Microeconomics For Labor Expenditures

Opportunity Cost

Discuss about the Microeconomics for Labor Expenditures.

Scarcity is a primary issue in economic decision-making. Resources are scarce and hence it is essential to ensure optimal allocation of these resources. This gives rise to the problem of choice between alternative uses of these resources (Varian, 2009). The opportunity cost of a certain use of a resource is the next best alternative use of that resource that is foregone after assessing the profitability from the two opportunities. It refers to the cost incurred from not using a resource in an alternative way. It measured by the difference in the tentative returns from the two available uses of a resource.

A firm may have the choice of producing either commodity X or commodity Y, but not both. If the firm decides to produce commodity X, then the opportunity cost of producing one unit of X is the amount of Y that could be produced using the same combination of inputs but is sacrificed to employ the resources in producing X. the production of Y is the next best alternative available to the firm that is foregone (Pindyck and Rubinfled, 2009).

The concept of opportunity cost not only applies to the production decisions of a firm but also to any issue that involves a choice between any two alternatives. For instance, a student may have a choice between writing an economics assignment and solving a set of problems. Here, time is the input that the student has to allocate to either of the two alternatives. If the student decides to solve the set of problems, the opportunity cost of doing the same would be foregoing the economics assignment that he / she could have written within the same period of time. 

This article relates to the opportunity costs of the trade deals that are supposed to be signed between the Britain and the United States of America. In the referendum vote of 2016, Britain had proposed to withdraw its membership from the European Union by virtue of which they will have to leave by April 2019. The Prime Minister Theresa May had earlier announced that the United Kingdom will no longer continue its membership in the single market formed by the European Union. As a member of the European Union, U.K had been at a significantly advantageous position on the trade frontier. As a consequence of that, its exit from the European Union had worsened off its trade position in the world economic forum as had already been forecasted. If Britain decided to still be a part of the European free Trade Area, it would have to substantially contribute to the European Union budget. It was however predicted that the country would hold its ground on the frontier of Foreign Direct Investment which was still expected to flow in (Varian, 2009). The market volatility arising out of Brexit would be short-term. The U.K market however was considered by foreign investors as a medium to enter into the European Union market. This was to a large extent beneficial for the U.K economy. The scenario changed after the exit of Britain from the European Union. The currency had been subject to major depreciation and the economic situation was unstable. However, after some time, the economic condition began to revive.

Trade Deals Between UK and USA and the Corresponding Opportunity Costs

In January 2017, American President Donald Trump had a meeting with Britain’s Prime Minister Theresa May regarding their trade agreements. The trade deals mainly consist of the opportunity and degree of the access to their markets that the two economies will henceforth provide each other. This essentially implies the structure of tariffs and quotas. Thus the United Kingdom will have to make arrangements for different trade agreements and accordingly adjust its international trade structure. By doing this, U.K will essentially incur an opportunity cost. The alternative solution is that instead of negotiating on trade agreements with the U.S.A, it could simply open up its domestic market to the international market under conditions of free trade. The opportunity cost that U.K has to incur is primarily related to the complicated adjustment and negotiations that it is having to bear instead. If it had proposed the conditions for free trade, other countries would have free access to the markets of U.K. and would in reciprocation probably provide the same to U.K.  The other countries would agree to such an arrangement if they could account for a large proportion of the U.K. imports. This would also result in a comparative advantage framework where each country could produce at the lowest cost and trade among themselves (Pindyck and Rubinfled, 2009). Hence, at the time of the Brexit when the economic situation is unstable and there is short-term volatility in the U.K. market, the next best alternative to negotiating trade terms with the U.S.A would be to provide free trade access to the international economic forum. The complications associated with the trade negotiations of U.K with U.S.A. include the determination of the costs and benefits resulting out of the negotiations and how it would accrue to the different industries of the country. Different sectors stand to lose out or gain from a particular section of the agreement. U.K. will have to analyse the same and undertake a cost-benefit analysis on such grounds. The overall outcome will be dependent on the benefits and losses accruing to the individual industries. Moreover, there would be transferring effects from one industry to another that would ultimately affect the economy on the whole. The free trade agreement would on the other hand produce some other kind of benefits for the U.K. economy. These benefits that it is foregoing in order to enter into the trade agreement with U.S.A can refer to the opportunity cost. Moreover, there is a popular belief that the U.K does not stand to benefit much on the positive side under the effects of the trade negotiations with the U.S.A. There are many obstacles that the U.K economy will have to overcome in order to go into a trade agreement with the U.S.A.  Even if the trade structure is based on comparative advantage, it might not prove beneficial to the economy. For instance, U.K has a comparative advantage in the production of whisky. On the other hand, U.S.A has a comparative advantage in the production of bourbon. But this does not necessarily imply that U.K would actually generate the demand for enough bourbon to be imported. The demand structure in the economy might not necessitate import of bourbon solely due to the fact that tariffs have been reduced. Thus in order to determine the overall impact, it is essentially to analyse the effects on the overall economy by combining the comparative advantages of the different sectors. These are all part of the opportunity cost that the U.K. will have to forego when entering into a trade negotiation with the U.S.A (Bloom, 2017). 

Cost-Benefit Analysis and Expenditures On Labour During A Phase Of Unemployment

The cost-benefit analysis of labour expenditures in public project is a significant issue in the decision making procedure of the political economy. There is always a debate regarding whether or not to hire labour in public endeavours especially in times of unemployment. The issue of opportunity cost arises in this context where the decision makers are faced with two alternatives: to hire labour and not to hire labour. This problem is mainly prevalent in economies with high levels of unemployment. Economies with full employment will not face this choice.

When there is a significant magnitude of unemployment in an economy, valuing employed labour at their current wages generates social costs. Since there is unemployment, if the workers are employed in the different projects even without any significant work, there would be no opportunity cost incurred except that they could enjoy the leisure time during those hours. However, in the presence of unemployment such an opportunity cost becomes redundant. The wage earned by the workers is the benefit accruing to them. Thus the opportunity cost of working for unemployed workers is much less than the wages that are being paid to them. The social cost of unemployed labour is a serious issue in developing economies and the opportunity cost of employing labour at a high cost is foregoing the employment that might have been provided to another set of unemployed workers. The social opportunity cost of generating employment for labour which would otherwise be unemployed is actually equivalent to the reservation wage of these workers (Dornbusch, Fisher and Startz, 2013). This is essentially representative of the value that the unemployed people allot to their leisure time which they have to give up when they are working. It is measured by the efficiency of the costs of labour during periods of unemployment. Again, when these workers are hired at a certain wage rate, the money cost is incurred by the government since it is a public project. The money is basically the revenue earned by the government in the form of taxes. Thus, ultimately, it is the taxpayers that have to bear the cost of the employed labour in the form of higher taxes paid. The benefit accruing to the workers is fundamentally the excess wage rate paid to them over and above their reservation wage. Thus different sections of the society are affected differently under such programs (Mankiw, 2012). When a worker is employed during a period of full employment, the wage is equal to the reservation wage and this is what denotes the social opportunity cost as well. In times of unemployment however, the reservation wage will generally be lower than the actual wage rate paid. In such cases the surplus labour is beneficial for the project under question. Thus a certain amount of gain accrues to the project from hiring unemployed labour.

 Thus in the case of employment in a public project, the opportunity cost arises because the authorities are faced with a choice between hiring and not hiring labour in times of unemployment. When unemployed labour is hired the government incurs the cost of the labour expenditures which in turn are paid by the taxpayers. Thus it imposes a certain kind of social cost in the society as a whole that could otherwise have been foregone by the government (Dornbusch, Fisher and Startz, 2013). Again, when the government chooses not to hire the unemployed labour, it will incur the social costs arising out of unemployment. These are essentially related to the well-being of the unemployed workers that could otherwise be employed (Haveman, 2011). 

Thus, opportunity costs arise in every form in the economy whenever it is faced with a choice between two different options, one of which has to be foregone in order to undertake the other. The two choices generally involve very close returns or results and hence there is a cost associated with taking up one instead of the other. Then the cost-benefit analysis has to be taken up in order to measure the relative yields from each of the choices and the option providing the relatively better return should be undertaken. In spite of that, another option which would be the next best alternative to the former has to be foregone and opportunity costs always exist (Varian, 2009). 

References

Pindyck, R. and Rubinfeld, D. (2009). Micreconomics. 7^th ed. New Jersey: Prentice Hall.

Varian, H. (2009). Intermediate Microeconomics: A Modern Approach. 8^th ed. New York: W. W. Norton & Company.

Dornsbusch, R. Fisher, S. and Startz, R. (2013). Macroeconomics. 12^th ed. New York: McGraw Hill Education.

Mankiw, N. (2012). Macroeconomics. 8^th ed. New York: Worth Publishers.

Haveman, R. and Farrow, S. (2011). “Labor Expenditures and Benefit-Cost Accounting in Times of Unemployment,” Journal of Benefit-Cost Analysis: Vol. 2: Iss. 2, Article 7.

Bloom, J. (2017). “Reality Check: Can there be a quick UK-USA trade deal?”, BBC News, Retrieved from https://www.bbc.com/news/business-38639638, (April, 2017)