Transcript Employed - McGraw Hill Higher Education

Chapter 16: Wages
and Unemployment
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1
Learning Objectives
1. Use a supply-and-demand model to
understand the labor market
2. Explain the relationship between the
supply of and the demand for labor and
real wages and employment
3. Define and calculate the unemployment
rate and the participation rate
4. Differentiate among the three types of
unemployment and the costs associated
with each
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Supply and Demand in The Labor Market
 Supply and demand analysis can be used to
find the price of labor (real wages) and the
quantity (employment)
 Analysis
will consider the number of workers
employed, not work-hours per year
 Labor market is an input market
 Firms
buy labor to produce goods and services
 Macroeconomics look at aggregate levels of
employment and real wages
 Microeconomics
looks at wage determination for
a category of workers
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Wages and Demand for Labor
 The demand for labor depends upon:
 The

Greater productivity increases employment
 The

productivity of workers
price of the worker’s output
Higher real prices increases employment
 Diminishing returns to labor
 Assumes
non-labor inputs are held constant
 Adding one worker increases output but by less
than the previous worker added
 Value of Marginal Product (VMP) is extra
revenue that an added worker generates
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Manama Computer Company (MCC)
 MCC can sell all its computers for $3,000 each
Number of
Workers
Computers
perYear
Marginal
Product
1
25
25
$75,000
2
48
23
69,000
3
69
21
63,000
4
88
19
57,000
5
105
17
51,000
6
120
15
45,000
7
133
13
39,000
8
144
11
33,000
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Value of Marginal
Product
5
 Hire an extra worker if
and only if the VMP
exceeds the wage paid
 If wage is $60,000,
MCC will hire 3
workers
 At
$50,000, MCC
hires 5 workers
 The lower the wage, the
more workers
employed
Wage ($000s)
Demand Curve for Labor
60
50
Labor
Demand
3 5
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Employment
6
Shifts in the Demand for Labor
Demand shifts when the value of the
marginal product of a worker changes
Two factors determine the demand (VMP)
for labor
 The

An increase in market demand
 The



price of the company’s output
productivity of the workers
Greater quantity of non-labor inputs
Organizational change
Training and education
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Price of Output Increases
 MCC can now sell all its computers for $5,000 each
Number of
Workers
Computers
perYear
Marginal
Product
1
25
25
$125,000
2
48
23
115,000
3
69
21
105,000
4
88
19
95,000
5
105
17
85,000
6
120
15
75,000
7
133
13
65,000
8
144
11
55,000
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Value of Marginal
Product
8
 When price was $3,000
MCC hired 3 workers
 When price is $5,000
MCC will hire 7
workers

Demand for labor
increased from 3 to 7
 An increase in the
price of workers' output
increases the demand
for labor
Real Wage ($000s)
Price of Output Increases
60
Labor
Demand
(P = $5,000)
50
Labor Demand
(P = $3,000)
3 5 7 8
Employment
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Higher Productivity
 Each technician builds 50% more machines
Number of
Workers
Computers
perYear
Marginal
Product
1
37.5
37.5
$112,500
2
72
34.5
103,500
3
103.5
31.5
94,500
4
132
28.5
85,500
5
157.5
25.5
76,500
6
180
22.5
67,500
7
199.5
19.5
58,500
8
216
16.5
49,500
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Value of Marginal
Product
10
Higher Productivity
Real Wage
 Increases in productivity
increase VMP
 MCC hires 6 instead of 3
 Demand curve shifts right
 Employers hire more
workers at any given wage
Labor Demand
(after productivity
increase)
Labor Demand
(before productivity increase)
Employment
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11
The Supply of Labor
Reservation wage is the lowest wage a
worker would accept for a given job

Will you go to the beach or clean your parents’
basement?
 Opportunity
cost of working is your leisure
activity
 Work compensates you for lost leisure

If working conditions are unpleasant or dangerous,
a premium for that would be included in the wage
 Cost
– Benefit Principle at work
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Aggregate Labor Supply
 People work for many reasons:



Personal satisfaction
Opportunity to develop skills and talents
Chance to socialize with co-workers
 Still, for most people, income is one of the principal
benefits of working

The higher the real wage, the more willing they are to
sacrifice other possible uses of their time
 The fact that people are more willing to work when
the wage they are offered is higher is captured in the
upward slope of the supply curve of labor
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The Supply of Labor
Real Wage
Labor
Supply
The labor supply curve
slopes up because the
higher the real wage,
the more people are
willing to work
Employment
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Shifts in Labor Supply
 A shift in labor supply is caused by any change
in the number of workers willing to work at
each wage
 Increase



in the working-age population
Baby Boom
Higher net immigration
Increasing age at retirement
 Increase
in the share of working-age population
willing to work

Women's participation in the labor force has increased in
the last 50 years
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Explaining The Trends in Real Wages and
Employment
We have discussed both the demand for and
supply of labor separately
We are ready to apply supply and demand
analysis to real-world labor markets
To do so we need to examine supply and
demand of labor in the same graph
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Trend 1: Increasing Real Wages
 Industrialized countries
have had sustained growth
in productivity over many
decades
demand for labor
 Both real wages and
employment increased
 Productivity increases
were due to
Real Wage
 Increases
S
W'
W
 Technological
progress
 Increases in capital
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D
D'
N N'
Employment
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Trend 2: Increased Wage Inequality
 Globalization results in an expansion of many
markets to worldwide supply

Increasing ease of goods and services crossing national
borders
 Benefit of globalization is increased specialization
and efficiency

Principle of Comparative Advantage
 Globalization also means that some goods
produced domestically are no longer competitive


Some domestic sectors shrink
The effects of globalization on the labor market are
mixed
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Trend 2: Increased Wage Inequality
Software
Textiles
SS
Real Wage
ST
W'S
W
W’T
D'S
DT
DS
D'T
N'T NT
Employment
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NS N'S
Employment
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Trend 2: Increased Wage Inequality
 Domestic market starts in equilibrium at
wage W
 NT workers are in the textile industry
 NS workers are in the software industry
 Globalization opens borders and country
begins importing textiles and exporting
software
 Demand
for domestic textiles decreases as some
textiles are bought overseas

This decreases the wage in the textile industry to W'T
and employment decreases to N'T
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Trend 2: Increased Wage Inequality
 Domestic market starts in equilibrium at
wage W
 NT workers are in the textile industry
 NS workers are in the software industry
 Globalization opens borders and country
begins exporting textiles and importing
software
 Exports
cause an increase in demand,
employment, and wages
 The
result is a wage differential (W'S – W'T)
where none existed before
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Trend 2: Increased Wage Inequality
 When wages in importing industries fall and
wages in exporting industries rise, wage
inequality increases
 Low-skill
industries face the toughest international
competition
 Political resistance to free trade grows
 Worker mobility is the movement of
workers between jobs, firms, and industries
 Market
incentives move workers out of textiles
and into software
 Transition aid by government can assist workers
to make the change
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Trend 2: Increased Wage Inequality
 Technological change can be a source of increasing
wage inequality

Occurs if technical change favors higher-skilled or
better-educated workers
 Some innovation renders old skills less valuable

Addition and the calculator and computer
 Skill-biased technological change affects the
marginal products of higher skilled workers
differently from those of lower-skilled workers

Recent changes favor higher skilled workers

Automobile production lines increasingly use robots
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Skill-Biased Technological Change
Unskilled Workers
Skilled Workers
Real Wage
SU
SS
W'S
WS
WS
W'S
D'S
DU
DS
D'U
N'U NU
Employment
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NS N'S
Employment
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Unemployment and the Unemployment Rate
 In most countries, a government agency is
responsible for conducting a survey of households
and the labor force and defining and measuring
unemployment
 Employed: works full-time or part-time
 Unemployed: unemployed but is actively seeking
employment
 Out of the labor force: unemployed and is not actively
seeking employment


Full-time students, unpaid homemakers, retirees, and
people unable to work because of disabilities
Discouraged job seekers who have given up searching
for employment
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Unemployment and the Unemployment Rate
Population Age 16+
Employed
Unemployed
 Measuring Unemployment
Out of
the
Labor
Force
 Labor force = employed + unemployed
 Unemployment rate = unemployed / labor force
 Participation rate = labor force / population 16+
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Unemployment and Labor Force Participation
Rates
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Unemployment in Egypt, 1970 – 2008
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Unemployment in Morocco, 1999– 2008
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Unemployment in Tunisia, 1999– 2008
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Costs of Unemployment
 Unemployment imposes:

Economic costs



Psychological costs



Lost wages and production
Decreased taxes and increased transfers
Individual self-esteem
Family stress of decreased income and increased uncertainty
Social costs

Potential increases in crimes and social problems
• Social resources spent to address these

Anger, frustration, and despair may result in social rebellion
• Uprisings in Tunisia, Egypt, Algeria, Bahrain, Libya, Syria, and Yemen
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“True” Unemployment
 Discouraged workers would like to have a
job but they have not looked for work (during
the survey period)
 Counted
as out of the labor force
 Willing and ready to work
 Could be counted as unemployed but they are not
 Involuntary part-time workers are people who
like to work full-time but cannot find a fulltime job
 Counted
as employed
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Types of Unemployment
Short-term unemployment that is associated
with the process of matching workers with
jobs is called frictional unemployment
Because the labor market is heterogeneous
and dynamic, the process of matching jobs
with workers often takes time
The costs of frictional unemployment are
low and may even be negative; that is,
frictional unemployment may be
economically beneficial (better match)
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Types of Unemployment
 Structural unemployment is long-term,
chronic unemployment in a well-functioning
economy due to
 Lack
of skills, language barriers, or discrimination
 Structural shifts in production create a long-term
mismatch between workers and market needs
 Barriers to employment such as


■ Unions
Minimum wages
Unemployment Insurance
 Cause
high economic, psychological, and social costs
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Structural Barriers to Employment: Minimum
Wage
Minimum Wage Laws
Real Wage
S
Wmin
A
B
W
D
NA
N
Employment
NB
 Setting a minimum
wage (Wmin) above
equilibrium (W)
creates (NB – NA)
unemployment
 Workers who find a
minimum-wage job get
a higher wage
 Others are
unemployed
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Structural Barriers to Employment: Labor
Union
 Labor union benefits
 Reduced worker
exploitation
 Support progressive
labor legislation
 Increase productivity
 Promote democracy in
the workplace
 Labor union costs
 Introduces inefficiency
into competitive markets
 May keep companies
from competing globally
 Increase labor supply in
non-union sector
• Decreases wages for
non-union workers
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Structural Barriers to Employment:
Unemployment Insurance
Unemployment insurance are government
transfers to unemployed workers
 Helps
to reduce the costs of unemployment
 May give the unemployed an incentive to
search longer and less intensely
To work efficiently, unemployment benefits
should be
 For
a limited time
 Less than the income received when working
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Types of Unemployment
Cyclical unemployment is the increase
in unemployment during economic slowdowns (recessions)
 Usually
short duration
 Significant economic cost since it is associated
with decline in real GDP
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Other Government Regulations
Health and safety regulations can reduce
the demand for labor by
 Increasing
employer costs
 Reducing productivity
The reduction in demand will increase
unemployment and lower wages
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Unemployment in Western Europe, 1980 - 2007
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Why Are Unemployment Rates High in
Europe?
 Structural rigidities explain persistently high
rates
 Highly
regulated labor markets
 High minimum wages
 Generous unemployment benefits
 Powerful labor unions
 This lack of flexibility in labor markets—which
some observers refer to as Eurosclerosis—
causes higher frictional and structural
unemployment
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