Key unit competence:Learners will be able to explain the impact
of labour mobility on the economy.
My goals
By the end of this unit, I will be able to:
- Identify categories of labour and characteristics of the labour force in LDCs.
- Explain the factors influencing labour demand, supply,efficiency, and mobility.
- Identify man power problems in LDCs.
- Explain the methods of determining wages in an economy.
- Identify the causes of wage differentials in an economy.
- Explain the forms of wage control in an economy.
- Explain the objectives, types,tools, benefits,disadvantages, and weaknessesof trade unions in LDCs.
- Analyse the impact of labour mobility in an economy.
- Discuss the methods used to determine wages in Rwanda.
- Examine the applicability of wage theories including the backward bending supply curve in LDCs.
- Describe the effects and measures to reduce wage differentials in Rwanda.
- Justify the need for government control of wages and its effect on an economy.
- Describe the operation of trade unions in an economy.
- Assess the impact of trade unions on the efficiency of labour.
- Acknowledge the role of labour mobility in solving manpower problems in LDCs.
- Appreciate the role of trade unions in bridging wage gaps in LDCs.
12.1 Labour and wages
12.1.1 Meaning
As a factor of production, the term ‘labour’ can be used to define any human effort both mental and physical directed towards the process of production of goods and services. The type of job one does and the financial compensation received for it are very important in our society. In the past, the terms blue collar or white collar or pink collar employees were used to describe the type of job.
Blue collar implies manual labourers, white collar for officer workers,
and pink collar represents jobs associated with women like nursing, secretarial.
Activity 1
Using photos in figure 1 below, discuss the following questions:
1. Define the term labour and give the different categories of labour
basing on the activities they do as seen in the photos.
2. Explain reasons why labour is needed in society.
Categories of labour
Labour can be categorised into the following:
1. Unskilled labour
This is labour which has received no special training and has few specific skills. As our society has grown into an increasingly technological one, the members of this group have developed more and more skills. A mechanic, for example, used to be considered unskilled labour. Today that is no longer the case. Mechanics require a great deal of skill and training to work with today’s modern engines.
2. Semi-skilled labour
This refers to labour which has some training to handle certain tasks but with little or no skills.
3. Skilled labour
This is labour that has received specialised training to do their jobs. They have developed a special skill and may or may not need to be licensed or certified by the state. Some examples of skilled labour are: carpenters,plumbers, electricians, business executives and managers, artisans, accountants, engineers, police, mechanics, etc.
4. Professionals
These are the elite of the labour grades and include those workers who need an advanced degree to do their jobs. The three primary groups of professionals are doctors, lawyers and teachers. These are white collar workers.Labour can also be grouped under;
(a) Productive and unproductive labour: Productive labour is that labour which is
actively involved in the production process and it is paid wage or salary.
(b) Unproductive labour is one that isn’t involved actively in the production of goods and services.
Labour force
This is defined as the number of people who are in the working age whether they are employed or not. In Rwanda the working age is believed to be eighteen years of age. Anyone below that age when involved in work is regarded as child labour. Anyone above that age is regarded as working class whether employed or not.
Determinants of Labour force
• Size of the population: The bigger the size of the population, the more the labour
force while if population size is small, labour force will be small.
• Structure of the population: If the population is composed of many women as compared to men,
the labour force will be low especially in work that is suitable for the men as compared to the women.
• Age of the population: If the population is comprised of many young children, the labour force will be low
while if the population is composed of many old people, labour force will be large.
• Rate of brain drain: When the rate of brain is high, labour force in that country will be low but it will be high
in that country where labour moves to.
• Migration rate: High rates of emigration reduces the size of labour in a country where labour is coming from
while immigration increases the size of labour force in the receiving country.
• Retirement age: When the retirement age is low, the size of the labour force will be low but if the retirement age
is high, the size of labour force will be big.
• Political situation: Political instability and insecurity, reduces the size of the labour when labour seeks for refugee
in other countries while stability will always lead to a large size of the labour force.
• Rate of population growth: The higher the rate of population rate, the higher the size of labour force while a low
population growth rate leads to low labour force. etc.
12.2 Demand for labour
Activity 2
Explain the following:
1. Meaning of demand and supply of labour.
2. Factors that affect demand and supply of labour.
3. Explain the reasons why people may leave work even when wages are high.
Facts
Demand for labour refers to the number of labourers needed by an employer at a given wage in a given period of time.
The demand for labour is always derived. Labour is demanded not for its own sake but because there exists a demand
for the goods or services which the entrepreneur may produce with the help of labour. If the demand for a certain good is increasing, the demand for labour will also increase and vice-versa.
Factors affecting demand for labour
• The demand for labour also depends on the supply of other factors of production. As land and capital cannot be used
without labour, the demand for labour must also depend on the supply of these factors.
• The price of other factors of productionalso influences the demand for labour. For instance if the price of capital is high,
the demand for labour may increase, as there could be substitution of labour for capital.
• Demand for products which labour produces: If the demand for the product is high, more labour will be needed to produce
that product hence the demand for labour will increase.
• Cost of labour: If the cost of labour compared to the total cost of production is high, less labour will be demanded and vice
versa.
• The ease of substitution of labour: If labour can easily and cheaply be substituted, the demand for it will be low because an
employer will prefer to use its substitutes like machines.
• Degree of competition: If the competition for labour among the firms is high, the demand for labour will be high and vice versa.
• Elasticity of demand for the final product: If the demand for the final product is high, the demand for labour will be high and if it
is low the demand for labour will be low.
12.2.1 Labour supply
This refers to the number of hours an individual is willing to offer for work per day, week, month, or year. For an individual, the decision on how many hours to offer to work depends on the real wage and on an individual’s attitude towards leisure and income.
The supply of labour is offered by households, and the traditional assumption is that more work will be offered for higher wages, implying an up sloping supply curve for labour as seen in figure 2 on page 407.
From Figure 2 above at a higher wage
, the supply of labour is
while at a lower wage
, the supply of labour is only
However, it has long been recognised that for some individuals or groups of workers, higher wages might lead to a reduction in hours of work offered. This may lead to a backward bending supply curve. The shape of the curve may be due to the following:
• The worker in effect prefers leisure at higher wages.
• It is also the case with target workers. After achieving the target, the worker either
reduces effort or stops to work despite an increase in the wage.
• Desire to live on accumulated wealth.
• Old age where even if the wages are high, labour may not increase supply etc
However, it has long been recognised that for some individuals or groups of workers, higher wages might lead to a reduction in hours of work offered. This may lead to a backward bending supply curve. The shape of the curve may be due to the following:
• The worker in effect prefers leisure at higher wages.
• It is also the case with target workers. After achieving the target, the worker
either reduces effort or stops to work despite an increase in the wage.
• Desire to live on accumulated wealth.
• Old age where even if the wages are high, labour may not increase supply etc.
From Figure 3 above, at W1, supply is
when the wage increases to
, the supply will increase to
,
however when the wage increases to
, labour supply reduces to
.
Factors determining labour supply
• Size of the population: In a country where the population is big, the labour force will also be big leading to a high
labour supply
• Structure of the population: If the majority of the population is below the working age, or mainly full time students,
labour supply will be low and vice versa.
• Incentives offered: If these such as wages and salaries are high, labour supply will be high and if low, labour supply
will be low.
• Level of education: In a country where the people are educated, the supply of skilled labour will be high and vice versa.
• Health conditions of workers: If the conditions of workers are good, they are willing to supply more labour because
they are able to work and vice versa.
• Retirement age: Ihe earlier the retirement age, the higher the rate at which the people will leave the jobs and the
lower the supply of labour.
• Political situation: If a country is politically stable, people are guaranteed securityand labour supply will be high and
is low in areas where people fear to risk their lives.
• Job security: Jobs that have high risk of retrenchment attract less labour force compared to those that have low risks
of retrenchment.
• Job esteem: Jobs that command high respect especially professional jobs attract a large part of labour force than
those where respect is low. E.g toilet cleaning
• Period of training: The longer the period of training, the lower the supply of labour in the short-run but the shorter the
period of training, the higher the supply of labour.
12.2.2 Efficiency of labour
Activity 3
Mr Murekeraho has been teaching economics at Nyamata high school for the last eight years.
He has worked so hard that he has always produced the best results in Bugesera district and was
even given a prize by the district mayor in 2014.
Basing on this information, respond to the following questions.
1. What do we call the act of producing better results by Mr Murekeraho?
2. Explain the factors that determine Mr Murekeraho’s capability.
3. What factors may limit his capability?
Facts
Efficiency of labour refers to the ease with which labour is able to produce good quality and high quantity output in the shortest time possible. Labour is said to be efficient if it can produce good quality and quantity output in the shortest time
possible.
Factors influencing efficiency of labour
• Physical condition of labour: If the health conditions of labour, levels of nutrition of the labour force is poor,
its efficiency will be low but it will be high where labour is healthy and well-fed.
• Level of technology: Where modern equipment are provided and used such as computers, efficiency of labour
tends to be high compared to situations where primitive technology is used (traditional tools).
• Working conditions of labour: When these are good especially job security, transport allowances etc, efficiency of
labour will be high and it will be low when the conditions are poor.
• Degree of specialisation: If labour is highly specialized and skilled, it will become more experienced and efficient.
• Quality and quantity of other factors of production: If other factors of production are available and of high quality,
labour efficiency will be high and it will be low if the others of production are of poor quality.
• Political atmosphere: Political security encourages concentration and efficiency among the labourers but where
instabilities prevail,labour tends to be inefficient because it cannot settle at work.
• Climatic conditions: Harsh conditions such as very hot and very cold tend to make labour inefficient but if conditions
are ideal or favourable, labour will be efficient.
12.3 Labour mobility
Activity 4
Referring to activity 3, due to Mr Murekeraho’s efficiency, he has been given part time jobs to teach
in several schools in the country and currently he has been offered a job at Riviera high school in Kabuga.
Basing on this information, discuss the following questions and make a presentation to the class.
1. How do we call Mr Murekeraho’s movement from one school to another and from one area to another?
2. Explain the factors that determine his movements.
3. What factors may hinder movement of labour from one place and work to another?
Facts
Labour mobility is the ease with which labour can move from one occupation or area to another.
Labour mobility can therefore be geographical or occupational. Labour can either be;
(a) Specific labour: This is labour that cannot be changed from one production activity to another for example doctors.
(b) Non specific labour: This is labour that can be transferred from one use to another for example unskilled labour like
car washers.
Labour mobility can be either geographical or occupational as seen below;
Geographical mobility of labour
This is the ease with which labour can move from one geographical area to another in search for work. People always move from one place to another depending on the activities that may interest them. Some move for economic reasons, social reasons and political reasons among others. The movement of labour from one area to another is influenced by many factors are seen below;
Factors influencing geographical mobility of labour
• Transport and communication: The lower the transport cost, the easier for labour to move from one area
to another and the higher the transport costs, the more hard for labour to move from one place to another.
• Degree of ignorance: In cases where people are ignorant about the available jobs, the lesser the rate of movement
but if people are aware of the available jobs, mobility of labour will be high.
• Nature of climate:Areas with good climate tend to attract more labour compared to areas which have harsh climate
i.e. too hot and too cold.
• Level of wages: Areas with high wages attract more labour than areas which give low wages.
• Cost of living: Labour tends to move away from areas with a high cost of living to areas with low cost of living.
• Degree of advertising: If the rate of advertising is high, labour will tend to move to those areas where the jobs are but
when the rate of advertising is low, labour will be immobile.
• Institutional barriers: This includes things like language barrier and if this exists, immobility of labour will be low because
it becomes hard to communicate.
• Political situation: Areas which are stable tend to attract more labour than those which are unstable.
Factors limiting geographical mobility of labour
• High level of ignorance about the existing jobs: Some people do not know about the existing jobs in other
areas so they end up not moving from one place.
• High wages got at the current job: If a worker is given a high wage at the current wage, he may not need to
move to another area looking for a job.
• Poor transport and communication: Sometimes the transport and communication may be poor. Related to
accessibility, the worker may not be able to move to another place.
• Good climate at the current place: People prefer to stay in good climate. When the climate in the current place
is conducive to the worker, he or she may not leave that place to go to another place.
• Low cost of living at the current place: A cost of living in the current area may not tempt the worker to move to
another area where the cost of living may be high.
• Low level of advertising: The low rates of advertising about the existence of other jobs in different areas may keep
the labour in the same area of region.
• High level of attachment to family members: Some people are so much attached to their families to the extent that
they cannot leave them. This closeliness may hinder labour to move to another area.
• Inadequate Institutions: People are interested in areas that have institutions like banks, stadiums, movie halls among
others. So if these are not found in a particular area, people may not move to such areas.
• Political instability and insecurity: Some region may be politically unstable so people may not move to them for fear
of their lives.
• Language barrier: Internationally, people may fear to move to other regions because of the problem of language.
For Rwanda, this may not be a limitation because the people all speak one language irrespective of the region of origin.
• Old age limits movement: Old people normally always want to stay in one place so they may not move to another area.
Occupational mobility of labour
This is the ease with which labour can move from one occupation to another. Normally according to the job search theory, labour will never stay in one area or job but it will still keep on looking for other jobs that may pay more. It involves two categories;
(a) Horizontal mobility: A situation where labour changes from one occupation to another but it does not change its status
e.g. from a teacher Good Hope High School to a teacher in Corner Stone Leadership Academy.
(b) Vertical mobility of labour: A situation where labour changes from one occupation to another but affects or changes
its status e.g. from a teacher to a headmaster. The movement of labour from one area to another is influenced by
many factors as seen further;
Factors determining occupational mobility of labour
• Level of education: If labour is highly educated, it becomes occupationally immobile because it cannot be substituted.
• Degree of advertising: Where the workers are knowledgeable about the existing jobs, labour mobility will be high to
take up such jobs and if the workers are ignorant about the existing jobs, mobility will be low.
• Cost and length of training: Jobs which involve high cost and long duration of training don’t experience much labour
mobility but where the cost and the length of training is low, mobility will be high.
• Skills required: Jobs where highly specialized skills are required such as accountancy, and doctoring, mobility of labour
is low but jobs where specialisation is not required, mobility of labour is high.
• Age of the workers: As workers grow old, they tend to settle down on their jobs and they are unwilling to change
occupation thus they become immobile but where workers are young, they tend to move from one job to another.
• Government policy of retrenchment: When such a policy is carried out by the government, labour mobility will be high
but if such policies are not carried out, labour will be immobile.
Factors that limit occupational mobility of labour
• Low Level of education: Because of the low level of education, labour may not be able to move to another job that may
require higher qualifications
.• Better working condition in the current job: When the working conditions are favourable in the current job, labour may
not go out looking for other jobs.
• Limited information about other jobs somewhere else: Some times labour is unaware of the existing jobs so it may
remain in one occupation.
• Better wages at the current job: Better wages at the current job will keep the labour at the job and limit its mobility.
• High prospects of promotion in the current job: When labour is expecting to be promoted in the long-run, it may not
move to another job instead it will become immobile.
• High discrimination in the labour market: Sometimes there is discrimination in the labour market where by jobs are give
to the few known people so this hinders labour to move to other occupations.
• High degree of specialisation: Labour that is so specialised may not change occupation. For example a doctor may
not easily change to a teacher.
• Low status of the alternative job e.g. toilet cleaning: When the alternative job has low status for example toilet
cleaning, labour may not move to that place instead it will remain in the current job.
• High cost of training for the alternative jobs: Moving to new jobs requires training that sometimes the labour may not
afford hence it will keep operating at the current station.
• Old age of the worker: Old people normally always want to stay in one job so they may not move to another area since
the employers sometimes prefer young and energetic youth.
12.4 Manpower problems in LDCs
Activity 5
Discuss the following and present to the class.
1. Causes of manpower problems in LDCs.
2. Effects and solutions of manpower problems.
Facts
Manpower is the labour force within a country. In any given economy, the quantity and quality of labour as a factor of production is important to the labourers themselves, the employers, the government, and the economy as a whole. Most developing countries are faced with numerous manpower related problems, which include among others the following;
• Excessive labour supply in some sectors e.g. agriculture.
• Scarcity of labour in some sectors e.g. engineering, medical services etc.
• Low skills and competence due to low and poor education system.
• Low levels of occupational mobility.
• Brain drain of highly skilled manpower to developed countries.
• Educated people are trained for white collar jobs which are not readily available.
• High rural urban migration due to an urban biased education system.
• Poor health due to poor feeding and diseases e.g. HIV/ AIDS.
• Over dependency on certain categories of labour e.g. in consultancy work.
Causes of manpower problems in LDCs
• Inappropriate education system which is based on the colonial arrangements before independence that does not
address specific needs and interests of most LDCs . It thus creates white collar job seekers than makers.
• Poor planning by government for expanding labour force with proper education, health and training, and putting up
enterprises that absorb excess labour.
• Structural changes within the economy e.g. if tastes and preferences change, it would change goods and services
needed, hence changes in labour requirements of employers.
• Technological development which leads to replacing labour in production which creates technological unemployment.
• High population growth rates which leads to excessive supply of labour.
• Low wages paid to the professionals which has led to brain drain i.e. people especially highly skilled personnel who move
to Most Developed Countries (MDCs) to look for “greener pastures” or highly paying jobs.
• Low levels of education due to high rates of poverty in LDCs thus leading to excessive supply of unskilled labour in LDCs.
• Political instability and insecurity in some regions leading to shortage of labour in some areas or sectors.
• Cultural and social ties/ beliefs that hinder people to move from one job to another.
Manpower planning
This refers to a long-term projection of labour demand and supply aimed at attaining a balance between labour demand and supply at different levels of economic development. It is investment in education through a particular number of people/ labour in specific fields so that in the long-run there are no deficits or surpluses in the labour market.
It involves a wide range of predictions and forecasting of the unskilled, semi-skilled and skilled workforce in an endeavour to develop the necessary human resource requirements of the economy.
Measures to minimise the current manpower problems in LDCs
• Appropriate manpower planning necessary to minimise such irregularities.
• Redeployment of the workforce should be undertaken to reduce shortage of manpowerin some sectors of the national
economy.
• The education system should be revised to avoid the production of more job seekers instead more job makers should
be produced.
• Retrenchment i.e. the old, the sick, and the very disabled workers should be terminated to create an effective labour force.
• Official exchange of manpower should be enhanced between governments, to not only reduce shortages of indigenous
manpower but also increase the supply of labour in all productive sectors of the economy.
• Promotion of science and technology in all the needy fields e.g. medical, engineering etc.
• Encourage the indigenous manpower to return home to serve in fields where there are apparent shortages.
• There is need to improve working conditions and increase workers’ morale so as to reduce brain drain. e.g. setting of
a favourable minimum wage attractive the highly skilled indigenous manpower.
• Encouragement of local entrepreneurs by enabling them to acquire loans so as to increase the supply of
local entrepreneurs.
12.5 Wages
Activity 6
Visit the library and research on the following then thereafter make a presentation to the classroom.
1. What is a wage?
2. Explain the different forms of wage and the determinants of a wage.
Facts
A wage is a reward to labour as a factor of production for services rendered. A salary is a fixed reward to labour and it does not change because of time or pieces of work done.
Real Wage is a wage in terms of what money can purchase. It is the purchasing power of money.
Forms of wages
Wages can be described in three forms as shown below;
1. Living wages:Living wages has been defined differently by different people in different countries. The best definition is given by Justice Higgins which reads “Living wage is a wage sufficient to ensure the workman food, shelter, clothing, frugal comfort, provision for evil days etc. Thus living wages means the provision for the bare necessities plus certain amenities considered necessary for the wellbeing of the workers in terms of his social status.
2. Minimum wages:The minimum wage may be defined as the lowest wage necessary to maintain a worker and his family at the minimum level of subsistence, which includes food, clothing and shelter. When the government fixes minimum wage in a particular trade, the main objective is not to control or determine wages in general but to prevent the employment of workers at a wage below an amount necessary to maintain the worker at the minimum level of subsistence.
3. Fair wages: A fair wage is something more than the minimum wages. Fair wage is a mean between the living wage and the minimum wage. While the lower limit of the fair wage must obviously be the minimum wage, the upper limit is the capacity of the industry to pay fair wage which compares reasonably with the average payment of similar task in other trades or occupations.
Methods of wage determination
There are different ways through which wages are determined some of which are seen below:
Piece-rate earning Here a wage is given to the worker basing on how much work he or she has done. The wage very much depends on the effort of the worker — the greater the effort, the higher the wage and vice versa. This method is associated with the following advantages:
• It stimulates output; the more the worker produces, the more he earns.
• Less supervision is required.
• Workers can proceed at their own pace.
• The employer’s costing calculations are simplified.
• The employer can identify inferior worker.
• Quality may improve.
• The inefficient workers cannot cheat the employer.
Time-rate earning
This is a situation where a fixed sum of money is paid to a worker for a certain period of time say an hour or a month. The period is agreed upon by both parties — the employer and the worker. It is associated with the following advantages:
• It is easily understood by both parties.
• There is a regular income to the worker even during the time of sickness.
• It is easy to calculate where work is hard to measure, e.g. Doctor’s services.
• Time rates are more satisfactory than piece rates where a high quality of work is essential.
• Encourages hard work/ over time.
• Reduces conflicts between employers and employees leading to industrial peace.
• Less hard working workers will benefit where there is no supervision.
Sliding Scale
This is a method of wage payment, which is related to the cost of living. Workers are paid more if the cost of
living increases, and they are paid less if the cost of living decreases. It has the following advantages:
• The worker does not suffer from higher prices; and it protects the worker from rises in the cost of living.
• Real income is maintained.
Minimum wage legislation
This is the setting of a wage by the government above the equilibrium/ ruling market wage below which it is illegal to pay the workers. The wage set is known as a minimum wage. The goal in establishing minimum wages is to protect the workers from exploitation by their employers through paying very low wages.
FromFigure 4 above, the minimum wage is fixed at
above the equilibrium wage where demand for labour
meets with labour for labour.
Through Trade unions
A trade union is a legally accepted association comprised of workers who come together in order to achieve specific objectives. The trade union as said earlier is made up of workers. These elect leaders who run the union on behalf of others. These trade unions through their representatives hold round table discussions (collective bargaining) with the employers in an attempt to achieve their objectives. Some of these may be increase in wages and good standard of living. So wages can be determined through the trade unions.
12.5.1 Wage theories
1. The marginal productivity theory of wages
This theory states that a worker should be given a wage which is equivalent to his additional output. According to the theory, there is a direct functional relationship between the level of wages and the level of employment, and that a rational employer will attempt to adjust one or both of these variables so that the marginal product of labour is equal to the wages of labour.
The theory states that under conditions of perfect competition, every labour will receive a wage equal to the value of its marginal product. The marginal product of one unit of labour is determined by adding to, or by withdrawing one unit of labour from a business, provided the supply of other factors of production is kept fixed. Assuming the supply of other factors of production constant and the price of the product remaining the same, the employment of more and more units of labour in a firm will increase the total product at a diminishing rate.
Assumptions
• Employers are able to measure and predict in advance the marginal product of labour.
• There is a free and complete competition among the employers for workers.
• There is a free and complete competition among workers for jobs
• Labour knows its marginal product.
• Capital and labour are perfectly mobile.
• Labour and capital are fully employed.
• Labour is homogeneous.
• Government does not interfere in wage determination. It is the forces of demand and supply that determine the wage.
• The bargaining power of labour and management are equal.
Weakness of the marginal productivity theory of wages
The weaknesses are discussed in light of LDCs.
• Most of the employers do not have enough information to assess the marginal productivity of labour. They employ
labour basing their judgment on the demand of their products in consumption markets. Many employers will pay fairly
high wages if the demand for their products is high.
• Labour does not know its marginal product.
• Wages are not determined according to the marginal productive theory but instead government sets wages — minimum
wages.Government is justified to set wages since it is the major employer of both skilled and unskilled labour.
• Labour is not homogeneous. There are skilled and unskilled workers.
• There is no free and complete competition among workers for jobs due to tribalism, nepotism, religious differences, etc.
• Labour and capital are not completely mobile.
• To a very great extent, the bargaining power of labour management in LDCs is not equal. This is partly due to highly
elastic supply of unskilled labour drawn from redundant labour in the agricultural sector.
2. Wages Fund Theory
This theory was developed by Adam Smith (1723-1790). His theory was based on the basic assumption that workers are paid wages out of a pre-determined fund of wealth. This fund, he called, wages fund created as a result of savings. According to Adam Smith, the demand for labour and rate of wages depend on the size of the wages fund. Accordingly, if the wages fund is large, wages would be high and vice versa.
3. The Bargaining Theory of Wages
John Davidson was the profounder of this theory. According to this theory, the fixation of wages depends on the bargaining power of workers/trade unions and of employers. If workers are stronger in bargaining process, then wages tends to be high. In case, employer plays a stronger role, then wages tends to be low.
4. Iron’s law of wages
This also called the subsistence wage theory was propounded by David Ricardo (1772-1823). According to this theory, “The labourers should be paid a wage that can enable them to meet their basic necessities in life. This payment is also called as ‘subsistence wages’. The basic assumption of this theory is that if workers are paid wages more than subsistence level, workers’ number will increase and, as a result wages will come down to the subsistence level.
On the contrary, if workers are paid less than subsistence wages, the number of workers will decrease as a result of starvation, death, malnutrition, disease etc. and many would not marry. Then, wage rates would again go up to subsistence level. Since wage rate tends to be at, subsistence level at all cases, that is why this theory is also known as ‘Iron Law of Wages’. The subsistence wages refers to minimum wages.
5. Residual Claimant Theory
This theory was developed by Francis A. Walker (1840-1897). According to Walker, there are four factors of production or business activity, viz., land, labour, capital, and entrepreneurship. He views that once all other three factors are rewarded, what remains is paid as wages to workers. Thus, according to this theory, worker is the residual claimant i.e. he should be given what remains after paying all other factors of production.
12.6 Wage differentials
Activity 7
In Nyamaseke district, Mukangarambe and Umulisa are two different working class women though Umulisa is more educated than Mukangarambe. They are both nurses in a government and private hospitals respectively in the district. However, Umulisa earns amore salary as compared to Mukangarambe and because of this, her standard of living and way of life is far better than that of Mukangarambe.
Basing on this information;
1. What do we call the difference
2. What factors make some people earn more than others?
3. How has this difference in earnings affected the people in different societies?
4. What should be done to solve the problem of differences in earnings in Rwanda?
Facts
Wage differentials is a situation where different people in different or the same occupations or places earn different wages.
It is very common experience that earnings in different occupations are strikingly different. There are occupations where the earnings are extremely low. There are others where the earnings are exceptionally high.
The causes of such disparities lie on the side of both demand for labour and supply of labour. If demand for a certain type of labour is very high, the earnings must also be correspondingly high. If, on the other hand, a particular type of labour is not much in demand, their earnings are bound to be very low. The chief causes of variations in wages are:
Causes of wage differentials in LDCs
• Human capital: Human capital is the knowledge, skills, education, training, and ability possessed by workers. Skilled
workers are those with lots of human capital; unskilled workers possess little human capital. Skilled workers receive a
higher wage than unskilled workers.
• General attractiveness of the job: If a job is pleasant, many people will be attracted to it. The result will be that wages
will tend to be less than those occupations which are unpleasant.
• Cost of learning a job: If there are certain jobs which require a very long training, the entry into that occupation or
profession will be very much restricted. The earnings in such a profession are naturally very high compared to a job
which requires short training.
• Regularity and irregularity of employment: Those jobs which provide a regular employment throughout the year will
be accepted by the people even if the earnings are low. On the other hand, earnings in irregular jobs must be high enough
to attract people who are prepared to put up with the precarious nature of the job.
• Immobility of labour: Workers are often unwilling to leave the area in which they live even if higher wages can be earned
by moving elsewhere. If labour is immobile, a lower wage will be paid unlike to the one which is mobile.
• Future prospects: If an occupation gives hope of future promotion, or other benefits, people will accept a lower wage start
in it, as against another occupation offering higher initial reward but no chances of rise in the future.
• Social discrimination by race or sex: In some cases, wage differentials are due to race or sex.
• Compensating wage differentials: Compensating wage differentials make up for high risk or poor working conditions.
Construction workers on skyscrapers receive a higher wage because of the greater risk of death than construction workers
renovating a house.
Effects of wage differentials
• Minimum economic welfare of some group of people because of low wages received by some people.
• Reduction in aggregate demand: The rich have a lower marginal propensity to consume than the poor.
The low wage earners are left with little money to purchase commodities. The reduction in aggregate
demand discourages investment.
• Misallocation of resources: The high income earners spend on luxuries leaving the low income earners
to go without basic need.
• Capital outflow especially when the high income earners are non-citizens who always repatriate their earnings
to their home countries. In countries which are politically unstable, the high income earners prefer to invest/bank
their money in other countries where there is political stability.
• It leads to reduction in government revenue since the majority of the people would be having little or no incomes to tax.
• It leads to social disharmony where by the low income earners feel neglected and not catered for which results into
insecurity and political instability.
• It leads to failure of government programs when the majorities have no adequate means to participate in development
activities.
• Regional imbalances come up because the regions with high income earners develop at the expense of others with low
income earners.
Measures to reduce wage differentials
• Education reforms have been undertaken: This has helped many people to access education so that they can be
prepared to get high paying jobs.
• Land tenure reforms: This is through land redistribution policies and making it accessible to all people in society so
that they can be able to carry out agriculture to increase their incomes.
• Kick start funds like the one cow per family has helped people to access cows that can be used as source of income
through selling the milk and supplement their incomes.
• Progressive taxation: This has reduced the gap between the high income earners and the low income earners.
• Improving infrastructure like roads which helps in the movement of low income earners to other areas where they
can access high incomes.
• Liberalisation of the economy: This has helped people to participate in economic activities and trade hence increasing
their incomes and standards of living.
• Controlling population growth: This has helped to reduce the demand for work leading to low competition for the few
jobs available hence giving high wages for those who take them.
• Modernising agriculture: This has helped increase incomes of people in rural areas where the activity is fully based.
The people are able to increase the quality and quantity of their products hence receiving more incomes.
• Improvement of the investment climate: This has been through giving tax holidays and free land like the free investment
zone in Masoro. This has attracted more investors, reduced their costs of production hence paying workers relatively high
wages.
• Improvement of the political climate: This has created good environment for production where by low income earners can
engage in other activities to supplement their incomes.• Encouraging development of small scale enterprises: These have also
created more employment for the people in Rwanda and hence improving their standard of living.
• Actively participating in trade unions: This will help to advocate for better payments in areas of work and also good working
conditions.
• Setting a minimum wage: This will enable the employers not to give workers very low wage.
12.7 Wage controls
Activity 8
Visit the library and research on the following:
1. What are wage controls?
2. Differentiate between maximum and minimum wage.
3. What are the advantages and disadvantages of wage legislation?
Facts
Wage controls refer to the setting of a wage by the government above or below the equilibrium/ ruling market wage, below or above which it is llegal to pay the workers. There are different reasons why this is done by the government but the major ones are to;
(a) Reduce exploitation of the workers by the employers through paying them a very low wage.
This is reduced by setting a higher wage by the government at which to pay the workers.
(b) Reduce exploitation of the employers by the employees through requesting and being paid very high wages.
This is reduced by setting a limit beyond which the employers should not pay though this is not common.
The two instances can further be explained.
Minimum and maximum
The wage set above the equilibrium is known as a minimum wage. The goal in establishing minimum wages is to assure wage earners a standard of living above the lowest permitted by health and decency and to protect them from exploitation by the employers.
The wage set below the equilibrium wage is called the maximum wage. Its major objective is to protect the employers from paying a very high wage to their workers. However this kind of wage legislation is not common in low developing countries. It is not common to find the government setting a wage above which people should not pay since wages are mostly determined by demand and supply of labour.
From Figure 5 above, the minimum wage is fixed at
above the equilibrium wage while the maximum wage is fixed
at
below the equilibrium.
Arguments in favour of minimum wage legislation
• To encourage employers to use labour intensive methods, thereby providing employment to more employees.
• To discourage labour mobility especially from rural to urban areas. Paying the same wage to rural and urban
dwellers discourages rural-urban migration.
• To reduce wage differentials and as a consequence, the gap between the poor and the rich is reduced.
• To satisfy the workers’ needs and raise standard of living.
• To protect the workers from employers’ exploitation.
• To increase the purchasing power of the workers. Consumption expenditures increase which in turn stimulates
demand, investment and consequently employment opportunities are generated. The increase in the purchasing
power of the people gives an incentive to producers and hence an increase in productivity.
• Minimum wages prove beneficial to the employers. This is because labour efficiency increases.
• Minimum wages tend to reduce labour unrest and maintain industrial peace. Workers are now more satisfied.
• It reduces relative geographical and industrial wage differential.
Disadvantages of a minimum wage
• Cost of production increases leading to high prices.
• A minimum wage makes employers to have preference for high wage.
• Unemployment results. As wages increase, employers demand less workers but supply increases and hence unemployment.
• Employers may now prefer to use capital-intensive techniques of production because machines may not demand for wages.
• The purchasing power may decrease due to unemployment and consequently this discourages producers.
• Leads to rural-urban migration since they are normally set and adopted in urban areas.
12.8 Trade unions
Activity 9
The workers in Rwanda who are under the teaching profession, basing on the problems that they encounter during their activities, decided to formulate a group that could help to iron out their problems.Indeed the group that they formed has done a lot in assisting them have increase in wages, good working conditions among others. This prompted other workers of different profession to follow suit. Despite the success, the above groups have had many problems in attempt to fulfill their cause.Discuss the following questions:
1. What name is given to the group formed by teachers mentioned in this activity?
2. Explain the reasons why the group was formed.
3. How has the group formed above benefited the members?
4. What challenges has the group encountered in its attempt to fulfill its objectives?
Facts
A trade union is an association of workers in a particular firm or industry that is formed with an aim of achieving specific objectives.It is a continuing and permanent democratic organisation, voluntarily created by and for the workers to protect them at their work. Normally they carry out their work through round table discussions through their representatives and the employers. They have the following objectives:
• To advocate for high wages.
• To advocate for good employer-employee relationships
• To advocate for good working conditions.
• To advocate for social benefits like medicine, transport amongothers.
• To advocate for respect between employers and employees.
• To advocate for job security.
• To advocate for representation in company’s decision making.
Types of trade unions
There are different types of trade unions and these include:
1. Craft unions
These are trade unions formed to organise workers according to their particular skills. E.g. engineers, teachers, printers, doctors, lawyers etc. Members of such unions can be in different organisations.
2. Industrial unions
These are unions which attempt to organise all workers in a particular industry, regardless of the job done by workers and their skills. It is a common type of workers’ organisation.
3. White collar unions
This is a union that brings together members in the clerical and administrative staff who are paid salaries. This is common in teaching, banking and legal services.
4. Open shop or General unions
These are unions that allow any one into membership i.e. Workers from all types of industries and with any level or range of skills are recruited. Such unions usually have a large number of unskilled memberships.
5. Closed shop unions
These are unions where particular employees are required to join a given trade union before they are employed in an Organisation or firm. Membershipof the union is a prerequisite for gaining or retaining employment in a particular firm or Organisation.
Tools / methods used by trade unions to achieve their objectives
Trade unions use a diversity of methods which are either peace or violent or both to achieve their objectives. Such methods include, among others the following:
1. Collective bargaining
This refers to the negotiation process between employers and employees association regarding establishment of procedures that concern conditions of work, terms and rates of pay.This is a peaceful method/ process that aim at strengthening worker employer relationship.
2. Giving ultimatum/ Grace period
Employers are given a time limit to respond to the workers’ demands beyond which workers may withdraw their labour services.
3. Go slow tactics
Workers in here slow down their pace of working by reducing their pace of working and reduce their productivity and total output as well. This is done by reducing hours of work and output so as to make the employer feel the impact of it on the organisation.
4. Work to rule/ dot
Workers apply the firm’s rules and procedures to the ‘letter’ with the aim of slowing down production. For example, workers arrive at work on time and leave on time regardless of quantity or quality of work done. In here, there is malicious obedience.
5. Sit down strike
Here workers lay down their tools, they will report at their work place but they will not work at all.
6. Demonstration
These are open protests against unfair treatment of workers e.g. marching through the streets. They carry placards/posters along. The aim is to shame the employer, attract attention and sympathy from the public and government against the employer.
7. Picketing
This is whereby the trade union members prevent their fellow members from working, by positioning or deploying of members at the entrance of business premises stop any potential workers from proceeding to work. This is designed to make the organisation feel the impact of the workers absence.
8. Boycott of the firm’s product/ sabotage
Trade unions may de-campaign the firm’s product openly in the public so that the product loses market, pack wrong weights or members may also boycott from consuming any of the product. This is aimed at causing severe loss of revenue to the company/ Organisation. This method however requires a lot of finance or it may be expensive.
9. Mediation or arbitration
This involves the intervention of a neutral party acceptable to both parties (employers and employees/ Trade unions) to resolve the industrial dispute or make the recommendations for resolving the disputes. For example, ministry of labour and social welfare. It is normally agreed beforehand that the two parties will accept and respect the decisions and recommendations of the arbitrator.
10. Industrial court
Here workers can present their claims or case to the industrial /Organisation court which examines the case or dispute and makes the recommendations or ruling which is binding to both parties. The court may award or reject their claims.
11. Mass media campaign against the firm (press war)
Here, trade union members can approach a re-known radio, television newspaper etc. so as to get their demands clearly spelt out and it is intended to capture sympathy as well as public support.
12. Further education and training
Trade unions may organise seminars and workshops for members so as to improve their skills required in the labour market hence increasing labour productivity. This is aimed at improving their bargaining power as well as increased demand.
13. Boycott of personnel
Workers may also decide to reject some person and refuse to work with them as their supervisors. This happens when such persons (the supervisors) are in disfavor of workers’ interests.
14. Restricting labour supply
This is where trade unions restrict employers to employ more new workers without permission. i.e. members require a particular employee to first join a given union in order to retain or obtain employment. This is aimed at strengthening the bargaining power of trade union members.
15. Violent industrial strike
This is done as a last resort in case all the above peaceful methods fail. It is a violent process which involves withdrawal of labour, putting down tools, destruction of buildings, machines and even loss of lives. It is intended to force employers to accept the needs of employees immediately.
Benefits of trade unions
Trade unions have played a big role in increasing the wages of their
workers whom they represent basing on the following arguments:
• A rise in the cost of living: Trade unions demand higher wages because of an increase in the cost of living.
This is because a rise in the cost of living reduces the real wage of the trade union members.
• Comparative wage rates argument: This is based on the idea that people doing similar jobs should get more-or-less
similar rewards. For instance, a teacher of G. S. Kibungo should get almost the same salary as the one of Green hills
academy. Hence different institutions have tried to increase the wages basing on that argument.
• The increased profit argument:The increased profits in the industry justify a higher return to labour. The trade union
is justified to press for higher wages whenever the profits in the industry increase. However, the trade union may not
know the profits earnedin the industry.
• The productivity argument: Trade unions demand higher wages if productivity increases. However,
there are several problems involved with this argument:
(a) Most increases in productivity arise from improvements in the quality and performance of the capital equipment on
which labour is employed. This would be unfair to those workers in the industries where there are no rapid changes
in technology.
(b) A larger number of workers are employed in occupations where it is difficult or impossible to measure productivity
e.g. the productivity of teacher, doctor, etc.
(c) In some occupations, it may be very difficult or even impossible to increase the productivity. This may be due
to circumstances beyond control of the worker, e.g. the driver who cannot increase his productivity because
of increased traffic congestion.
• Trade unions have also played a big role in improving the standards and working conditions of the people
through advocating for fair treatment at their areas of work.
• Trade unions also have helped in creating and advocating for job security for the people they represent. This is
through seeking for work permits for their members and this has helped to reduce fear from the people about the
uncertainty of their jobs.
Failure/ weakness of trade union in low developing countries
Trade Unions in LDCs have failed to raise wages due to the following reasons:
• Workers have no keen interest in the trade union: Trade unions represent a small proportion of the total labour
force and therefore, they are in a weak bargaining position.
• Leadership problem: Trade unions have poor leadership as they fail to present their wage claims in the right manner.
They have no correct approach thus their wishes have not always been granted.
• Unemployment: There is open unemployment in LDCs. There is a large surplus of labour in the agricultural sector.
On top of this, there are so many job seekers migrating from the countryside to the urban sector. In a position like this,
where the possible supply of workers is much greater than demand, it will be quite difficult for the trade unions to push
wages up.
• Financial difficulties: Trade unions are always in financial difficulties. To begin with, the incomes of union members are
generally low, and they are therefore reluctant to pay union dues.
• Government interference: In most cases, governments of LDCs interfere in the running of trade union affairs. Strikes of
any nature are made illegal.
• Tribal, religious, political and racial differences cause disunity in the trade union; This particularly makes a trade union
very weak and it is in a weak bargaining position.
• A high proportion of migrants within the work force: The composition of the labour force changes continuously.
Organisation of a trade union becomes particularly very difficult. People are not interested in becoming members of a
trade union. This puts a trade union in a weak bargaining position.
• Trade unions are normally used as a springboard to the achievement of a big position in the government. Leaders of
trade unions lack in terest in the union affairs. Their interest is to achieve a big post in the government.
Unit assessment
1. Explain how wages are determined in Rwanda?
2. Why do you think that some workers are paid more than others in Rwanda?
3. Give a justification for trade union’s demand for high wages
12.9 Glossary
- Collective bargaining:This is a round table discussion between employers’ and workers’ representatives with an aim of reaching and enforcing agreements concerning wages, conditions of work and worker’s welfare.
- Geographical mobility of labour:This is the ease with which labour can move from one area to another.
- Labour efficiency: This is the ease which labour can produce good quality and quantity output in the shortest time possible.
- Labour productivity: This is output per unit of labour.
- Labour mobility: This is the ease which labour can move from one area or occupation to another.
- Iron law of wages: This states that a worker should be given a wage which is just enough to enable him meet his necessities in life and nothing more.
- Living wage: This is a wage given to a worker to only satisfy his basic needs. It is sometimes called a subsistence wage.
- Marginal productivity theory of wages: This states that a worker should be given a wage which is equivalent to the value of his additional output.
- Minimum wage: This is a wage set by the government above the equilibrium/ ruling market wage, below which, it is illegal to pay the workers.
- Occupational mobility: This is the ease with which labour can move from one occupation to another.
- Piece rate system: This is when a worker is paid according to the work done
- Sliding scale: This is when workers are paid more if the cost of living increases, and they are paid less if the cost of living.
- Specific labour: This is labour that cannot be changed from one productivity activity to another.
- Skilled labour: This is labour that has got skills and under gone training.
- Semi-skilled labour: This is labour that has got some training and gained some skills.
- Time rate: This is a system of wage payment where a worker is paid according to the time spent at work.
- Trade union:This is a legally accepted association comprised of workers who come together in order to achieve specific objectives.
- Un-skilled labour:This is labour that has no any training and has no skill at all.
- Wage freeze: This is the deliberate government policy of maintaining wages at their current levels so as to control inflation.
- Wage restraint: This is the voluntary restriction of wage increase by workers in order to control inflation.
Unit summary
• Meaning and categories of wages
• Demand for labour
• Labour supply
• Efficiency of labour
• Labour mobility
• Geographical
• Occupational
• Manpower problems
• Wages
• Determinants
• Forms
• Wage theories
• Wage differentials
• Wage controls
• Trade unions
From Figure 3 above, at W1, supply is
FromFigure 4 above, the minimum wage is fixed at
From Figure 5 above, the minimum wage is fixed at