Week 4_SII2013 [Compatibility Mode].pdf

8/14/2019 Week 4_SII2013 [Compatibility Mode].pdf

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Chapter 7:The Labor Market in advanced economies

In the U.S. labor market Wages account for two-thirds of per capita

GDP.

Average wages have grown at 2 percentper year for the last century.


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The employment-population ratio The fraction of the civilian population over the

age of 16 that is working

This ratio:

Has been increasing over time in large part

due to the entry of women into the workforce. Decreases in times of a recession.


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The unemployment rate The fraction of the labor force that is

unemployed

A person is unemployed if the followingconditions hold:

She does not have a job that pays a wage orsalary.

She actively looked for a job during the four

weeks before measuring the unemploymentrate.

She is available to work.


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The Dynamics of the Labor

Marketthe example of Australia

Job creation and job destruction in the

United States Occur each month

Are part of normal changes in the economy


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For most people, periods of

unemployment are relatively short. People who are unemployed for long

periods account for most of the total

weeks of lost work. Many countries have developed social

safety nets.

Unemployment


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Australia: Long-term unemployed as a proportion of thelabour force


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7.3 Supply and Demand

The labour market is an example of a factor market

Supply of labour those people seeking employment(employees)

Demand for labour from employers

Supply and demand for labour services determine the wage

The labor demand curveslopes downward because of

diminishing marginal product of labor (MPL). The labor supply curveslopes upward because the price of

leisure is higher when wages are higher.

The intersection of labor supply and demand determines thelevel of employment and the wage rate.


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Downward flexible wages and


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A Derived Demand not wanted for its own sake but for what itcan contribute to production

Demand for labour related to productivity of labour and the level ofdemand for the product

Elasticity of demand for labour related to the elasticity of demand forthe product

Employers make hiring decisions taking into account costand benefit of an extra workers.

Higher wages means higher costs: At higher wage ratesthe demand for labour will be less than at lower wage rates

Higher productivity means higher benefits

Demand for labour from employers


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Labour productivity


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A critical Assumption: Law of Diminishing

Returns


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Main assumptions: price/wage takingbehaviour

The wage rate employers must pay isgiven to them by the market;

From the viewpoint of the single firm,

the supply of labour is horizontal; at themarket wage there is no labourshortage;

Firms can instantaneously adjust theirlabour input (and costs) as marketconditions change.


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A production function: q=F(K ! A"

K=capital stoc#$!=la%our inputs

A=technology


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&enefit of hiring an additional wor#er = cost of hiring an additional wor#er

'='& from hiring )=*+'**

if the firm ta#es ) and * as gi,en (perfectly competiti,e mar#ets"


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The firms hiring decision


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-he 'R* cur,e is the firm.s la%our demand cur,e/


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A Change in Labor Demand

Suppose the government createsregulations making it harder to fire

workers. Firms will demand fewer workers.

Labor demand shifts left, causing wages and

employment to fall. The unemployment rate rises initially and

recovers as discouraged workers drop out of

the labor force.


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A Change in Labor Supply

If the government collects a tax on a

workers wage: The labor supply curve shifts left.

A worker receives less money and suppliesless laborthis applies to anywage.

In order to be in equilibrium, firms mustraise wages.


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age !igidity

Wage rigidity Wages fail to adjust after a shock to labor

demand or supply.

What happens if wages do not fall in theabove demand shock example?

The labor market will not clear and thisresults in a larger fall in employment.


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Different "inds of Unemployment

The natural rate of unemployment

Rate that would prevail if the economywere in neither a boom nor a bust

Cyclical unemployment

The difference between the actual rate andthe natural rate

Associated with short-run fluctuations in

output


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The natural rate of unemployment includestwo components:

Frictional unemployment

workers being between jobs in the dynamiceconomy

Structural unemployment labor market failing to match up workers

and firms in the market


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Actual unemployment is the sum offrictional, structural, and cyclicalunemployment.


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Two equations:

employment unemployment

size of

labor force

change inunemployment

job separation

rate

job finding

rate

Sol ing the model


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Solving the model:

Set the change in unemployment to zero

Solve the equation for U


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The unemployment rate is defined asthe fraction of the labor force that isunemployed. Therefore:


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Insights of the model: Only way to alter the natural rate of

unemployment is:

change the job finding rate.

change the job separation rate.

Policies along these lines can haveunintended consequences.


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7.5 Labor Markets around theWorld

Some facts about international labormarkets since 1980:

Unemployment in Europe Substantially above Americas rate

Unemployment in Japan

Historically below the United States.


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European unemployment has increaseddramatically because of:

Adverse shocks and high oil prices. Inefficient labor market institutions in the form of

higher unemployment and welfare benefits.

1990s hours worked in Europe much lowerthan 1970s levels.


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7.6 How Much Is Your HumanCapital Worth?

The present discounted value of your lifetime income islikely greater than $1 million.

Present discounted value

The value of money you would need to put in the banktoday to equal a given future value.

Tells how much a future payment or a future flow ofpayments is worth today.


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Equation for present discounted value


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To calculate the value of a stream of equal

payments over a given number of years: Arrange the sum of each periods present

discounted values into a geometric series.

Use the formula for a sum of a geometricseries to calculate the present discountedvalue of the stream of payments.

If ais some number between 0 and 1, thencalculating a geometric series is:

$


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For example, the series for a $100 initial

payment for twenty years is:

Or:

From previous page: If a= 1/(1 + R), then:


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Letting the interest rate R= .10

What is the pdvon $100 over 20 years? $936.


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7 7 The Rising Return to


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7.7 The Rising Return to

Education

The premium to having a college degree: Has been rising rapidly over the last fortyyears.

Far outweighs the forgone wages and tuitioncosts of going to college.


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Supply of skilled workers and their


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Supply of skilled workers and their

wagesSource: Table 10.1, drawn from Machin (2001)

Share of graduates intotal employment (%)

US UK

Relative wages ofgraduates to non-graduates

US UK

1980 19.3 5.0 1.36 1.48

1990 23.8 10.2 1.55 1.60

2000 27.5 17.2 1.66 1.64

Can supply side factors explain the rising college wagepremium? Empirical evidence


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premium? Empirical evidence


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Explanations for a large shift in demandfor highly educated workers include:

Skill-biased technical change: newtechnologies are more effective at improving

productivity of college-educated workers.

Globalization: increased opening of trade.


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Case Study# ithin)country ,ncome,ne-uality

Rising college premium is one cause ofrising income inequality

Early 1900s

Most inequality associated with capitalincome

Recently

Most inequality associated with salariesand business income


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Week 4_SII2013 [Compatibility Mode].pdf