© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-1

Chapter Six

Labour Demand,NonWage Benefits, and Quasi-

Fixed Costs

Created by: Erica Morrill, M.Ed Fanshawe College

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-2

Chapter FocusNonwage benefits Hours of labour Payroll taxes Labour decisions in economic

downturnsCreating more jobs

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-3

Figure 6.1 Components of Total Compensation

Total Compensation

Nonwage Benefits(supplementary labour income)Wages and Salaries

Pay for Time Worked Pay for Time Not Worked

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-4

Quasi-Fixed Labour Costs Independent of the number of hours

workedArise from:

hiring costs training costs dismissal costs nonwage benefits

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-5

Quasi-Fixed Costs Impact the employer's decisions on:

work schedules part-time work overtime work hiring and Layoff decisions unemployment

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-6

Nonwage Benefits and Total Compensation

Fastest growing components pension legally required payments

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-7

Nonwage Benefits vs. WagesWhy 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

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-8

Nonwage Benefits vs. WagesEmployer’s benefits

planning of production process reduce need for contingency plans for

layoffs and accidents alter employee behaviour in favor of

production reduce turnover

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-9

Nonwage Benefits vs. WagesGovernment’s benefit

reduce pressure for government expenditures

public pension plans unemployment insurance

increase social security

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-10

Quasi-Fixed Labour CostsVariable Labour costs

vary with hours Quasi-fixed

incurred per employee independent of hours

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-11

Quasi-Fixed Labour CostsRecurring

payroll taxesNonrecurring

hiring and orienting new employees dismissing employees

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-12

Quasi-Fixed Labour CostsGiven the quasi-fixed costs:

firm is no longer indifferent in the way to increase labour input

increasing the number of employees becomes more costly

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-13

Quasi-Fixed CostsFirms try to:

amortize these costs encourage additional hours rather than hire

employees

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-14

General Effect of Quasi-Fixed Costs 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

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-15

H+T+ N

t=0

Wt

(1+r)t=

t=0

N VMPt

(1+r)t

6.1

N

t=0(1+r)t

> t=0

N Wt

(1+r)t

VMPt

6.2

Profit-Maximizing Employment Rule

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-16

Phenomena Explained by Fixed CostsOvertimeTemporary help agenciesLayoffsSegmentation of labour marketsResistance to worksharing

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-17

Figure 6.2 (a) Nonrecurring fixed Employment

Costs and Changes in Labour Demand

No fixed costsW

N*0

W0

N

VMP

N10

VMP1

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-18

Figure 6.2(b) Nonrecurring fixed Employment Costs and Changes in Labour Demand

Fixed costsW

N*0

W0

N

VMPVMP1

N0

VMP0

VMP - (H+T)

“Buffer”

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-19

Job CreationWorksharingPart-time workOvertime restrictions

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-20

Reducing Barriers to Employment Sharing

Premiums based on hourly earnings with a ceiling based on hourly earnings

Prorating contributions according to hours worked

Subsidizing employment sharing

© 2002 McGraw-Hill Ryerson Ltd. Chapter 6-21

End of Chapter Six