Premier University

Department of Business Administration

Assignment on:
A representation of labor market

Course title:
Labor Economics

Submitted to:
Rahima Begum
Assistant Professor

Submitted by:
Israt Suraya Karim
ID:1903910109811
Batch: 39th
Semester:8th

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 Introduction

Bangladesh is one of the densely populated countries with abundant low skilled workers. This supply of
workers puts downward pressure on wages. As a labor-abundant country, the prospect of the entire
economy of Bangladesh depends on the features of the labor market. So, at first we should know about
labor market and labor supply.

Labor market
Labor market is the supply of and demand for labor, for which employees provide the supply and
employers provide the demand. It is the place where workers and employees interact with each other. In
the labor market, employers compete to hire the best, and the workers compete for the best satisfying job.
It is a major component of any economy and is intricately linked to markets for capital, goods, and
services.

Labor supply
Definition :
Labor supply is the total hours that workers or employees are willing to work at a given wage. Labor
supply is impacted by changes in preferences, income, population, prices of related goods and services,
and expectations.

Here are more about labor supply :

Labor force
The labor force is the sum of the employed plus the unemployed. There are three types of labor force:

I. Employed
II. Unemployed
III. Residual group

I. Employed:
To be employed, a worker must have been at a job with pay for at least 1 hour or worked at least 15
hours on a nonpaid job.

II. Unemployed:
To be unemployed, a worker must either be on a temporary layoff from a job or have no job but be
actively looking for work in the four-week period prior to the reference week.

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III. Residual group :
They do not have any job but involve in job searching activity for four weeks. That is said to be out of
the labor force.

The worker’s preference

Worker’s preference analyze labor supply behavior which is the Neo-Classical Model of Labor-Leisure
Choice. This model isolates the factors that determine whether a particular person works and if so, how
many hours he/she chooses to work.

Utility Function – Is a measure of how satisfied people are with their leisure and product purchases.
U = f(C, L), where
U is an index of entire life which measures the individual’s level of satisfaction or happiness. This index
is called utility. Higher U means happier person because, the more higher is U the more higher is the
consumption level.

Indifference curve properties

Indifference curve is a graphical representation of a combined products that gives similar kind of
satisfaction to a consumer thereby making them indifferent. Every point on the indifference curve shows
that an individual or a consumer is indifferent between the two products as it gives him the same kind of
utility.

Here are facts about indifference curve :

 ICs are downward sloping.
 Higher ICs indicate higher levels of utility.
 ICs do not intersect
 ICs are convex to the origin

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Indifference curve properties graph

In this graph, the vertical axis denotes consumption and horizontal axis denotes
leisure hours. If a person enjoys 225 hours of leisure, he can consume $350. If he enjoys 125 hours of
leisure he can consume $450. Which means there is a negative relationship between consumption and
leisure hours. The scope of indifference curve is downward slopping because the more he will enjoy
leisure hours the less he can consume.

Prove of why ICs do not intersect each other :

Consumption ($)

Y
Z
U2
U1

0 Leisure

In this graph, the vertical axis denotes consumption and horizontal axis denotes leisure hours. Utility 1
denotes U1. Utility 2 denotes U2. Suppose, there are two point x and y. They are in the same indifference
curve so, we can write x = y. On the other hand, two point y and z are in the same indifference curve. So,
we can write y = z. Which means we can also write x = y = z. But, this equation cannot be accepted
because x and z are not in the same indifference curve. This proves ICs do not intersect each other.

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Budget constraint
The person's salary plus the fact that a day consists of only 24 hours limit her consumption of products
and leisure. No matter how many hours she works, some of her income (such as dividends, lottery
winnings, and income from real estate) is constant.
We denote,
 Non-labor income = V
 The number of hours the person will allocate to the labor market = h
 the hourly wage rate = w

The person’s budget constraint can be written as

• C = wh + V

Total working hours –

 T=h+L
So, h = T - L

 Consumption equals labor earning (wages × hours) plus non-labor income (V) or we can also write
as-

C = w(T – L) + V [ as, h = T – L]
Or, C = (wT + V) – wL
Or, C = wT + V [when a person does not enjoy his leisure time at all, then the value of L will be 0]

• Budget constraint sets boundaries on the worker’s opportunity set of all the consumption baskets
the worker can afford

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Depicting the budget constraint :

In this graph, the vertical axis denotes consumption and horizontal axis denotes leisure hours. T is the
total hours. Here, E is the endowment point where a person do not work at all still gets to consume at V
point which denotes nonlabor income. The more he will go to the origin the less will be his leisure hours.
The FE constraint the budget line. At wT+V point a person won’t enjoy his leisure at all which means the
value of L will be 0.

The hours of work decision

At the hours of work decision individual will choose consumption and leisure to maximize utility. The
decision will be taken at optimum consumption.
 Optimal consumption :
Optimum consumption is the point where the budget line is tangent to the indifference curve. At
this point the Marginal Rate of Substitution between consumption and leisure equals the wage
rate.
 Any other bundle of consumption and leisure given the budget constraint would mean the
individual has less utility.

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Optimum consumption and leisure :

Consumption ($)

In this graph, the vertical axis denotes consumption and horizontal axis denotes leisure hours. To make
work decision we must denote optimum point. Here, at A point the working hour is more and leisure hour
is less so, A cannot be the optimum point. On the other hand, at Y point both consumption level and
leisure hour is more still Y cannot be the optimum point because, it did not tangent the indifference curve
EF. P is the optimum point because it tangent the indifference curve.

Two effects
There are two types of effects –
1. Income effect
2. Substitution effect

Income effect :
When non-labor income increases workers jump to the higher indifference curve which is called Income
effect.

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Substitution effect :
When wages change holding the real income constant, the consumption-leisure bundle also change which
indicate the Substitution effect.

Leisure can be treated as : a) Normal good & b) Inferior good

The effect of a change in non-labor income on hours of work :

 When leisure is normal good

In this graph, the vertical axis denotes consumption and horizontal axis denotes leisure hours. E 0 is the
endowment point. E0 F0 has tangent the curve U0 at the point P0. When leisure hour is normal good,
[leisure hours > working hours] due to changes in non-labor income. Which means the worker will enjoy
70 hours of leisure so, leisure hours will shift from P 0 to P1 and the budget line will be upward shifted .
Now, the new budget line E1 F1 has tangent the curve U1 at P1 point.

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  When leisure is inferior good

Consumption ($)

F1

P1
F0

U1
$300 P0 E1

U0
$200 E0

60 70 120 Hours of
Leisure

Again, the vertical axis denotes consumption and horizontal axis denotes hours of leisure. When the
leisure is inferior good then, working hours > leisure hours. Which means due to changes in non-labor
income the working hour is more and the worker can enjoy less leisure time so, hours of leisure will shift
from the point P0 to P1 at U1 curve and create a new budget line E1F1.

1) Income effect

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In this graph, the vertical axis
denotes consumption and the horizontal axis denotes hours of leisure. Here, E is the endowment point and
P is the optimum combination of EF. When the horizontal line indicate the P point the worker will enjoy
70 hours of leisure. When wage increases from $10 to $20 and non-labor income V is constant, the
budget line will be rotated to the endowment point E and create a new budget line EG. The wage increase
shifts the optimum consumption bundle point P to point R. So, he will enjoy 75 hours of leisure.

2) Substitution effect

In this graph, the vertical axis denotes consumption and the horizontal axis denotes hours of leisure. Here,
when the wage increases from $10 to $20 this moves the worker to a higher indifference curve and works

more. So, the optimal consumption bundle shifts from point P to point R. This time due to increase in

wage working hour increases and labor hour decreases.

Labor supply curve

Labor supply curve is the predicted relation between hours of work and the wage rate.

Substitution effect dominates -

When the wage is slightly above the reservation wage and the labor supply curve is positively sloped.

Income effect dominates-

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 When hours of work decline as wage rates increase and the labor supply curve is negatively sloped.

Labor supply elasticity

 % change in hours worked / % change in wage rate

 If labor supply elasticity is less than 1 then it is inelastic.

Backward bending labor supply curve:

Wage Rate($)

25

20

10

0 20 30 40

In this graph, the vertical axis denotes wage and the horizontal axis denotes hours of work. Here, the
minimum wage is $10, a worker won’t work at a wage less than that. When the wage increases to $20
Wag Wag
working hour increases. But after the wage increases to $25 working hours decreases because of income
effect.

Market derivation :
Supply curve of individual worker h

W
W

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Hour
Hour
In the graph here are two workers Janice and Amy. Janice enters in the labor market when
the wage is WJ. On the other hand, Amy enters in the labor market when the
wage is WA.

Scenarios of labor supply on the perspective of Bangladesh

Developments in the Labor Market

The GDP of Bangladesh was $460.20B in 2022. The per capita GDP increased to Tk. 2,59,919 in fiscal
year 2022-23 which was Tk. 2,31,861 in previous fiscal year. On the other hand, per capita national
income in fiscal year 2022-23 stood at Tk. 270414. In terms of total employment, agriculture continues to
be the largest industry, employing the average value is 51.31 percent with a minimum of 37.09 percent in
2021 and a maximum of 64.03 percent in 1991. The latest value from 2021 is 37.09 percent. In 2016-17,
4.39 crore people were employed in rural areas. In 2022, that number stood at 5.31 crore. In contrast,
urban employment increased from 1.69 crore to 1.77 crore in 2022.

Employed labor force

Labor market in Bangladesh constitutes of three types of market: 1) Formal 2) Rural informal and 3)
Urban informal.
A small portion of the total labor force works under the formal labor market framework. In many
countries informal economy plays important role in employment creation and income generation. Country
having high population growth like Bangladesh, informal sector tends to absorb most of the growth in
labor force. So, in Bangladesh informal economy has been an important component of the growth
dynamics, which has increased and reached 89% of the total number of jobs in the labor market.

Rate of labor force participation

Year Participation rate for ages 15-24 Annual change

2017 40.47% 2.42%
2018 40.59% 0.12%
2019 40.63% 0.04%

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 2020 39.86% -0.77%
2021 39.84% -0.02%
2022 40.14% 0.30%

The total labor force of Bangladesh has increased to 73.69 million of which 48.25 million are male while
25.44 million are female, according to the findings of the 1st quarter of the Labor Force Survey 2023.
There is a discernible gender gap in the participation rate. Nonetheless, the rate of female engagement
increased more quickly over that time (from 23.9 to 29.2 percent) than the rate of male participation (from
84.0 to 86.8 percent). In the early 80s or 90s, Bangladesh depended on agriculture. But later, the
development of the garments industry changed the pattern of employment. As a result, women are also
joining the labor force. The development of the garments industry is enabling them to enter the labor
market easily.

. Conclusions and Policy Implications

In Bangladesh, labor force participation is growing at a faster pace than the current employment
generating capacity of the economy making it difficult for the country to absorb the incremental labor
force in productive and remunerative employment. As such, the country needs higher and more
employment intensive economic growth for which adoption of several complementary approaches
could
be useful, such as giving priority to more employment friendly growth policies, widening micro credit
based and targeted employment generating programs and special schemes for new job creation
especially
in rural areas, and increasingly tapping overseas employment opportunities focusing on skill intensive
jobs
in the global . In view of the current compulsions, several elements should feed into developing an
appropriate
employment strategy for Bangladesh.

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