Supply of Labor and Upward Slopping? Demand of Labor and Down Slopping

CHAPTER 01:
Supply of labor and upward slopping?
Demand of labor and down slopping
“Just as a consumer’s response to a change in the price of a good can be broken into a substitution
effect and an income effect, a firm’s response to an input price change can be broken into a
substitution effect and an output effect. For the consumer, the substitution effect shows how he would
change his purchases if his income were adjusted to leave him at his original level of well-being, and the
income effect shows how he would change his purchases due to the adjustment in purchasing power at
the new output prices. For the firm, the substitution effect shows how the firm would change its use of
inputs if it were to continue producing the same amount of output, and the output effect shows how
the firm adjusts its use of inputs when it chooses a new profit-maximizing output level.”
Change in the wage rate:
For firms (labor demand)
 Substitution effect
 Output effect
For employees (supply of labor)
 Income effect
 Substitution effect
Laws of labor and supply
Equilibrium wage and its implications
Economic efficiency
IR/HR implementation with Shift premium
 Normal circumstances
 Principle of seniority
Problems:
Autoworkers at Ford have voted more than 90 per cent in favour of a new contract that saves two-thirds
of the jobs that would have been lost when the company closes its Oakville pickup truck plant.... When
the pickup truck plant closes, 900 of the plant’s 1400 workers will likely go to work in the neighbouring
Windstar minivan plant, which is getting a $600 million upgrade.... That means workers used to
working steady day shifts at the pickup truck plant will end up on afternoon shifts and a new
overnight shift at the minivan factory, complicating childcare arrangements and other aspects of family
life for many.” (Toronto Star)
(A) Compare the efficiency and equity of allocating employees between day and afternoon shifts using
shift differentials rather than requiring all employees to alternate between shifts every two weeks, using
supply and demand diagrams where appropriate to clarify your answer.
For example, two-earner families may prefer part-time employment for one party, reduced hours of
work for the other party, and flexible work-time arrangements, as well as the right to refuse overtime
work for both parties. This would enable them to better combine labour market work with their
household activities. In contrast, the one-earner family may prefer a long workweek (e.g., with regular
overtime) for the single earner so as to earn a family income similar to that of the dual-earner family. In
essence, the growing diversity of the work force has given rise to a growing diversity of preferences for
alternative work-time arrangements. Preferences for such arrangements are no longer dictated by the
former stereotypical male breadwinner in a single-earner family.
Competition for such jobs would ensure that firms could offer lower wages in return for more flexible
work schedules. In this sense, the gains from flexible work schedules could be recouped by the firm to
cover the other costs that may be associated with such schedules. Firms that offer more flexible hours
need not lower wages but may take the benefits in the form of reduced absenteeism, lower turnover,
and improved worker morale. Various combinations of reduced wages (downward-rotated wage line)
and improved worker morale (higher indifference curve), of course, are possible
(B) Discuss the broader IR/HR issues involved in implementation of shift differentials, including the
changing demographic composition of the labour force. In your discussion, address the situation in
which the alternative to shift differentials is a policy in which employees choose shifts according to
seniority (rather that rotating every two weeks) as well as the situation in which the collective
agreement prevents lowering of the wage of any employee.
As illustrated previously, the composition of the work force has been changing dramatically in recent
years. This is evidenced by such phenomena as the increased labour force participation of women, the
dominance of the two-earner family, and the aging of the workforce. Given such changes, it is not
surprising that these different groups would have different tastes and preferences for alternative work-
time arrangements in the labour market. As well, they will face different household constraints.
Chapter 2
Economic incident of Payroll tax
Because the equilibrium wage rate did not decrease by the full amount of the tax, both the employer
and the employee share the burden of paying the tax. The employees' contribution to paying the tax is
represented by the reduction in the wage rate and by the loss in employment. The employer's portion of
the payroll tax is the difference between the amount of the tax and the reduction in the wage rate.

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CHAPTER 01:

Supply of labor and upward slopping?

Demand of labor and down slopping

Change in the wage rate:

For firms (labor demand)

For employees (supply of labor)

Laws of labor and supply

Equilibrium wage and its implications

IR/HR implementation with Shift premium

Economic incident of Payroll tax

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