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WAGES & UNEMPLOYMENT PART I. Chapter 6. Trends in Real Wages and Employment. 1. In the last 100 years, all industrial countries have enjoyed substantial growth in real wages.
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WAGES & UNEMPLOYMENTPART I Chapter 6
Trends in Real Wages and Employment 1. In the last 100 years, all industrial countries have enjoyed substantial growth in real wages. U.S. Workers: In 2007 the average worker’s earning could buy twice as many goods as services as in 1960 and nearly five times as many goods and services as in 1929.
Trends in Real Wages and Employment 2. Since 1970, the rate of increase in the U.S. real wage has slowed. Real wages have increased since 1970, but at a much slower rate than prior to 1970.
Real Wage real wage = nominal wage/price level The real wage is the purchasing power of the nominal wage. That is, the real wage tells us the amount of goods and services that can be purchased.
U.S. Real Wage Growth 1960 – 1973: 2.5% 1973 – 1996: 1.1% 1996 – 2007: 2.0%
Trends in Real Wages and Employment 3. Since 1970, the inequality in U.S. real wages has increased. A. The real wage of the least-skilled, least-educated workers has fallen since 1970. The real wages of the least-skilled workers have fallen by 25% to 30%. B. The real wages of the most-skilled, most-educated workers have risen continually since 1970.
Trends in Real Wages and Employment Currently, the real income of U.S. workers with advanced (graduate) degrees is almost three (3) times higher than the real income of a high school graduate.
Trends in Real Wages and Employment 4. Since 1970, the level of employment in the U.S. has increased substantially. That is, the number of people with jobs has risen substantially.
Trends in Real Wages and Employment 5. Unemployment in the U.S. has been substantially lower than in Europe. Average unemployment: 1990-2007 5.5% in the U.S. 10.0% in France
Notation W = nominal wage P = price level w = real wage =W/P N = quantity of labor
Supply and Demand in the Labor Market Labor Supply: The supplyof labor curve (LS) relates w to the QS of N.
Labor Supply LS is upward sloping; the higher w, the higher N.
Shifts in the Supply of Labor. Shifts in LS are primarily caused by changes in the size of the labor force.
Labor Demand The demand for labor curve (LD) relates w to the QD to N.
Labor Demand LD is downward sloping; the higher w, the lower N.
Shifts in the Demand for Labor 1. Changes in the price of the worker’s output. 2. Changes in productivity.
Explaining the trends in U.S. w and N 1. Last 100 years—substantial growth in w Primary Cause: productivity ( technology)
Explaining the trends in U.S. w and N 2.(4.) Since 1970, the rate of increase in w has slowed and N has increased. Causes: 1. Smaller increases in productivity—LD shifts outward by smaller amounts. 2. Expanding labor force—LS shifts outward.
Explaining the trends in U.S. w and N 3) Since 1970, w inequality has increased. Causes: 1. Globalization - expands the market for some goods, reduces the market for others. 2. Technological change - has tended to increase the productivity of skilled workers.
Globalization Import Goods – Unskilled Workers
Globalization Export Goods – Skilled Workers
Globalization Result: Wage distribution becomes more unequal.
Technology Favored skilled labor
LRAS – Long Run Aggregate Supply LRAS gives us the relationship between inflation (π) and output (Y). LRAS—A vertical line showing the economy’s potential output (Y*).
Deriving LRAS To derive LRAS, we begin in the labor market. We change P and see what happens to N and Y.
Deriving LRAS P
Deriving LRAS Continued At w1, QD > QS. There is a shortage of N. The nominal wage will be bid up until N0 is reached. At equilibrium, w0 = W0/P0 = W1/P1. N remains at N0. There will be no change in output.
Deriving LRAS Continued Using the same logic, we can draw LRAS in terms of the inflation rate (π).
Permanent changes in the labor market will alter Y* and shift LRAS Productivity and Labor Force
