The model of labour demand in terms of hours worked by employees assumes that firms instantly adjust their employment when the economic environment or business cycle changes. A firm looking to change the size of its work force will always find that it is costly to make spontaneous changes to its labour force. A firm firing a large proportion of its workers, for example, will in most cases suffer some costs when the experience and knowledge of these workers disappear from the work environment. Differently, a firm wishing to expand employment or increase hourly working hours (this maybe due to a rise in output price) will find that hiring additional workers might be equally costly: the firm will have to process the job applicants through the personnel office and train new workers.
[...] In choosing the amount of labour services, a company can alter the dimensions of labour input by altering the amount of hours worked by each employee. The choice of an employer to vary the amount of labour services in hires will largely depend on changes that occur within the labour market. These changes are more usually associated with fluctuations in the structure of labour costs and the relative productivity of persons and hours. Figure 1 below, illustrates the cost structure faced by any given firm in choosing between alternative lengths of the working week at any given time. [...]
[...] Given that there are times when labour demand in terms of the real number of workers employed is constant, unless there are alterations in firms' inventories (stocks of goods not sold), which one can assume there are not, then employers must alter the hours worked in order to respond to changes in product demand. The most common instance of changing the hours worked by employees is the increasing or decreasing availability of overtime. Increasing overtime enables the firm to postpone the hiring of fresh employees without sacrificing out put. [...]
[...] As the cycle turns up, it relays this information to the labour market, and this in turn affects the activities taking place in the labour market, and hence the rise in demand will lead to an increase in hours being demanded by employers. When hours worked reach ha at time t3 then the firm begins to take on new workers as argued by Lindsay (2004). During the period t4-t5 all the factor inputs are in full use with the number of hours worked by the employees rising as a result of demand for goods rising to its optimal level at h*. [...]
[...] (2004) State of the Labour Market: 2004 Report, London, Office for National Statistics. Labour Market Division Nickell, S J "Fixed Costs, Employment and Labour Demand over the Cycle," Economica, London School of Economics and Political Science, vol. 45(127), pages 329-45 Smith, S.,(1994)(2nd eds.): Labour Economics, Routledge, pp 48-51 Siebert. H., (1997) Labour Market Rigidities: the root of unemployment in Europe, Journal of Economic perspectives 37-35. http://highered.mcgraw- hill.com/sites/0070891540/student_view0/chapter1/chapter_notes.html Bosworth, D., Dawkins, P., & Stromback, T., (1996)(1st eds.): The Economics of the Labour Market, Longman, pp 123-125 0 Borjas, G., (2000)(2nd eds.): Labor Economics, Mcgraw-Hill, pp 149 Bosworth, D., Dawkins, P., & Stromback, T., (1996)(1st eds.): The Economics of the Labour Market, Longman, pp 123. [...]
[...] It has also been examined extensively that the business cycle of the economy, a key factor that affects the activities within any labour market, is another major reason why firms will alter hours before employment. A firm will look to ensure it does not lose out put production and hence crucial sales revenue during an economic upturn, and hence it will try and minimize loss in production output whilst keeping adjustment costs at the very minimum. In fact, the occurrence of a boom or recession is enough reason for an employer to either increase its staff of employees or to downsize its labour force. [...]
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