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Chapter 3

Chapter 3. Labor Force Participation. Are people poor because they don’t work?. 81.3% of male headed households participate in the labor force More than 50% of females headed households participate in the labor force What does it mean to be in the labor force??

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Chapter 3

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  1. Chapter 3 Labor Force Participation

  2. Are people poor because they don’t work? • 81.3% of male headed households participate in the labor force • More than 50% of females headed households participate in the labor force • What does it mean to be in the labor force?? • Employed or actively seeking work • May not be collecting a wage

  3. Sub-employed • Discouraged worker • Stop looking because frustrated • No longer counted as unemployed • Can be contagious • Underemployed • Accept any job • Usually in secondary labor market • Unemployed • Not working but attached to labor force

  4. Why are people sub-employed?? • Conservatives • Poor are unwilling to take any job • Have unrealistic job expectations • Liberals • Poor lack the opportunity or education to get jobs that will assure a decent standard of living

  5. Official Definition of Unemployed • A person 16 years or older is unemployed if he/she • Is not currently working • Has actively looked for work during the previous four weeks • Is currently available for work

  6. Types of Unemployment • Frictional • Arises from normal operations of the labor market • Labor markets are dynamic and information is not perfect • In between jobs • Seasonal • Can’t work due to seasonal patterns

  7. Structural • Imbalance between skills have and those demanded by labor market • Lack of proper training • Monetary and Non-monetary costs • Cyclical • Demand deficient unemployment • Associated with the business cycle • Aggregate Demand: total amount of goods and services demanded by all people • Aggregate Supply: Total amount of good and services supplied by all people

  8. Price AS AD AD’ 2 5 GDP (in trillions) Unemployment because need 3 trillion less units of the good

  9. Natural Rate of Unemployment • Frictional + Seasonal + Structural + Cyclical • Estimated at 5% • Can this figure ever be zero? • No…why?? • Cyclical is the only type of unemployment that could even in theory be zero

  10. Costs of Unemployment • Economic • Inefficient because not using all our resources • Okun’s Law • For every 1% increase in unemployment there is a 2.5% decrease in GDP • If we are inefficient where are we on the PPC?? • Inside the curve • Social • Loss of self respect, erosion of stable family, more crime, homelessness, discrimination

  11. Roger and me Pick out as many costs of unemployment as you can…the person with the most will get extra credit!!!

  12. Relative Importance of Income Sources • Differ for poor and non-poor • Average incomes differ by $27,396 • Part of this gap is closed by in-kind transfers • Gap can be closed by labor market earnings • Poor either not work enough or are paid too little

  13. Nonparticipants • If you don’t work you run the risk of poverty…but not a simple relationship • ½ of nonparticipants are children under age 16 • 20 million are retired • 8 million are over 16 but full time students • 10 million are institutionalized, sick or disabled • 23 million are women who consider themselves homemakers • 6 million are others who just don’t work

  14. Remember duration is important ½ of those who experience unemployment stay unemployed for greater than 5 weeks

  15. Review • Poor families receive most of their income from work • Labor force participation is key • Many are sub-employed • Discouraged worker, underemployed, unemployed

  16. Is reducing poverty a societal goal? • Public Policy affects Aggregate Demand • If increase AD more jobs • No need for more products = surplus • Expensive for the firm • Must layoff workers to compensate • Is there an opportunity cost of unemployment??? • Yes….inflation

  17. Phillips Curve • Statistical Relationship between unemployment and inflation • Not a series of equilibrium points • Shows the Short Run tradeoff between unemployment and inflation • Can relate to Aggregate Supply Curve

  18. Aggregate Supply Price AS Quantity

  19. What are the relationships?? • Between Prices and Inflation? • Positive • Inflation is the rate of change of prices • Between Quantity produced and Unemployment? • Negative • Produce more??? You need more people (unemployment decreases)

  20. Phillips Curve Inflation Expected Rate of Inflation Natural Rate Of Unemployment Unemployment

  21. More Phillips Curve… • Negative relationship between inflation and unemployment • What would happen on the Phillips Curve if Aggregate Demand would increase? • Move up the curve • Because unemployment would decrease • What would happen on the Phillips Curve if Aggregate Demand would decrease? • Move down the curve • Because unemployment would increase

  22. Long Run Phillips Curve • Represents equilibrium • Vertical at the natural rate of unemployment Inflation Unemployment Natural Rate

  23. In-class exercise 9 The Phillips Curve

  24. Phillips Curve worked until the early 1970s • Due to Stagflation • High rates of unemployment and inflation from supply shocks AS’ Price AS P2 P1 AD Quantity Q2 Q1

  25. Summary • Price increased • Inflation did what?? • Increased • Quantity decreased • Unemployment did what?? • Increased • Phillips Curve says they should move in the opposite direction!!

  26. So… • Phillips Curve still used by economists but less faith is put in it • Politicians disagree about it also… • Conservatives • Slope is steep • Liberals • Slope is flat • Important in decision whether or not to fight inflation

  27. Inflation Inflation Unemployment Unemployment Liberals (Democrats) Don’t Fight Inflation Conservatives (Republicans) Fight Inflation Big decrease in inflation with only Small increases in unemployment Small decrease in inflation but Big increases in unemployment

  28. Chapter 4 The Working Poor

  29. Is it possible to eliminate poverty by providing everyone a job? • Statistics say no!! • Most of the poor population work • Don’t work enough • Work part time or part year • New problem • Low wages

  30. Where do wages come from? • Interaction of the Supply and Demand for Labor • Where does demand for labor come from? • Firms • What are the important variables? • Wages and number of workers • What relationship do these variables have? • Negative

  31. What happens when wages increase? • Higher costs for the firm • What happens to prices? • increase • What happens to output? • decrease • What happens to the number of workers needed? • decreases • Change from using labor to capital

  32. What factors affect the demand for labor? • Demand for the product • Increase??? • More output needed so more workers needed • Price of inputs • Increase??? • Costs increases so less output produced and less workers needed • Available technology??? • Increase??? • More capital used so less workers needed

  33. What determines the Supply of Labor? • Workers • What is the slope? • Positive or Zero depending on whether it is the market or firm • Market Labor Supply • Positive Slope • If wages of secretaries increase (ceteris paribus) more people want to be secretaries

  34. Firm Labor Supply • Horizontal • If all firms were offering similar wages and everyone had enough workers…. • How many workers will want to work at a lower wage? • NONE • What if firms want to offer a higher wage? How many workers will they get? • Infinitely many…but the firm already had enough • Higher wages will only increase the costs to the firm • Everyone offers the same wage…which is??? • MARKET EQUILIBRIUM WAGE

  35. Wage Wage Ls Ls Ld Ld # workers # workers Market Firm

  36. What about between occupations?? • A decrease in the Ls of one occupation could increase the Ls in another occupation • Remember • A decrease in Ls is a shift to the left • An increase in Ls is a shift to the right

  37. In-class exercise 10 What happens as workers change occupations?

  38. Equilibrium Wages Can Change Overtime!! Ls’ Wage Wage Ls Ls Ls’ W2 W1 W1 W2 Ld Ld N2 N1 N1 N2 # workers # workers Sales Computer

  39. Since Ld is downward sloping, ifwage gets too high will the firm stop hiring workers? NO…workers add to output and revenue

  40. Marginal Product of Labor (MPL) • Additional output that can be produced by a firm when they hire one additional worker • What is the goal of the firm?? • Maximize profits • Profits = Revenue – Costs

  41. So… • Employ up to the point where the additional revenue (Marginal Revenue) just equals the additional cost (Marginal Cost) of that worker • If MR > MC what should the firm do • Hire another worker • If MC > MR what should the firm do • Don’t hire

  42. Does does MPL look like either of these? MP MP Number of Workers Number of Workers

  43. MP Stop Hiring MR=MC MR>MC Hire Don’t Hire MR<MC Number of Workers

  44. Marginal Revenue Product of Labor (MRPL) • Value of the additional output produced • MRPL = MPL * P

  45. What about the cost side? • What is the MC or additional cost per worker? • Wage • Want to hire until revenue made by the last worker = cost of the last worker • Hire until MR = MC • What is the MR?? • MPL * P • Hire until MPL * P = wage

  46. In-class exercise 11 Hire or Not???

  47. Why is the wage rate too low??MPL * P = wage • MPL is too low • MPL poor < MPL non-poor • Too little education • Not enough skills or experience • Price too low • Farmers during a good harvest because everyone is probably having a good harvest

  48. Where does income come from? • Wages • Capital/assets • Government transfers • If first two do not equal some “required minimum” then the third entered

  49. Summary: The poor have lower wages because… • Low Marginal Revenue Product of Labor • Low levels of training/education • Low price of the output • Work in markets with restricted demand • Work in markets with high labor supply • Work in non-unionized markets • Discrimination

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