Labour Economics assignment 1
zaleel503
Chapter061.pptxChapter Six Labour Demand, Nonwage Benefits, and Quasi-Fixed Costs
© 2012 McGraw-Hill Ryerson Ltd.
Prepared by Dr. Amy Peng
Ryerson University
Learning Objectives
Understand the concept of quasi-fixed costs of labour. Unlike wages and salaries, these are cost a firm has to pay regardless of the number of hours worked by each employee.
Learn about the distinction between workers and hours as components of the labour input, and understand the potential insights gained that way.
Realize how important nonwage benefits are as a share of total compensation, and see how these nonwage benefits affect the way we model labour demand.
Learn that quasi-fixed costs create a wedge between the value of the marginal product and the wage rate, and that this has implications for labor hoarding and other dynamic decisions of the firm.
Chapter 6
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Components of Total Compensation
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Total Compensation
Nonwage Benefits
(supplementary labour income)
Wages and Salaries
Pay for Time Worked
Pay for Time Not Worked
Canadian Compensations Over Time
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Quasi-Fixed Labour Costs
Independent of the number of hours worked
Arise from:
hiring costs
training costs
dismissal costs
nonwage benefits
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Quasi-Fixed Costs
Impact the employer's decisions on:
work schedules
part-time work
overtime work
hiring and layoff decisions
unemployment
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Nonwage Benefits and Total Compensation
Fastest growing components:
pension
legally required payments
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Nonwage Benefits vs. Wages
Why wouldn’t employees prefer wages over nonwage benefits?
Generally not taxed
Economies of scale for group purchases
Perception that they are free
Ease of purchase
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Nonwage Benefits vs. Wages
Employer’s benefits:
Planning of production process
reduce need for contingency plans for layoffs and accidents
Alter employee behaviour in favor of production
Reduce turnover
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Nonwage Benefits vs. Wages
Government’s benefit:
Reduce pressure for government expenditures:
public pension plans
unemployment insurance
Increase social security
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Quasi-Fixed Labour Costs
Variable labour costs:
vary with hours
Quasi-fixed:
incurred per employee
independent of hours
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Quasi-Fixed Labour Costs
Recurring
payroll taxes
Nonrecurring
hiring and orienting new employees
dismissing employees
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Quasi-Fixed Labour Costs
Given the quasi-fixed costs:
firm is no longer indifferent in the way to increase labour input
increasing the number of employees becomes more costly
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Quasi-Fixed Costs
Firms try to:
amortize these costs
encourage additional hours rather than hire employees
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General Effect of Quasi-Fixed Costs
Increase in the MC of hiring an additional worker relative to MC of working an existing worker longer hours
Discourage labour expansion away from employment and toward working more hours
Hiring continues until the present value of additional future revenues = the present value of additional costs
Chapter 6
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Profit-Maximizing Employment Rule
Where, H + T = hiring and training costs
Wt = wage rate in period t
R = discount rate
N = expected length of employment rate
MRPt (VMPt) = the expected value of the marginal product
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Phenomena Explained by Fixed Costs
Overtime
Temporary help agencies
Layoffs
Segmentation of labour markets
Resistance to work-sharing
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Nonrecurring Fixed Employment Costs and Changes in Labour Demand
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No fixed costs
W
N*0
W0
N
VMP
N10
VMP1
Nonrecurring Fixed Employment Costs and Changes in Labour Demand
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© 2012 McGraw-Hill Ryerson Ltd.
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Fixed costs
W
N*0
W0
N
VMP
VMP1
N0
VMP0
VMP - (H+T)
“Buffer”
Job Creation and Work-sharing
Overtime restrictions
Part-time work
Subsidizing employment sharing
Reducing barriers to employment sharing
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Summary
Labour compensations and nonwage benefits
Quasi-fixed costs of employment
The “extensive” vs. “intensive” margins of additional employment hours
Quasi-fixed costs and a wedge between the VMP of labour and the wage rate
Labour cost and worksharing programs
Chapter 6
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