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Chapter 2. The Labor Market: Definitions, Facts, and Trends .

Chapter 2. The Labor Market: Definitions, Facts, and Trends. Labor Force Measures. (Adult) Civilian noninstitutional population . persons 16 years of age and older residing in the 50 States & DC not inmates of institutions (e.g., penal and mental facilities, homes for the aged),

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Chapter 2. The Labor Market: Definitions, Facts, and Trends .

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  1. Chapter 2. The Labor Market: Definitions, Facts, and Trends.

  2. Labor Force Measures • (Adult) Civilian noninstitutional population. • persons 16 years of age and older • residing in the 50 States & DC • not inmates of institutions (e.g., penal and mental facilities, homes for the aged), • not on active duty in the Armed Forces.

  3. Labor Force Measures • Employed persons. • during the reference week, • did any work at all (at least 1 hour) as paid employees, • worked in their own business, profession, or on their own farm, • or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family, • all those who were not working but who had jobs or businesses from which they were temporarily absent

  4. Labor Force Measures • Unemployed persons. • no employment during the reference week, • available for work, except for temporary illness, and made specific efforts to find employment some time during the 4-week-period ending with the reference week. • Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.

  5. Labor Force Measures • Labor force. employed + unemployed • Unemployment rate. Unemployed / Labor Force • Labor Force Participation rate. Labor Force / Civ. NonInst. Pop • Employment-population ratio. Employed/ Civ. Noninst. Pop. • Historical Data (Table B35 from Econ. Report)

  6. 1995/2005 Data

  7. Labor force measures

  8. Start with • U=10 million, E=90 million, CNIP=200 million • What would happen to unempl rate, lfpr, and empl rate if • 10 million people out of labor force begin looking for work and 6 million find jobs. • 1 million unemployed people become “discourage” and quit looking for work? • 1 million unemployed people find new jobs? • 1 million employed people lose jobs and .5 million choose to retire while the other .5 million begin search for new jobs.

  9. Unemployment rates • See employment situation for variations in unemployment rate by • Sex • Age • Education • Why is there a correlation between these characteristics and unemployment rates?

  10. Labor Earnings • Wage rate X hours worked =Earnings • Earnings + Benefits = Total Compensation • Total compensation + unearned (non-labor) income = Total Income

  11. Earnings Measures

  12. Real versus Nominal Wages. • CPIt = • Real Waget = • Nominal Wage represents earnings in current dollars. • Real Wage represents earnings in constant (base year) dollars.

  13. Real versus Nominal Wages. • Issues with Indexing • The bundle • Varies across people/time. • Evidence that CPI over-states growth in cost of living by 1 to 1.5 percent per year). • Quality of goods • Substitution effects • Point in time adjustments versus across time • Comparable salary in city j = salary in city k * city j cpi city k cpi

  14. Real versus Nominal Wages. • CPI data (available from BLS) • If a person earned $8 per hour in 1980, what would yield the equivalent purchasing power in 2006? • If a person’s nominal wage rose from $10 per hour in 2000 to $11 per hour by 2006, what happened to their real wage (in 1982-84 dollars)?

  15. Earnings Measures • Cost of Living by City (ACCRA) • If a person moved from Cincinnati to Washington DC and their earnings rose from $50,000 to $60,000, did their real earnings rise or fall? • What are some of the problems with the Cinci/DC comparison?

  16. Labor Demand • Changes in wages (move along D-curve) • scale effect • substitution effect • Changes in other factors (shift D-curve) • demand for product • scale effect, no substitution effect • supply of other inputs (e.g. capital) • scale effect and substitution effect

  17. Labor Demand • Market, Industry, and Firm Demand. • different ways of measuring labor demand. • Long run versus short run demand. • substitution effects tend to be larger in the long run, making labor demand more elastic in the long run.

  18. Labor Supply • Labor supply curve. • Market supply curve: upward sloping. • Firm supply curve: horizontal in competitive market. • Factors shifting labor supply: • population. • alternative opportunities (other employment, nonemployment) • taxes • non-pecuniary aspects of job (fringes, risk, night shifts, etc.)

  19. Labor Market Equilibrium • If wage is below equilibrium: shortage. • If wage is above equilibrium: surplus (unemployment). • Shortages put upward pressure on wages. Surpluses put downward pressure on wages.

  20. Labor Market Equilibrium • Effect of • Increased population • Increased tax on employers • Increased tax on employees • Cheaper capital • Cheaper imports • Increased demand for product

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