Casual and Permanent Labor

Transcription

1 Chapter 13: Labor Key Issues: Labor markets and labor categories: casual labor and permanent labor Poverty, nutrition, and labor markets Voluntary and involuntary unemployment Wage determination of casual and permanent labor Efciency wage

2 Casual and Permanent Labor We can distinguish between two types of hired workers: casual labor and permanent labor. Casual Labor: Workers hired on casual basis for short duration (mostly daily basis or for a season). These workers are hired to carry out tasks which can be easily monitored (harvesting, weeding etc.). There is also seasonality in agricultural activities, with high demand for labor for short period. These workers are also hired to meet peak demand for workers. Permanent Labor: Workers hired for relatively long duration (one year or more). These workers are hired to do more specialized tasks, tasks which cannot be easily monitored (irrigation, applying fertilizer, operating agricultural implements etc.) or require timely application. They may also do the tasks performed by casual workers.

3 Competitive Labor Market In the competitive labor market, equality of demand and supply of labor determines equilibrium wages and employment. But the competitive labor market model does not explain many of the salient features of labor market such as: 1. Existence of permanent labor 2. Similar workers paid different wages 3. Unemployment particularly involuntary unemployment 4. Uncertainty in the labor market 5. Distinction between labor power (work capacity) and laborers.

4 Nutrition, Work Capacity, and Labor Markets Productivity of a worker depends on his work capacity, which in turn depends on the intake of nutrition (quality and quantity of food). In developing countries with high incidence of poverty, the intake of nutrition depends on the income of workers. The relationship between work capacity and income is captured by the capacity curve. The capacity curve is upward sloping and S-shaped. The particular shape of the capacity curve leads to kink in the individual and the aggregate labor supply curve, which has a number of interesting implications.

5 Nutrition, Work Capacity, and Labor Markets Kinked labor supply curve can explain many realistic features of labor market such as 1. workers with higher income/wealth earning more wage income 2. voluntary and involuntary unemployment

6 Determination of the Permanent Wage and Allocation of Workers between Permanent and Casual Category Assumptions: There are L number of risk-neutral workers in the economy. Employers are risk-neutral and prot maximizers. Production requires monitarable and non-monitorable tasks to be performed. Let production function be Y = f (L c, L p ), where L c and L p are number of casual and permanent workers employed respectively.

7 Determination of the Permanent Wage and Allocation of Workers between Permanent and Casual Category Assumptions: A permanent worker is hired for N periods, subject to satisfactory performance. Suppose that if a permanent worker does not perform satisfactorily he is red. In the case of ring, the red worker can get jobs only as a casual worker in future. While working a worker (permanent and not shirking or casual) incurs disutility µ. The utility function of a worker is U i = w i µ where i = c, p. Casual labor market is competitive. The issue we want to consider is how labor is allocated between permanent and casual categories and the determination of permanent wage, w p, and casual wage, w c.

8 Demand for Causal and Permanent Labor The prot maximizing demand for casual and permanent labor for given wages is characterized by MPL c = w c & (1) (1) and (2) imply that MPL p = w p. (2) MPL c MPL p = w c w p. (3)

9 Determination of Permanent Wage: Efciency Wage Efciency wage arises when a worker's effort and thus productivity depends on wages paid. Recall that permanent workers do non-monitarable jobs. This gives them incentive to shirk. However, in the case of being caught and red they can only work as casual workers in future. Thus, working as casual worker in future is the opportunity cost of a shirking worker. While deciding whether to shirk or not, a permanent worker takes into account cost and benet of shirking. If the cost of shirking exceeds the benet, he will not shirk. The employer also takes into account the incentive of permanent worker to shirk. While hiring a permanent worker, he will set the permanent wage,w p, such that permanent worker does not have incentive to shirk.

10 Determination of Permanent Wage: Efciency Wage The gain to a permanent worker from shirking is w p. The loss from shirking is given by N(w p w c ). Thus, a permanent worker will not shirk iff w p N(w p w c ). (4) A prot-maximizing employer will set w p such that a permanent worker is indifferent between shirking and not-shirking, w p = N(w p w c ), which implies that w p = N N 1 w c. (5) (5) shows that w p > w c i.e. permanent workers get wage premium over causal workers though both types of workers have same innate ability. This premium arises due to informational imperfections. w p is an example of efciency wage.

11 Allocation of Workers (3) and (5) together imply that The labor market clearing implies MPL c MPL p = N 1 N. (6) L = L p + L c. (7) (6) and (7) are two equations in two unknowns and together determine equilibrium L p and L c. Once equilibrium L p and L c get determined, we can back out equilibrium w p and w c using (1) and (2).