This paper discusses and analyzes why some firms will reduce working hours before making staff redundant and increase overtime just before hiring new staff.
Written in 2005; 1,870 words; 7 sources; APA; $ 59.95
Paper Summary:
This paper explains that the model of labor demand in terms of hours worked by employees assumes that firms instantly adjust their employment when the economic environment or business cycle changes; hence, rational firms will always try to minimize their adjustment costs when making decision on altering their labor force, whether through hiring new workers or laying-off staff. The author points out that adjustment costs tend to produce the familiar phenomena of labor hoarding or reduction of working hours during a slump and increased use of extending overtime during a boom. The paper deduces that the relationship between output, hours worked and employment follows a lagged pro-cyclical trend but so must labor productivity, especially if it is measured as output pertaining to each employee; thus, as output and hours worked fall during the economic recession then so does the level of output per worker.
From the Paper:
"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. The variable parts of wage costs are especially crucial: (i) the basic wage, w0 per hour, which operates under normal working hours; (ii) the basic wage augmented by overtime premium, w1 above normal working hours. The basic wage is constant up to normal hours HN. Hence, in the absence of guaranteed wages of any sort, the average variable cost per hour is equal to marginal cost, AVC = w0H/H = w0 = MC, and shown by the line ae."
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