THE LABOR MARKET, WAGES, AND UNEMPLOYMENT

1. THE LABOR MARKET,
WAGES, AND
UNEMPLOYMENT
Shihab Selim
Student on Dept. of Economics
EastWest University
Contact email: shihabselim@yahoo.com

2. Composition of Labor Market In Bangladesh
FiscalYear FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
( In Millions)
Total Labor Force(15 +) 60.7 62.3 63.9 65.6 67.2 68.9 70.6 72.2
OfWhich:
Unemployed People 2.6 2.7 2.7 2.8 2.9 3.0 3.0 3.1
Employed People 58.1 59.6 61.1 62.8 64.3 65.9 67.5 69.1
Total population 157.2 159.1 161.0 162.9 164.8 166.7 168.6 170.5
Non-Institutionalized Population104.8 106.9 109.1 111.3 113.5 115.8 118.0 120.1
Total Participation(%) 57.9 58.2 58.5 58.9 59.2 59.5 59.8 60.1
Source: Labor force survey, Bangladesh, Delta Plan 2100 Estimates

3. 60.7 62.3 63.9
65.6 67.2 68.9 70.6 72.2
58.1 59.6 61.1 62.8 64.3 65.9 67.5 69.1
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
TLF Employed
Bangladesh Labor Market: Employed People ofTotal Labor Force
Source: Labor force survey, Bangladesh, Delta Plan 2100
Estimates

4. 2.6
2.7
2.7
2.8
2.9
3.0
3.0
3.1
2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
Bangladesh: Unemployed People(In millions)
Source: Labor force survey, Bangladesh, Delta Plan 2100
Estimates
Bangladesh Labor Market: Unemployment Dynamics

5. Labor market Equilibrium: Supply and Demand
• Labor demand curve is derived from the firm’s profit-
maximization problem.
• This curve says that firms continue to hire new workers until
the additional output produced by the last worker (the
marginal product of labor) equals the cost of hiring that
worker — the wage.
• That is:
𝑊
𝑃 𝐿
= 𝑀𝑃𝑃𝐿
• Labor demand curve slopes downward because of the
diminishing marginal product of labor

6. • The labor supply curve slopes upward.
• That means, at higher wage rates, individuals are willing to
work more.
• At higher wages, the price of leisure (of not working)is higher,
so people consume less leisure and work more
• Labor supply curve will be upward when income effect” is
dominated by substitution effect.
Labor market Equilibrium: Supply and Demand

7. • The intersection of labor
supply and labor
demand determines the
level of employment
and the wage.
• If we assume there is a
fixed population of
people, say N, then this
intersection also
determines the
employment-
population ratio L /N.
Labor market Equilibrium: Supply and Demand

8. Changes in Labor Supply:
• Tax on labor supply creates a
wedge between the wage paid by
firms and the wage received by
workers.
• This can be understood as a shift
back in the labor supply curve: at a
given wage paid by firms, workers
receive less and supply less labor.
Labor market: Factors Change in Equilibrium
Employment

9. A Change in Labor Demand
• Suppose, input price increases
• A reduction in labor demand
causes both the equilibrium wage
and the level of employment to
decline.
Labor market: Factors Change in Equilibrium
Employment

10. • If wages are rigid for some
reason and don’t fall to clear
the labor market, the result is
an even larger reduction in
employment (compare points
B and C ).
• Notice also that at the original
wage w, labor supply exceeds
labor demand: more people
would like to work than are
able to find jobs.
Wage Rigidity: Labor Market is in
Disequilibrium

11. • The natural rate of unemployment is the rate that would prevail if the economy was in
neither a boom nor a recession.
• Economists decompose this natural rate into two smaller parts: frictional and structural
unemployment.
• Frictional unemployment inevitably results when workers are changing jobs in a dynamic
economy
• Structural unemployment results from the labor market institutions that match up
workers and firms in the labor market. Examples include hiring and firing costs, the level
of unemployment benefits, and the level of the minimum wage
• Cyclical unemployment is the difference between the actual rate and the natural rate and
is associated with short-run fluctuations, such as occur in booms and recessions.
• With these terms defined, you can see that the following relationship holds:
Actual unemployment = frictional + structural + cyclical
Unemployment: Demographic Changes and Others
Economic Policies’ Impacts

12. • The bathtub model is based on two simple equations:
𝐸𝑡+ 𝑈𝑡 = 𝐿 ……………..(1)
• The first equation just says that the number of people in the labor force, L, is
the sum of employment plus the number of people unemployed.
• And, ∆𝑈𝑡+1= 𝑠 𝐸𝑡 − 𝑓 𝑈𝑡…………(2)
• The first term on the right side of equation(2) raises unemployment.This
term captures the number of employed people who lose their jobs: it is the
product of the job separation rate, s, and the number of people who start
out with jobs, Et.
• The second term on the right side is the number of unemployed people who
find a new job.This term equals the product of f , the job finding rate, and
the number of unemployed people, Ut.
Bathtub Model of Unemployment

13. • This steady state occurs when ∆𝑈𝑡+1= 0 that is, the change in unemployment is
zero. Something quite intuitive happens in the steady state: the number of
people losing jobs exactly equals the number of people finding new jobs.
• To solve mathematically, just set ∆𝑈𝑡+1= 0, and then use equation(2) to
eliminate Et from the equation:
0 = 𝑠 𝐸𝑡 − 𝑓 𝑈𝑡
0 = 𝑠 ( 𝐿 − 𝑈𝑡) − 𝑓 𝑈𝑡
0 = 𝑠 𝐿 − ( 𝑓 + 𝑠 )𝑈𝑡
• Solving this last equation for Ut gives the number of people unemployed in
steady
state:
𝑼∗ =
𝒔 𝑳
𝒇 + 𝒔
Bathtub Model of Unemployment

14. • Finally, recall that the unemployment rate is defined as the fraction of the labor
force that is unemployed.Therefore
Because this equation holds in the steady state — the long run — think of the
bathtub model as determining the natural rate of unemployment: the rate that
prevails when the economy is neither in a boom nor a recession.
𝒖∗ =
𝑼∗
𝑳
=
𝒔
𝒇 + 𝒔
Bathtub Model of Unemployment