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), • not on active duty in the Armed Forces.

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 (vacation, sick)

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.

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)

1990/2011 Data

Labor force measures

Between 2010 & 2011, unemployment rate and employment rate both fell. How is this possible? Based on the growth in Civilian Non-institutional Population between 2010 and 2011, how many jobs would have to be added over the year to keep the unemployment rate at 9.6% if LFPR a. stayed at 2010 level (64.7%)? b. drops to 2011 level (64.1%)? c. rises to level prior to recession (66.0%)?

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.

Variation in unemployment rates • Employment Situation from bls.gov • Sex • Age • Education • Why is there a correlation between these characteristics and unemployment rates? • Unemployment and employment rates by state.

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

Earnings Measures

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

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

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 2010? • If a person’s nominal wage rose from $10 per hour in 2000 to $11 per hour by 2010, what happened to her real wage (in 1982-84 dollars)?

Earnings Measures • Cost of Living by City (ACCRA) • If a person moved from Cincinnati to San Francisco and his earnings rose from $50,000 to $70,000, did his real earnings rise or fall? • What are some of the problems with the Cinci/San Francisco comparison?

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

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.

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.)

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.

Labor Market Equilibrium • Effect of • Increased population • Increased tax on employers • Increased tax on employees • Cheaper capital • Cheaper imports (consumer versus intermediate goods) • Increased demand for product

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