Workers, Wages, and Unemployment in the Modern Economy

1. Workers, Wages, and Unemployment in the Modern Economy

3. Five Important LaborMarket Trends • Trends in Real Wages • Over the 20th century, all industrial countries have enjoyed substantial growth in real wages. • Since the early 1970s, however, the rate of real wage growth has slowed. • Recent decades have brought a pronounced increase in wage inequality in the U.S.

5. How to measure unemployment? • Population Survey • The U.S. Census Bureau conducts monthly surveys to determine the status of the labor force in the United States. • The working-age population—the number of people aged 16 years and older who are not in jail, hospital, or other institution.

6. Jobs and Wages • The working-age population is divided into two groups: • People in the labor force • People not in the labor force • The labor force is the sum of employed and unemployed workers.

7. Jobs and Wages • To be considered unemployed, a person must be: • without work and have made specific efforts to find a job within the past four weeks, or • waiting to be called back to a job from which he or she was laid off, or • waiting to start a new job within 30 days.

8. Unemployment rate • The unemployment rate is the percentage of the labor force that is unemployed. • The unemployment rate is (Number of people unemployed/Labor force)  100.

9. Theory • How are wages and employment determined in a competitive market? • Demand & Supply

10. Supply and Demand inthe Labor Market • Wages and the Demand for Labor • The demand for labor depends upon: • The productivity of workers. • The price of the worker’s output.

11. 25 $75,000 23 69,000 21 63,000 19 57,000 17 51,000 15 45,000 13 39,000 11 33,000 • How many workers will Banana hire? • Observations: • Marginal product diminishes • Value of marginal product (VMP) = Price ($3,000) x Marginal product (MP) Production and MarginalProduct for Banana Computers Value of Number of Computers Marginal marginal product workers produced per year product (at $3,000/computer 0 0 1 25 2 48 3 69 4 88 5 105 6 120 7 133 8 144

12. Production and MarginalProduct for Banana Computers Value of Number of Computers Marginal marginal product workers produced per year product (at $3,000/computer 0 0 1 25 2 48 3 69 4 88 5 105 6 120 7 133 8 144 25 $75,000 23 69,000 21 63,000 19 57,000 17 51,000 15 45,000 13 39,000 11 33,000 • How many workers will Banana hire? • Hiring rule: • Hire if VMP > W • If the wage is: • $60,000, hire 3 workers • $50,000, hire 5 workers • Banana will hire more workers at lower wages

13. The lower the wage, the greater the number of workers hired. • The wage can be measured in nominal or real terms. Labor demand The Demand Curve for Labor Wage Employment

14. Supply and Demand inthe Labor Market • Shifts in the Demand for Labor • Two factors determine the demand (VMP) for labor: • The relative price of the company’s output. • The productivity of the workers.

15. Relative price = $3,000 • If real wage was $60,000 -- hire 3 • If real wage was $50,000 -- hire 5 • Relative price = $5,000 • If real wage was $60,000 -- hire 7 • If real wage was $50,000 -- hire 8 Production and MarginalProduct for Banana Computers after an Increase in Computer Prices Value of Value of Number of Computers Marginal marginal product marginal product workers produced per year product (at $3,000/computer (at $5,000/computer) 0 0 1 25 2 48 3 69 4 88 5 105 6 120 7 133 8 144 25 $75,000 $125,000 23 69,000 115,000 21 63,000 105,000 19 57,000 95,000 17 51,000 85,000 15 45,000 75,000 13 39,000 65,000 11 33,000 55,000

16. An increase in the relative price of workers’ output increases the demand for labor. Labor demand (after relative price increase) Labor demand (before relative price increase) A Higher Relative Price of Output Increases the Demand for Labor Real wage Employment

17. Production and MarginalProduct for Banana Computers after an Increase in Worker Productivity Value of Number of Computers Marginal marginal product workers produced per year product (at $3,000/computer 0 0 1 37.5 2 72 3 103.5 4 132 5 157.5 6 180 7 199.5 8 216 37.5 $112,500 34.5 103,500 31.5 94,500 28.5 85,500 25.5 76,500 22.5 67,500 19.5 58,500 16.5 49,500 • Assume • 50% increase in productivity • Relative price = $3,000 • If real wage: • $60,000, employment = 6 • $50,000, employment = 8

18. Increases in productivity increases VMP. • Employers will hire more workers at any given wage. • Demand curve shifts right. Labor demand (after productivity increase) Labor demand (before productivity increase) Higher Productivity Increases the Demand for Labor Real wage Employment

19. Labor supply The labor supply curve is upward sloping because, in general, the higher the real wage, the more people are willing to work. The Supply of Labor Real wage Employment

20. Supply and Demand inthe Labor Market • Shifts in the Supply of Labor • Macroeconomic determinants of the supply of labor: • Size of the working age population; determined by: • Domestic birthrate • Immigration and emigration • Ages when people enter and retire from the workforce

21. Supply and Demand inthe Labor Market • Shifts in the Supply of Labor • All else being equal, the supply of labor will increase when: • The working age population increases. • The percent of the working age population looking for work increases.

22. Equilibrium • Wages and employment are determined in equilibrium by the interaction of the demand of labor and the supply of labor • In a free market, equilibrium wages are at the intersection of labor supply and labor demand • If wages are not at equilibrium economic forces will quickly push them into equilibrium

23. S W D N Equilibrium analysis Real Wage Employment

24. Explaining the Trends in Real Wages and Employment • Economic Naturalist • Why have real wages increased by so much in the industrial countries?

25. S w’ w D’ D N N’ An Increase In ProductivityRaises The Real Wage Real wage Employment

26. Explaining the Trends in Real Wages and Employment • Economic Naturalist • Factors contributing to productivity growth: • Technological progress • Increase in capital stock

27. Growth Rates in Productivityand Real Earnings Annual Growth Rate (%) Productivity Real Earnings 1960 - 1970 2.33 2.89 1970 - 1980 0.84 0.79 1980 - 1990 1.38 1.15 1990 - 2000 1.89 1.92 • Observations • Reduced growth in productivity reduces the demand for labor and real wage growth • Increases in the supply will cause employment to increase and hold real wages down

28. Explaining the Trends in Real Wages and Employment • Economic Naturalist • Why has the gap between the wages of less-skilled and higher-skilled workers widened in recent years?

29. Sskilled Sunskilled w’skilled wunskilled w’skilled D’skilled w’unskilled Dskilled Dunskilled D’unskilled N’unskilled N unskilled Nskilled N’skilled • Initially, wages are equal. • The increase in demand for skilled workers raises their wages. • The decrease in demand for unskilled workers reduces their wages. The Effect of Skill-Biased Technological Change on Wage Inequality Real Wage Employment Employment Unskilled workers Skilled workers

30. Explaining the Trends in Real Wages and Employment • Increasing Wage Inequality: Technological Change • Technological change that is biased in favor of skilled workers will increase wage inequality.

31. S • Minimum wage = Wmin • Quantity of workers demanded = NA • Quantity of workers supplied = NB • Unemployment = NB - NA • No minimum wage • Wage = W • Employment = N • No unemployment A B wmin W D NA N NB A Legal Minimum Wage May Create Unemployment Real Wage Employment

32. Unemployment • Impediments to Full Employment • Minimum Wage Laws: • Benefit workers who are employed. • Hurt those who lose their jobs. • Create economic inefficiency.

33. S • Labor unions can push the union wage above the equilibrium -- Wmin • Union workers are employed at high wages • Nonunion unemployment increases A B wmin W D NA N NB A Legal Minimum Wage May Create Unemployment Real Wage Employment

34. Unemployment • Labor Unions • Benefits • Reduced worker exploitation • Support progressive labor legislation • Promote democracy in the workplace

35. Unemployment • Labor Unions • Costs • Unions cause otherwise competitive labor markets to function inefficiently. • Unions may prevent companies from competing in the global economy.