2019-09-09

IRE1010HF 20199 (Day) Announcements: 2010-09-09 Course Website

• Lecture times
ECONOMIC FOUNDATIONS OF
INDUSTRIAL RELATIONS & HUMAN RESOURCES
– Lectures are from 1:10pm to 3:00pm with a 10
minute break at about 2pm.
Professor Frank Reid – The exact timing of the break vary may to reflect
Centre for Industrial Relations & Human Resources a natural break in the lecture material.
• Questions
WEEK 1P
Supply and Demand for Labour & Economic Efficiency – Questions are very welcome during class and
after class.
2019-09-09 – No questions during the 10 minute break please.
– I’m happy to stay after class to answer questions
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Course website uses the Quercus learning management
engine. Login at: http://q.utoronto.ca
Handouts posted on the website include the course
Syllabus and tests & exams from previous two years
that I taught the course.
Preliminary lecture slides (designated “P”) normally
posted by 10pm the day before the lecture. There
may be some revision of slides for the class.
Revised slides (designated “R”) may be posted a day or
two later.

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Competitive Markets
• Competitive Labour Market
– Refers to basic supply and demand model.
– Many (perhaps most) labour markets are not
strictly competitive, in the economic sense.
– Benchmark for comparisons.
– Ideological importance.
• Abbreviations used in this course:
– ER means employer
– EE means employee
Assumptions of Competitive
Model
“Large” number of employers.
• No artificial barriers to entering occupation.
• Employers are wage takers
– i.e. the employer takes wage rate as given by the
market and decides how many employees to hire.
Supply of Labour
• Supply of labour is defined as the number of
people who want to work in any given
occupation.
• Supply of labour depends on:
– Wage rate (actually, total compensation) in the
occupation.
– Working conditions.
– Amount of training required.
– Preferences of employees.

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Upward Sloping Labour Supply The Labour Supply Curve The Labour Supply Curve
• wage rate on
• Greater the wage rate, the more people will
WW vertical axis,
want to work in the occupation, other things SS • As the wage rate
(Wage) employment on
equal. (W) increases, the
horizontal axis
• Supply and Demand curves are drawn on a $15 • number of
As the wage rate
graph with the wage rate on the vertical axis employees
increases, (N)
morethat
and number of employees on the horizontal want to workwant
employees in theto
axis. $10 occupation
work in therises.
• The labour supply curve is upward sloping on occupation.
a graph. N1 N2 NL(Number of Employees)

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Demand for Labour Downward Sloping Labour Demand The Labour Demand Curve
• wage rate on
• Demand for labour is defined as the number • An increase in the wage rate will reduce the amount
W
vertical axis,
of workers an employer wants to hire in any of labour an ER wants to hire, other things equal. W
• As the wage rate
employment on
occupation. • That is, the demand for labour is downward sloping. increases,
horizontal quantity
axis
• Two reasons: of labour demanded
• Demand for labour depends on several factors
– Substitution effect of a wage increase • As the wage rate
including: decreases (i.e.
• For any given output level, the ER has an incentive to $15 increases, quantity of
– Wage rate Employers want to
use less labour and more of other inputs labour demanded
– Technology $10 hire fewer
– Output effect of a wage increase decreases
D employees at higher
– Output of the organization (“sales”) • An increase in costs causes a rise in price and a
reduction in sales (i.e. lower output) wage rates)
N2 N1 LN

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The Labour Demand Curve Equilibrium Wage Rate Equilibrium Wage and Employment

• Equilibrium wage is the wage at which the • Equilibrium occurs

W
supply of labour equals the demand for S at the intersection
• Equilibrium occurs
Oversupply
labour. of the intersection
at the supply and
W1
• No unemployment at equilibrium wage E
demand
of curves.
the supply and
– Frictional unemployment due to turnover. We demand curves.
– No deficient demand unemployment. • Oversupply of
• Pressure toward equilibrium wage. D labour at W1 causes
downward pressure
N2 Ne N1 N on wage.

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Equilibrium Wage and ER is a wage-taker in a perfectly Relation between the individual

Employment competitive market ER and the Labour Market
• In a perfectly competitive labour market, the
wage rate is determined by “the market.”
• As indicated previously, the individual ER
takes the wage rate as given by the market,
and decides how many EEs to hire at the
market wage. That is, the individual ER is a
wage-taker.
• Graphically, this implies the supply of labour
to each individual ER is horizontal at the
market determined wage rate.
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Increase in Demand for Labour

The “Laws” of Supply and Demand Increase in Supply of Labour
(rightward shift of demand curve)
• An increase in demand for labour (i.e. a
rightward shift in demand curve) results in an • Suppose a change in
W
increase in the equilibrium wage and external factors shifts
S
the labour demand
equilibrium employment.
W2 curve to the right (an
– Conversely for a decrease in demand.
W1 increase in the demand
• An increase in supply of labour (i.e. a for labour)
rightward shift in labour supply curve) results
in a decrease in equilibrium wage and an D2
increase in equilibrium employment. D1
– Conversely for a decrease in supply.
N1 N2 N

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Increase in Labour Supply vs Increase in

Decrease in Demand for Labour Decrease in Supply of Labour Quantity of Labour Supplied

• Note that economic terminology distinguishes

between an increase in labour supply (i.e. a
rightward shift of the labour supply curve) and an
increase in the quantity of labour supplied (i.e. a
movement rightward along the labour supply curve,
caused by an increase in the wage rate).
• The reason why an increase in the wage rate results
in a movement along the labour supply curve is that
the wage rate is the variable on the vertical axis of
the diagram. Changes in other variables that affect
labour supply (not shown on the axis) shift the
supply curve left or right.

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Increase in Labour Demand vs Increase in
Quantity of Labour Demanded
• Similarly, an increase in demand (i.e. a
rightward shift of the demand curve) is
distinguished from an increase in the quantity
of labour demanded (i.e. rightward movement
along the labour demand curve caused by a
decrease in the wage rate.)
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Definition of Economic Efficiency
• An increase in economic efficiency means a
change that make some people better off and
no one worse off.
– that is, a change that is a win-win outcome.
– In other words, increasing economic efficiency
means worker smarter, not working harder.
• One of the grand theorems of economics
shows that (subject to some stringent
assumptions about the economy) if all
markets were competitive the result would be
maximum efficiency.
2019-09-09
An IR/HR Application of
Economic Efficiency
• More generally, one lesson of competitive
markets is that it is typically more efficient to
use the price mechanism (i.e. wages in the
case of the labour market) to allocate
resources than administrative direction.
• Example: Consider the proposition that it is
more efficient to establish shift differentials
and allow EEs to choose their shifts rather
than simply having having an HR policy that
EEs rotate day and night shifts.
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Application: Shift Premiums
• Assume initially equal number of EEs
working rotating day and night shift (with no
shift differential).
• Proposition: Some EEs can be made better off
and no one worse off with an appropriate shift
differential and allowing EEs to chose their
shift (including continuing to rotate).
Example: Shift Premiums (cont’d)
• Assume shift differential is created by
increasing night wage and lowering day wage
by equal amount (so no change in ER labour
costs).
• Increase shift differential until equal numbers
of EEs select day and night shifts.
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Example: Shift Premiums cont’d
• Employees who choose steady day shift are better
off because they must value steady day shift more
than reduction in income.
• Employees who steady night shift are better off
because they must value extra income more than
need to work steady night shifts.
• No employee is worse off because if they continue
to rotate shifts their income and shift pattern is
unchanged.
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Shift Premiums: Implementation
Issues
• IR/HR barriers to implementing shift
premiums as compensating differentials
• To be discussed in class.
2019-09-09
Shift Premiums: Implementation Principle of seniority in
Issues unionized workplaces
• In unionized workplaces the principle of seniority is
extremely important, i.e. workers who have been
employed longer (i.e. have more seniority) get
priority over junior workers who have been hired
more recently (i.e. have less seniority).
• E.g. if layoffs are required, the employees with least
seniority are the ones who are laid off.
• Similarly, in assessing employees for a promotion,
among the group of employees who are qualified,
the employee with the most seniority will normally
be given the promotion.
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Shift Premiums: Seniority Issue Shift Premiums & Seniority: Solution

• Suppose that instead of an initial situation of • To be discussed in class.

rotating shifts, shifts were allocated by seniority,
with no shift differential. Assume that most senior
EEs chose steady days and junior EEs worked
steady nights and the wage is $20/hr.
• The shift differential used in the rotating shift case
would not work because if senior EEs were faced
with a lower wage to work steady days, they would
be worse off, so it would not be efficient (win-win).
• Question: how could our shift differential principle
be modified to create an efficient (win-win) solution
in the seniority case?

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