ○​ Trends: Often linked to the business cycle. During economic downturns,
unemployment rises. Structural changes in the economy can lead to persistent
unemployment in certain sectors or for certain skill sets.
●​ Part-time work: Employment that involves working fewer than full-time hours (e.g.,
typically less than 35 hours per week).
○​ Trend: Significant increase in part-time work over recent decades in Australia.
○​ Reasons: Increased female participation (seeking flexibility), growth in service
industries (which often have irregular hours), employer preference for flexibility,
and sometimes, it reflects underemployment if individuals want full-time work but
can only find part-time.
●​ Casualisation of work: Employment where there is no firm commitment in advance for
the duration of the job or the number of hours. Casual employees usually don't have
entitlements like paid sick leave or annual leave, but often receive a casual loading
(higher hourly rate) in lieu of these entitlements.
○​ Trend: Marked increase in casual employment.
○​ Reasons: Offers greater flexibility for employers to adjust staff levels based on
demand, reduces non-wage labour costs. For employees, it can offer flexibility,
but often comes with less job security and fewer entitlements.
●​ Outsourcing: When a business pays another firm to perform a task or service that was
previously done in-house.
○​ Example: A manufacturing company might outsource its IT support or cleaning
services to specialized firms.
○​ Reasons: To reduce costs (the outsourced firm might have economies of scale),
access specialized expertise, or focus on core business activities. Can impact the
jobs within the original firm.
●​ Contractors: Individuals or firms hired for a specific project or period, typically
self-employed, rather than being a permanent employee.
○​ Trend: Growth in the use of independent contractors.
○​ Reasons: Similar to outsourcing, offers flexibility for firms and can reduce
employee-related costs and obligations. For individuals, it can offer greater
autonomy and potentially higher rates, but comes with less stability and no
employee benefits.
●​ Sub-contracting: A specific form of outsourcing where a primary contractor hires
another firm or individual (sub-contractor) to complete a part of a larger project.
○​ Example: A construction company (primary contractor) building a house might
sub-contract the electrical work to a licensed electrician.
○​ Reasons: Utilises specialized skills, distributes risk, and helps manage large
projects.

Labour Market Institutions

These are the organisations, rules, and structures that influence how the labour market
operates.
●​ Unions: Associations of workers formed to protect and promote the interests of their
members.
○​ Role: Bargain collectively with employers for better wages, working conditions,
and job security (collective bargaining). They can also advocate for workers'
rights, provide legal advice, and represent members in disputes.
○​ Trend: Union membership and influence in Australia have declined significantly
since the 1980s, especially in the private sector.
●​ Employer associations: Organisations of employers that represent and promote the
interests of their member businesses, often in dealings with unions and government.
○​ Role: Provide advice and support to members on industrial relations matters,
represent employers in wage negotiations, lobby the government on policies
affecting businesses (e.g., industrial relations laws, taxation).
○​ Examples: Australian Industry Group (Ai Group), Business Council of Australia
(BCA).
●​ Current employment/industrial framework: This refers to the laws, tribunals, and
policies that govern the relationship between employers and employees in Australia.
○​ Key elements:
■​ Fair Work Act 2009 (Cth): The primary piece of legislation governing
workplace relations in Australia. It establishes minimum employment
standards, rules for collective bargaining, and protections against unfair
dismissal.
■​ National Employment Standards (NES): A set of 11 minimum
employment entitlements that must be provided to all employees. These
include maximum weekly hours, paid annual leave, sick leave, public
holidays, and parental leave.
■​ Awards: Legally binding documents that set out minimum terms and
conditions of employment for specific industries or occupations. They act
as a safety net above the NES.
■​ Enterprise Agreements: Collective agreements made at the enterprise
level between an employer and its employees (and usually a union).
These agreements generally replace awards and must pass the "Better
Off Overall Test" (BOOT), meaning employees must be better off under
the agreement than under the relevant award.
■​ Individual employment contracts: Agreements between an individual
employee and an employer. These cannot undercut the NES or applicable
award/enterprise agreement.
■​ Fair Work Commission (FWC): Australia's national workplace relations
tribunal. It has powers to set minimum wages, approve enterprise
agreements, deal with unfair dismissal claims, and resolve industrial
disputes.
○​ Shift over time: Australia has moved from a highly centralised wage-setting
system (where a tribunal set wages for most industries) to a more decentralised
system focused on enterprise bargaining, allowing for more flexibility but also
contributing to wage dispersion.
Pros of a Decentralised Labour Market

●​ Incentive for Productivity: It encourages workers to be more productive because they

can directly negotiate better wages and conditions with their employers.
●​ Reduces Unemployment during Downturns: A flexible system allows employers to
offer reduced wages or hours instead of firing staff during economic downturns, helping
to save jobs.
●​ Efficient Allocation of Resources: It allows firms in growing industries to offer better
wages to attract skilled workers, drawing labour away from less productive industries.

Cons of a Decentralised Labour Market

●​ Increases Inequality: It can lead to greater income inequality, as workers with

in-demand skills can negotiate for higher wages while those with fewer skills may earn
less.
●​ Inflationary Pressures: High wages negotiated in booming industries can lead to
cost-push inflation, increasing overall inflationary pressure in the economy.
●​ Loss of Government Control: The government loses the ability to use wage control as
a tool to manage inflation, which it can do more effectively in a centralised system.