Chapter 4

1. Chapter 4 Labour Markets and Unemployment

2. Household preferences Figure 4.1

3. Figure 4.01 gain pain A household indifference curve:utility held constant Consumption More leisure = less work Leisure 0 Figure 4.1

4. Figure 4.01 Household preference.Economic interpretation of the geometry • Slope. (<0) Substitution of leisure for consumption • Curve. Marginal rate of substitution is not constant. The less leisure you have, the less leisure you are willing to sacrifice for one more unit of consumption (holding utility constant). • Shift. Level of economic welfare (utility). Figure 4.1

5. Figure 4.01 Higher utility Lowerutility Household preferences Consumption Leisure 0 Figure 4.1

6. Household budget line and optimal choice Figure 4.2

7. Figure 4.02 B A The household budget (zero non-labour income) Consumption Leisure 0 Figure 4.2

8. Figure 4.02 B Nice but we can’t afford it! We can do better than this! A Highest attainable indifference curve is tangent to this budget constraint for those who work Consumption Leisure 0 Figure 4.2

9. Figure 4.02 B R Consumption A Leisure Work Optimal choice Consumption Leisure 0 Figure 4.2

10. Reaction of the household to a wage increase:Labour supply Figure 4.3

11. Figure 4.03 R´ Wage increase chances budget set B Consumption R A Leisure 0 Figure 4.3 (a)

12. Figure 4.03 Figure 4.3

13. Figure 4.03 (Upward sloping) household labour supply curve Real wage Labour supply 0 Figure 4.3 (b)

14. The production function andthe labour demand curve Figure 4.5

15. Figure 4.05 Firm has a production function and it paysthe real wage w1 Output (Y) Labour Real wage Labour Figure 4.5

16. Figure 4.05 R1 Wage costs increase with employment Output (Y) Labour Real wage Labour Figure 4.5

17. Figure 4.05 A1 R1 Determine L1 so that MPL1=w1 Output (Y) Labour Real wage Labour Figure 4.5

18. Figure 4.05 A1 R1 R2 Now determine L for a lower wage, w2 Output (Y) Labour Real wage Labour Figure 4.5

19. Figure 4.05 A2 A1 R1 R2 Find L2 so that MPL2=w2 Output (Y) Labour Real wage Labour Figure 4.5

20. Figure 4.05 A2 A1 R1 R2 MPL Connect the dots to derive the demand for labour Output (Y) Labour Real wage Labour Figure 4.5

21. Figure 4.05 Economic interpretation of geometry of the demand for labour • Slope. Negative because MPL falls as we move to the right along the production function. • Curve. Here there is no reason to expect curvature one way or the other. Note that an absolutely linear demand for labour implies a quadratic form of the production function. • Shift. Capital accumulation or productivity change. (Figure 4.6) Figure 4.5

22. An increase in labour productivity Figure 4.6

23. Figure 4.06 MPL´ Hold L constant An increase in labour productivity (A increases) Output (Y) Labour Real wage MPL Labour Figure 4.6

24. Figure 4.07 Equilibrium in the labour market Figure 4.7

25. Figure 4.07 Labour market: first blade of scissors consumption leisure Real wage Labour hours 0 Figure 4.7

26. Figure 4.07 Labour market: second blade of scissors output Labour hours Real wage Labour hours 0 Figure 4.7

27. Figure 4.07 A w L Equilibrium in the labour market Real wage Labour hours 0 Figure 4.7

28. Figure 4.07 Voluntary unemployment Real wage A w Labour hours 0 L Figure 4.7

29. Shifting labour demand and supply Figure 4.8

30. Figure 4.08 A´ Increase in labour demand(MPL increases because of increase in A or K) w,Lboth increase Real wage A Labour hours 0 Figure 4.8 (a)

31. Figure 4.08 A´ Increase in labour supply(e.g. new entries through immigration) w falls,L rises Real wage A Labour hours 0 Figure 4.8 (b)

32. Involuntary unemployment Figure 4.9

33. Figure 4.09 B Wage fixed above market-clearing level Real wage It’s a free market, so the short-side determines actual employment. A Labour 0 Figure 4.9

34. Trade unions’ indifference curves Figure 4.10

35. Figure 4.10 Real wage Real wage Real wage Employment Employment Employment (a) Average (b) Hard-line (c) Jobs-first Trade unions’ indifference curves Figure 4.10

36. The collective labour supply curve Figure 4.11

37. Figure 4.11 Collective labour supply curve Real wage Employment 0 F.4.11 Collective labour supply curve

38. Labour market equilibrium with a trade union Figure 4.12

39. Figure 4.12 B A w L Labour market with a trade union Realwage Labour 0 Union-voluntary, individual-involuntary unemployment Figure 4.12

40. Minimum wages Figure 4.13

41. Figure 4.13 A w L No unions, no minimum wage Realwage Labour 0 Figure 4.13

42. Figure 4.13 B Add unions, no minimum wage yet Realwage A w Labour L 0 Union-voluntary, individual-involuntary unemployment Figure 4.13

43. Figure 4.13 C Adding a minimum wage above union wage Realwage B A w Labour L 0 Unemployment under a minimum wage Figure 4.13

44. A map of labour markets Figure 4.14

45. Figure 4.14 Employed Unemployed Not inlabour force All working age people are in one of three states Figure 4.14

46. Figure 4.14 Quitstootherjobs Employed Unemployed Layoffs Quits tounemployment Retirements Not inlabour force Gross flows starting from state of employment Figure 4.14

47. Figure 4.14 Job finds Employed Unemployed Discouraged Not inlabour force Gross flows from state of unemployment Quitstootherjobs Layoffs Quits tounemployment Retirements Figure 4.14

48. Figure 4.14 Employed Unemployed New entries Unsuccessfulnew entries Not inlabour force Gross flows from out of the labour force Job finds Quitstootherjobs Layoffs Quits tounemployment Retirements Discouraged Figure 4.14

49. Actual and equilibrium employment Figure 4.17

50. Figure 4.17 A Equilibrium employment and unemployment Realwage Labour 0 Figure 4.17