© 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 Focus Nonwage benefits Hours of labour Payroll taxes Labour decisions in economic downturns Creating 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 WorkedPay for Time Not Worked

© 2002 McGraw-Hill Ryerson Ltd.Chapter 6-4 Quasi-Fixed Labour Costs Independent of the number of hours worked Arise 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. Wages Why wouldnt 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. Wages Employers 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. Wages Governments 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 Costs Variable Labour costs vary with hours Quasi-fixed incurred per employee independent of hours

© 2002 McGraw-Hill Ryerson Ltd.Chapter 6-11 Quasi-Fixed Labour Costs Recurring payroll taxes Nonrecurring hiring and orienting new employees dismissing employees

© 2002 McGraw-Hill Ryerson Ltd.Chapter 6-12 Quasi-Fixed Labour Costs Given 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 Costs Firms 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 WtWt (1+r) t = t=0 N VMP t (1+r) t 6.1 N t=0 (1+r) t > t=0 N W t (1+r) t VMP t 6.2 Profit-Maximizing Employment Rule

© 2002 McGraw-Hill Ryerson Ltd.Chapter 6-16 Phenomena Explained by Fixed Costs Overtime Temporary help agencies Layoffs Segmentation of labour markets Resistance 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 costs W N*0N*0 W0W0 N VMP N10N10 VMP 1

© 2002 McGraw-Hill Ryerson Ltd.Chapter 6-18 Figure 6.2(b) Nonrecurring fixed Employment Costs and Changes in Labour Demand Fixed costs W N*0N*0 W0W0 N VMP VMP 1 N0N0 VMP 0 VMP - (H+T) Buffer

© 2002 McGraw-Hill Ryerson Ltd.Chapter 6-19 Job Creation Worksharing Part-time work Overtime 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