Lecture 2After Mid

A Tour of the Labor Market 1998 2006Population in virtual country 270.2 million 301.0 million Minus: Pop. under 16, and -65.0 million -73.0 million

Armed forces and Incarcerated

Civilian Noninstitutional Pop. 205.2 million 228.0 million

Minus: Out of the Labor Force -67.6 million -76.6 million(above60 tears).

Civilian Labor Force 137.6 million 151.4 million

Employed 131.4 million 144.4 million

Unemployed 6.2 million 7.0 million

Slides Prepared By:Dr.Abdelmohsen Mostafa3

Labor force :

It is the number of population above a certain appropriate working age ( usually 18 years of age, whether

employed or not), and the pop above of 60 years)

Labor force = Population – (pop under 18 years of age + pop above 60 years of age).

Important rules

2- Labor force rate = Number of labor force

Total population

Slides Prepared By:Dr.Abdelmohsen Mostafa4

1-Labor force = unemployment + employed

Slides Prepared By:Dr.Abdelmohsen Mostafa5

4- Unemployment rate = Number of unemployed

Number of labor force

The participation rate =

PopulationtionalNoninstituForceLabor

(1998)67%205.2

137.6

PopulationnalinstitutioNon

ForceLabor

rationparticipatThe

)1998(%5.46.1372.6

ForceLaborUnemployed

ratentunemploymeThe

Total number of population = 10 million, population under 18 years =2.5 million, population above 60 years = 1.5 million, the rate of the

employees=40%. Requires: Calculate:

1- The labor force rate.2- The number of unemployment.

Labor as a

resource

A collection of people and firms who are

trading labor services.

The Labor market

like other markets in the economy, are

governed by the forces of supply and demand.

Labor markets

Job

A long-term contract between a firm and a household to provide

labor services.

PerfectlyCompetitive

Labor MarketCharacteristics

1-Large number of firms trying to hire an identical

type of labor

2-Numerous qualified people independently offering their services

3-Neither firms nor workers have control over the market wage

4-Perfect, costless information and labor

mobility

5- No barriers to entering or

leaving labor market.

The Market Demand For

LaborIndicates total number of workers all firms in a

labor market want to employ at each wage rate

Quantity of labor demanded is the total labor hours that all

the firms in the economy plan to hire during a given time period at a given real

wage rate.

The Demand for Labor

is the relationship between the

quantity of labor demanded and real

wage rate.

Demand for labor

19

At the lower level of real wage rate,

the quantity of labor demanded is greater.

20

The Firm’s Labor Demand Curve

Firm's Labor Demand Curve

W2

W1

B

A

n1 Number of workers

wage

n2

W2

W1

n3

w3 w3C

Labor Demand DeterminantsThe demand for labor depends on:

The main determinant of

labor demand is:

1- the wage rate, and:

6-22

Labor Demand will change if there are changes in:

2- Product demand

3- Productivity

4- Prices of other resources

5- Number of employers

6-23

Changes in product demand that increase (decrease)

the product price,

will increase (decrease) labor demand.

2- Product demand

6-24

3-ProductivityAn increase (decrease) in productivity will increase (decrease) labor demand, assuming that it does not

cause an offset in the product price.

6-25

an increase (decrease) in the price of a

substitute input will increase (decrease)

labor demand.

4-Prices of other resources

6-26

an increase (decrease) in the price of a

complement input will decrease (increase)

labor demand.

For gross complements :

6-27

5-Number of employers An increase (decrease) in the number of employers

will increase

(decrease) labor demand.

6-28

Market Labor Supply

Quantity of Labor Hours

Wag

e ra

temarket supply curve

are usually positively

sloped over normal wage

ranges.

S

Quantity of labor supplied is the number of labor hours that

all the households in the economy plan to work during:

The Supply of Labor

a given time anda given real wage rate.

is the relationship between the quantity of labor supplied and the

real wage rate ((all other influences on work plans

remain the same)).

The Supply of labor

The Supply of Labor

•The market supply for labor may be

upward sloping and backward bending.

6-32

Labor Supply Determinants

The main determinant of labor supply is:

1-the wage rate:

6-33

Labor Supply will change if there are

changes in the following factors:

6-34

Other wage rates Nonwage income

Preferences for work Number of qualified suppliers

Adult population: Time in school and training:

Immigration

6-35

Substitution Effect:At the lower portion of the supply curve, people

are willing to supply more labor hours

when wage increase.

labor supply curve will bend backwards at the higher

wage rate, indicating a negative relationship

between wage rate and labor supply quantity

Income Effect:

As people gets richer, they need time to spend their income. So they will take

time off from  work to enjoy life. Less labor hours will be

supplied as a result.

If the income effect exceeds the

substitution effect• the supply curve is backward bending.

39

Income Effect <Substitution Effect

Backward-Bending Supply of Labor

Hours of Work per Day

Wage($ perhour)

Supply of Labor

Income Effect >Substitution

EffectIncome Effect

=Substitution Effect

6-40

Labor Supply Determinants

Other wage rates• If wages in other occupations rise

(fall), then labor supply will fall (rise).

Nonwage income• If nonwage income rises (falls), then

labor supply will fall (rise).

6-41

Preferences for work • If preferences for work increase (decrease), then labor supply will increase (decrease).

Number of qualified suppliers• An increase (decrease) in the

number of qualified workers will increase (decrease) labor supply.

1 .Adult population :

increase in population will increase work force, and

labor supply.

Other determinants of Labor supply are:

as more woman or retired people choose to work, labor supply increases.

2. Changes in tastes OR Preferences:

3. Time in school and training:

when people spend more time in school, the low

skill labor supply decrease, and high skill labor supply increases.

4- Changes in alternative opportunities

5- Immigration

Labor Market Equilibrium

Demand and Supply in Factor Markets

46

The labor market is in equilibrium: at:The equality of

quantity demanded and quantity supplied

Demand and Supply in Factor Markets

47

Equilibrium

employment, L

Labor Market Equilibrium

Supply

Wage (price of labor)

Quantity of Labor

0

Demand

Equilibrium wage,

W

If the wage rate exceeds the equilibrium

wage rate, there is a surplus of labor

and wage will fall.

If the wage rate is less than the equilibrium wage rate, there is a shortage of labor

and wage will rise.

Given the following data about

virtual country:Qds = 140 + 6 W ,

Qdl = 560 – 8 WQdl: The demand of labor

Qds :The supply of labor

W: Wage

Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 16-52

Requires :1-Find the equilibrium wage.

2 -Number of employment level.3-Determined the effect of Labor

Unions entry to make minimum wage = $40 and $50 in hour.

16-53