Labor and Employment

Agec 217, Summer 2007

Labor and Employment

Two sides of Labor and Employment

• Labor is one of the resources used in production, making the goods and services we need.

• Employment provides most of us with the incomes we need to purchase goods and services

The Production Side of LaborPercent of Employed by Industry

20th Century Trends

• Large drop in % employment in agricultural sector over century

• Large drop in % employment in manufacturing sector over end of century

• Large increase in service sector % employment

Employment

Employment

Drop in Agricultural % Employment

• Farms have become more productive, requiring less labor

• Increases in population gravitate into the non-farm sector, decreasing the percentage remaining on the farm

The Income Side of Labor

The Income Side of LaborGlobal Unemployment Rates

Unemployment Rates

• % Unemployed =

Number unemployed ---------------------------------- * 100 Number in the labor force

Unemployment Rates

• % Unemployed (United States, 2001)=

6.7 million ------------------------ * 100 = 4.7% 141.8 million

What is the Labor Force?

In the United States, 2001:

• Adult Population (211.9 million)

– Labor force (141.8 million)

– Not in labor force (70.1 million)

What is the Labor Force?

In the United States, 2001:

• Labor force (141.8 million)

– Employed (135.1 million): those who have spent the previous week working at a job

– Unemployed (6.7 million): seeking employment or not employed due to temporary layoff

Not in Labor Force

In the United States, 2001:

• Not in labor force (70.1 million)– Student only– Homemaker– Retiree– Discouraged workers– Other marginally attached workers

Labor Force Participation Rate% Adults in Labor Force

Labor Force Participation Rate

Changes by gender:

• More women have entered the labor force

• Men staying as students longer, becoming retirees earlier and living longer, and taking over homemaker responsibilities

Unemployment Misses ...

(1) Discouraged and other marginally attached workers who want to work and have given up looking for a job

(2) Individuals who are employed, but for less hours than desired during a week

• Taking these workers into account, the unemployment rate in August, 2002 would increase from 5.7% to 9.5%

Can We Have 0% Unemployment?

• Economists believe that it is not possible

• Natural rate of unemployment: the normal rate of unemployment due to built in frictions and structures in the economy

Frictional Unemployment

• Frictional unemployment: Unemployment caused by the time it takes for workers to search for the best job

Frictional Unemployment• Example using the supply curve– You are a widget manufacturer– You are perfectly competitive, and therefore, a

price taker– The market price drops– The price is now not high enough to cover the

marginal costs of the widgets made by the last worker

– You fire the last worker to decrease marginal costs of the last unit made

– This worker is unemployed while job hunting

Structural Unemployment

• Minimum wages

• Unions

• Efficiency wages

Minimum Wage

• We know from microeconomic theory that this is a price floor

• Quantity labor supplied exceeds the quantity of labor demanded

Minimum WagePrice is wage, firms demand labor

Unions

• Perfect Competition: Many sellers, many buyers. No market power.

• Monopoly: One seller, many buyers. Seller has market power

• Monopsony: One buyer, many sellers. Buyer has market power to drive the price down

Unions

• Unions can be seen as negatively colluding to gain market power in a manner similar to firms trying to sell their products.

• In the presence of monopsony (one firm buying all the labor), unions are often needed to group workers into a single entity (monopoly) and thus shift some market power back to the workers.

Efficiency Wages

• Efficiency Wages: paying workers higher wages than the equilibrium amount in order to retain employees and receive a better effort. Creates similar inefficiencies to a price floor.

Summary

• Unemployment rates do not account for all unemployed adults, or even those working less hours than desired. They only consider those without work who are in the labor force. Most economists agree that there is a natural rate of unemployment due to frictional and structural unemployment in the economy.