mbmc workers, wages, and unemployment in the modern economy
TRANSCRIPT
MB MC
Workers, Wages, and Unemployment in the
Modern Economy
Workers, Wages, and Unemployment in the
Modern Economy
US Real compensation per worker (1960=1)
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
1960 1970 1980 1990 2000
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Five Important LaborMarket Trends
Trends in Real WagesOver 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.
Slide 5
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How to measure unemployment?
Population SurveyThe 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.
Slide 6
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Jobs and Wages
The working-age population is divided into two groups: People in the labor force People not in the labor forceThe labor force is the sum of employed and unemployed workers.
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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.
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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.
Slide 9
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Theory
How are wages and employment determined in a competitive market?
Demand & Supply
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Supply and Demand inthe Labor Market
Wages and the Demand for LaborThe demand for labor depends upon:
The productivity of workers.The price of the worker’s output.
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Production and MarginalProduct for Banana Computers
0 0
1 25
2 48
3 69
4 88
5 105
6 120
7 133
8 144
Value ofNumber of Computers Marginal marginal product
workers produced per year product (at $3,000/computer
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)
Slide 12
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Production and MarginalProduct for Banana Computers
0 0
1 25
2 48
3 69
4 88
5 105
6 120
7 133
8 144
Value ofNumber of Computers Marginal marginal product
workers produced per year product (at $3,000/computer
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 workersBanana will hire more workers at lower wages
Slide 13
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The Demand Curve for Labor
Employment
Wag
e
Labor demand
•The lower the wage, the greater the number of workers hired.
•The wage can be measured in nominal or real terms.
Slide 14
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Supply and Demand inthe Labor Market
Shifts in the Demand for LaborTwo factors determine the demand (VMP)
for labor:The relative price of the company’s output.The productivity of the workers.
Slide 15
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Production and MarginalProduct for Banana Computers after an Increase in Computer Prices
0 0
1 25
2 48
3 69
4 88
5 105
6 120
7 133
8 144
Value of Value ofNumber of Computers Marginal marginal product marginal product
workers produced per year product (at $3,000/computer (at $5,000/computer)
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
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
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A Higher Relative Price of Output Increases the Demand for Labor
Employment
Rea
l w
age
Labor demand(before relative price increase)
An increase in the relative price of workers’ output increases the demand for labor.
Labor demand(after relative price increase)
Slide 17
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Production and MarginalProduct for Banana Computers after an Increase in Worker Productivity
0 0
1 37.5
2 72
3 103.5
4 132
5 157.5
6 180
7 199.5
8 216
Value ofNumber of Computers Marginal marginal product
workers produced per year product (at $3,000/computer
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
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Higher Productivity Increases the Demand for Labor
Employment
Rea
l w
age
Labor demand(before productivity increase)
• Increases in productivity increases VMP.
•Employers will hire more workers at any given wage.
•Demand curve shifts right.
Labor demand(after productivity increase)
Slide 19
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
The Supply of Labor
Employment
Rea
l wag
e
Labor supply
The labor supply curve is upward sloping because, in general, the higher the real wage, the more people are willing to work.
Slide 20
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Supply and Demand inthe Labor Market
Shifts in the Supply of LaborMacroeconomic determinants of the supply
of labor:Size of the working age population; determined
by:o Domestic birthrateo Immigration and emigrationo Ages when people enter and retire from the
workforce
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Supply and Demand inthe Labor Market
Shifts in the Supply of LaborAll 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.
Slide 22
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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
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Equilibrium analysis
Employment
Rea
l Wag
e
D
S
N
W
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Explaining the Trends in Real Wages and Employment
Economic NaturalistWhy have real wages increased by so
much in the industrial countries?
Slide 25
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An Increase In ProductivityRaises The Real Wage
Employment
Rea
l wag
eS
D
w
N
D’
w’
N’
Slide 26
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Explaining the Trends in Real Wages and Employment
Economic NaturalistFactors contributing to productivity growth:
Technological progressIncrease in capital stock
Slide 27
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Growth Rates in Productivityand 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
Annual Growth Rate (%)
Productivity Real Earnings
Slide 28
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Explaining the Trends in Real Wages and Employment
Economic NaturalistWhy has the gap between the wages of
less-skilled and higher-skilled workers widened in recent years?
Slide 29
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The Effect of Skill-Biased Technological Change on Wage Inequality
Employment
Rea
l Wag
e
Employment
Unskilled workers Skilled workers
D’unskilled
w’unskilled
N’unskilled
•The decrease in demand for unskilled workers reduces their wages.
•The increase in demand for skilled workers raises their wages.
D’skilled
N’skilled
w’skilled
Sunskilled
Dunskilled
N unskilled
Sskilled
Nskilled
•Initially, wages are equal.
wunskilled w’skilled
Dskilled
Slide 30
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Explaining the Trends in Real Wages and Employment
Increasing Wage Inequality: Technological ChangeTechnological change that is biased in
favor of skilled workers will increase wage inequality.
Slide 31
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
A Legal Minimum Wage May Create Unemployment
Employment
Rea
l Wag
e
D
S
N
W
Awmin
NA
B
NB
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
Slide 32
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Unemployment
Impediments to Full EmploymentMinimum Wage Laws:
Benefit workers who are employed.Hurt those who lose their jobs.Create economic inefficiency.
Slide 33
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A Legal Minimum Wage May Create Unemployment
Employment
Rea
l Wag
e
D
S
N
W
Awmin
NA
B
NB
Labor unions can push the union wage above the equilibrium -- Wmin
•Union workers are employed at high wages
•Nonunion unemployment increases
Slide 34
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Unemployment
Labor UnionsBenefits
Reduced worker exploitationSupport progressive labor legislationPromote democracy in the workplace
Slide 35
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Unemployment
Labor UnionsCosts
Unions cause otherwise competitive labor markets to function inefficiently.
Unions may prevent companies from competing in the global economy.