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1 Chapter 6 1. Discuss three US labor market trends since Use supply and demand to explain the labor market 3. Use supply and demand to explain employment and real wage trends since Define and calculate the unemployment rate and the labor force participation rate 5. Define and discuss three types of unemployment and their costs to individuals and society. 6-2 Industrialized countries have enjoyed real earnings growth in the 20 th century 2010 U.S. real earnings are about twice real earnings in U.S. real earnings are nearly five times real earnings in The graph shows that average hourly earnings for employees (and selfemployed people) doubled since 1960 However, the growth in real wages for over half of American workers slowed since 1970 while the total number or workers and the percent of the population that works increased Data on real wage growth: % per year % per year % per year % per year

2 The Median earnings level is the earnings level where 50% of employees earn less and 50% earn more It s what the middle person earns The stagnant median earnings but rising average earnings reflect rising inequality Earnings rose mostly for the 50% highincome/above-median earners https://www.brookings.edu/blog/socialmobility-memos/2017/02/03/what-weknow-and-dont-know-about-thedeclining-labor-force-participation-rate/ Wage inequality increased from (especially after 1970) Average real weekly earnings of production workers decreased Real wages of the least-skilled, least-educated workers decreased 25 to 30% Best-educated, highest-skilled workers' real wages increased Income with an advanced college degree is Three times the income of a high school graduate Four times the income of a worker who did not graduate from high school

3 Supply and demand analysis can be used to find the price of labor (the real wage) and the quantity supplied (the employment level) The labor market is an input market where firms demand (or buy) labor to produce goods and services; and individuals supply (or sell) labor to earn income The demand for labor depends upon The productivity of workers The price of the workers output When workers produce more or the output sells for higher prices, labor demand rises. We normally assume diminishing returns to labor Diminishing returns means that, holding equipment and other inputs constant, each additional worker adds less to production than the previous worker The Value of the Marginal Product (VMP) is the extra revenue an added worker generates

4 BCC can sell all its computers for $3,000 each Hire an extra worker if Number of Workers Computers per Year Marginal Product Value of Marginal Product $75,000 69,000 63,000 57,000 51,000 45,000 39,000 33,000 and only if the VMP exceeds the wage paid If wage is $60,000, BCC hires 3 workers At $50,000, it hires 5 The lower the wage, the greater the quantity of labor demanded/workers employed Wage ($000s) Demand Demand shifts when the value of the marginal product of a worker changes Two factors affect the VMP and therefore demand for labor (a) The price of the company s output Higher prices raise the VMP, shifting out demand (b) The productivity of the workers Higher labor productivity also increases the VMP The productivity growth can reflect a greater quantity of non-labor inputs like machines Or organizational change, better management, and better training and education making workers more productive If the price of computers increases, demand for labor shifts to the right There is a separate demand for labor curve for each possible output price An increase in the price of workers' output increases the demand for labor ($000s) Demand (P = $5,000) Demand (P = $3,000) Increases in productivity increase VMP Demand curve shifts right Employers hire more workers at any given wage Demand (after productivity increase) Demand (before productivity increase) When individuals offer to work, they should follow the Cost Benefit Principle Supply your labor as long as the extra benefit exceeds or equals the extra cost The wage must at least compensate you for the opportunity cost of foregone leisure The wage that makes you just indifferent to working is your reservation wage

5 If working conditions are unpleasant or dangerous, a premium for that would be included in the wage Supply The labor supply curve slopes up because at a higher real wage, (a) more people are willing to work (b) existing workers are willing to work longer hours What determines the economy-wide or macroeconomic labor supply? 1. The size of the working age population (#non-institutionalized 16+ aged individuals) 2. The share of the working-age population that is willing to work The US has ~225 million people aged 16+ and 150 million willing to work The labor force participation rate LFPR is about 2/3 The size of the labor force responds to population growth (natural + net immigration) and the ages where people start working and retiring 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 A Baby Boom (like after WW 2, lots of babies born) 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 Industrialized countries have had sustained growth in productivity in the 20 th century This increased demand for labor and explains why real wages and employment increased since 1960 Productivity increases were due to Technological progress Increases in capital equipment W' W S D' D N N'

6 Average Growth Rate (%) Productivity Real Earnings % 0.00% Stagnant growth in real wages for most US workers since 1970 could be due to Slower growth in demand for labor Faster growth in the supply of labor Slower demand growth for labor should lead to limited job creation Yet, total employment grew rapidly The supply of labor increased as well. Increased participation by women Baby Boomers (born after WW2) entered labor force around High immigration since 1970 Exercise: show that limited growth in labor demand (outward demand shifts) coupled with increased labor supply (outward supply shifts) can explain both: (a) stagnant real wages (b) employment growth The large baby-boomer generation (born ca ) is now retiring The growth in labor supply as women joined the labor force is leveling off as large % has joined The labor force participation rate (% of people aged 16+ working or looking for work) has declined since 2000 If the growth in labor supply slows down and labor demand grows stably/picks up because of technology and education making the workers more productive, we should expect faster real-wage growth but it s hard to predict

7 Globalization = stronger connection and integration with other countries, in terms of trade, investment, culture etc. It allows countries to specialize and exploit Comparative Advantage (Chapter 2) But ex. production of low-skilled, laborintensive goods has moved abroad This decreased demand for unskilled US workers and their wages W W T Textiles S T D' T N' T N T D T W' S Software N S N' S S S D S D' S One source of rising inequality can be globalization as skilled wages rise (ex. for the software sector) and unskilled wages (ex. for the textile sector) fall Economists do not recommend shutting off to trade b/c the US as a whole benefits from specializing in its comparative advantage industries (Chapter 2) The best policy is to let the workers who lose their jobs move to the comparative advantage industries (from textiles to software) or new geographical regions where jobs are found Transition aid by government can assist workers to make the change, retrain and reeducate Another cause of increasing wage inequality is technological change Because technology may be skill-biased and favor the higher-skilled or better-educated Automatic check-out at supermarket or robots can lower demand for unskilled workers Computer and management innovations (like new accounting techniques or better access to economic data) can favor college-educated people who can better use it Demand for skilled labor goes up, demand for unskilled labor decreases

8 Unskilled Workers Skilled Workers Bureau of Statistics (BLS) estimates employment and unemployment monthly W S W' S S U W' S W S S S D' S Population Age 16 + Employed Unemployed Out of the Force D U D S D' U N' U N U N S N' S force = employed + unemployed Unemployment rate = unemployed / labor force Participation rate = labor force / population U.S. Data, August 2014 (in millions) Employed million Unemployed 9.59 million Force million Not in the Force million Working-Age Population million Unemployment Rate 6.1% Participation rate 62.8% Economic costs: Lost production (the GDP loss equals the wage loss plus the profit loss) Psychological costs Individual self-esteem Family stress and increased uncertainty Additional social costs (other cost to society) Potential increases in crimes and social problems Use scarce public resources to address these problems and assist the unemployed

9 Costs of unemployment are directly related to the length of time a person has been unemployed Unemployment spell is the period during which an individual is continuously unemployed Duration of unemployment is the length of the unemployment spell The unemployed population in April 2011: Duration (weeks) 5 or less 5 14 More than 14 % of unemployed 20% 22% 58% People who have been out of work for 6+ months are long-term unemployed People that continuously mix short-term or temporary jobs with unemployment are chronically unemployed People who want to work but gave up looking are discouraged workers Involuntary part-time workers are people who like to work full-time but cannot find full-time jobs The August 2014 unemployment rate was 6.1% But if we add the discouraged workers and involuntary part-time workers, it would be 12% Frictional unemployment occurs when workers are between jobs Short duration, low economic cost May increase economic efficiency b/c you move to a better match Cyclical unemployment is the increase in unemployment during economic slow-downs (recessions) Usually short duration also Structural unemployment is long-term, chronic unemployment in a well-functioning economy Lack of skills, language barriers, or discrimination Structural shifts in production create a long-term mismatch between workers and market needs Regulations and other employment barriers: Minimum wages Unions Unemployment Insurance High economic, psychological, and social costs Example: U.S. steel and manufacturing sectors due to loss of international comparative advantage W min W A B N A N N B S D Minimum Wage Laws Setting a minimum wage (W min ) above equilibrium (W) creates (N B N A ) unemployment Workers who find a minimum-wage job get a higher wage Others are unemployed

10 union benefits Improve wages and working conditions Promote democracy and dialogue in the workplace as employers and unions make joint decisions union costs The high wages discourage hiring and create unemployment Decrease companies international competitiveness, raise consumer prices Strikes and production disruptions Unemployment insurance is a government transfer 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 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 It s a trade-off between the benefits and costs to society Demand for Three Trends Market Supply of Unemployment Costs Types

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