Topic 04 unemployment


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  • Domestic market starts in equilibrium at wage W. N T workers are in the textile industry and N S workers are in the software industry. Globalization opens borders and US begins importing textiles and exporting software. Demand for domestic textiles decreases as some textiles are bought overseas. This decreases the wage in the textile idustry to W' T and employment decreases to N' T. The opposite happens in the software industry. Exports cause an increase in demand, employment, and wages. The result is a wage differential (W' S – W' T ) where none existed before.
  • Topic 04 unemployment

    1. 1. Topic 04 Wages andUnemployment 13-1
    2. 2. Learning Objectives1. Discuss the four important trends that have characterized labor markets in the U.S. since 19602. Apply a supply-and-demand model to understand the labor market3. Explain how changes in the supply of and demand for labor explain trends in real wages and employment since 19604. Define and calculate the unemployment rate and the participation rate5. Differentiate among the three types of unemployment and the costs associated with each 13-2
    3. 3. Trend 1: Increasing Real Wages• Common in industrialized countries in the 20 th century 13-3
    4. 4. Trend 2: Slower Wage Growth Since 1973• The annual rate of real wage growth is uneven• Data on real wage growth: – 1960 – 1973 2.5% per year – 1973 – 1996 -1.1% per year – 1996 – 2009 2% per year – 1973 – 2009 0% per year 13-4
    5. 5. Trend 3: Increased Wage Inequality in US• Between 1960 and 2009 – Average real weekly earnings of production workers decreased • Real wages of the least-skilled, least-educated workers decreased 25 to 30% – Best-educated, highest-skilled workers real wages increased• Income with an advanced college degree is – Three times the income of a high school graduate – Four times the income of a worker who did not graduate from high school 13-5
    6. 6. Trend 4: Increasing Employment in US• In 2007, 146 million people in the US had jobs – 46 million new jobs since 1980• In 1970, 57% of the over-16 population had jobs – In 2007, 63% worked• Between 1980 and 2007 employment increased 46% – At the same time over-16 population increased 38% 13-6
    7. 7. The Labor Market• Supply and demand analysis can be used to find the price of labor (real wages) and the quantity (employment) – Analysis will consider the number of workers employed, not work-hours per year• Labor market is an input market – Firms buy labor to produce goods and services• Macroeconomics look at aggregate levels of employment and real wages – Microeconomics looks at wage determination for a category of workers 13-7
    8. 8. Wages and Demand for Labor• The demand for labor depends upon: – The productivity of workers • Greater productivity increases employment – The price of the worker’s output • A higher real price increases employment• Diminishing returns to labor – Assumes non-labor inputs are held constant – Adding one worker increases output but by less than the previous worker added• Value of Marginal Product (VMP) is extra revenue that an added worker generates 13-8
    9. 9. Banana Computers (BCC)• BCC can sell all its computers for $3,000 eachNumber of Computers Marginal Value of Marginal Workers per Year Product Product 1 25 25 $75,000 2 48 23 69,000 3 69 21 63,000 4 88 19 57,000 5 105 17 51,000 6 120 15 45,000 7 133 13 39,000 8 144 11 33,000 13-9
    10. 10. Demand Curve for Labor• Hire an extra worker if and only if the VMP exceeds the wage paid Wage ($000s)• If wage is $60,000, 60 BCC will hire 3 workers 50 – At $50,000, BCC hires 5 workers Labor• The lower the wage, the Demand more workers employed 3 5 Employment 13-10
    11. 11. Shifting Demand for Labor• Demand shifts when the value of the marginal product of a worker changes• Two factors determine the demand (VMP) for labor – The price of the company’s output • An increase in market demand – The productivity of the workers • Greater quantity of non-labor inputs • Organizational change • Training and education 13-11
    12. 12. Price of Output Increases• If the price of computers increases, demand for labor shifts to the right – There is a separate Real Wage ($000s) demand for labor curve for each 60 possible output price 50 Labor• An increase in the Demand (P = $5,000) price of workers output increases the demand Labor Demand (P = $3,000) for labor 3 5 7 8 Employment 13-12
    13. 13. Higher Productivity  Increases in productivity increase VMP  Demand curve shifts right  Employers hire more workers at any given wageReal Wage Labor Demand (after productivity increase) Labor Demand (before productivity increase) Employment 13-13
    14. 14. Individual Labor Supply• Reservation wage is the lowest wage a worker would accept for a given job – Opportunity cost of working is your leisure activity – Work compensates you for lost leisure • If working conditions are unpleasant or dangerous, a premium for that would be included in the wage – Cost – Benefit Principle at work 13-14
    15. 15. Aggregate Labor Supply• Macroeconomic determinants of labor supply – Size of the working age population • Domestic birthrate • Immigration and emigration • Ages when people enter and retire from the workforce – Share of working-age population willing to work 13-15
    16. 16. The Supply of Labor Labor SupplyReal Wage The labor supply curve slopes up because at a higher real wage, more people are willing to work Employment 13-16
    17. 17. Shifts in Labor Supply• A shift in labor supply is caused by any change in the number of workers willing to work at each wage – Increase in the working-age population • Baby Boom • Higher net immigration • Increasing age at retirement – Increase in the share of working-age population willing to work • Womens participation in the labor force has increased in the last 50 years 13-17
    18. 18. Trend 1: Increasing Real Wages• Industrialized countries have had sustained growth in productivity in the 20th century – Increases demand for labor – Both real wages and S employment increased Real Wage• Productivity increases W were due to W – Technological progress D D – Increases in capital N N Employment 13-18
    19. 19. Trend 2: Slower Wage Growth Since 1970• Slower growth in real wages could be either – Slower growth in demand for labor OR – Faster growth in the supply of labor• Productivity growth and real wages move together Annual Growth Rate (%) Productivity Real Earnings 1960 – 1970 2.34% 2.90% 1970 – 1980 1.71 1.23 1980 – 1990 1.60 0.71 1990 – 2000 2.04 1.50 2000 – 2008 2.60 0.68 13-19
    20. 20. Trend 2: Slower Wage Growth Since 1970• Slower demand growth explains slower wage growth – Does not explain rapid growth in employment• Supply of labor must have increased as well – Increased participation by women – Baby Boom – High rates of immigration• Looking forward – Labor supply growth will slow – Partly depends on whether productivity growth continues 13-20
    21. 21. Trend 3: Increased Wage Inequality in US• Globalization results in an expansion of many markets to worldwide supply – Increasing ease of goods and services crossing national borders• Benefit of globalization is increased specialization and efficiency – Principle of Comparative Advantage• Globalization also means that some goods produced domestically are no longer competitive – Some domestic sectors shrink 13-21
    22. 22. Trend 3: Increased Wage Inequality in US Textiles Software SS STReal Wage WS W W’T DS DT DS DT NT NT NS NS Employment Employment 13-22
    23. 23. Trend 3: Increased Wage Inequality in US• When wages in importing industries fall and wages in exporting industries rise, wage inequality increases – Low-skill industries in the US face the toughest international competition – Political resistance to free trade grows• Worker mobility is the movement of workers between jobs, firms, and industries – Market incentives move workers out of textiles and into software – Transition aid by government can assist workers to make the change 13-23
    24. 24. Trend 3: Increased Wage Inequality in US• Technological change can be a source of increasing wage inequality – Occurs if technical change favors higher-skilled or better-educated workers• Some innovation renders old skills less valuable – Addition and the calculator and computer• Skill-biased technological change affects the marginal products of higher skilled workers differently from those of lower-skilled workers – Recent changes favor higher skilled workers – Automobile production lines increasingly use robots 13-24
    25. 25. Skill-Biased Technological Change Unskilled Workers Skilled Workers SU SSReal Wage WS WS WS DS WS DU DS DU NU NU NS NS Employment Employment 13-25
    26. 26. Unemployment• Bureau of Labor Statistics (BLS) estimates employment and unemployment monthly Population Age 16+ Unemployed Out of the Employed Labor Force• Labor force = employed + unemployed• Unemployment rate = unemployed / labor force• Participation rate = labor force / population 16+ 13-26
    27. 27. US Employment Data, March 2010Employed 138.9 millionUnemployed 15.0 millionLabor Force 153.9 millionNot in the Labor Force 83.2 millionWorking-Age Population 237.2 millionUnemployment Rate 9.7%Participation rate 64.9% 13-27
    28. 28. US Unemployment Rate, 1960 - 2009 13-28
    29. 29. Costs of Unemployment• Economic costs – Lost wages and production – Decreased taxes and increased transfers• Psychological costs – Individual self-esteem – Family stress of decreased income and increased uncertainty• Social costs – Potential increases in crimes and social problems • Social resources spent to address these 13-29
    30. 30. Duration of Unemployment• Costs of unemployment are directly related to the length of time a person has been unemployed – Unemployment spell is the period during which an individual is continuously unemployed – Duration of unemployment is the length of the unemployment spell• The unemployed population in March 2010 Duration (weeks) 5 or less 5 – 14 More than 14 % of unemployed 18% 22% 60% 13-30
    31. 31. Duration of Unemployment• Long-term unemployed have been out of work for 6 months or longer• Short-term unemployed have several possible outcomes – Find a permanent job after searching a few weeks • Economic costs are low – Leave the labor force – Short-term or temporary job that leads to unemployment again • These chronically unemployed have costs similar to the long-term unemployed 13-31
    32. 32. Other Unemployment Issues• Discouraged workers would like to have a job but they have not looked for work in the past four weeks – Counted as out of the labor force – Willing and ready to work – Could be counted as unemployed but they are not• Involuntary part-time workers are people who like to work full-time but cannot find a full-time job – Counted as employed• March 2010 unemployment rate was 9.7% – Including discouraged workers and involuntary part- time workers would make the rate 16.9% 13-32
    33. 33. Types of Unemployment• Frictional unemployment occurs when workers are between jobs – Short duration, low economic cost – May increase economic efficiency• Cyclical unemployment is the increase in unemployment during economic slow-downs – Usually short duration – Economic cost is the decline in real GDP 13-33
    34. 34. Types of Unemployment• Structural unemployment is long-term, chronic unemployment in a well-functioning economy – Lack of skills, language barriers, or discrimination – Structural shifts in production create a long-term mismatch between workers and market needs – Barriers to employment such as • Minimum wages ■ Unions • Unemployment Insurance – High economic, psychological, and social costs – Example: US steel, telecommunications manufacturing 13-34
    35. 35. Structural Barriers to Employment Minimum Wage Laws S  Setting a minimum wage (Wmin) above A B equilibrium (W)Real Wage Wmin creates (NB – NA) W unemployment D  Workers who find a minimum-wage job get a higher wage NA N NB  Others are Employment unemployed 13-35
    36. 36. Structural Barriers to Employment• Labor union benefits • Labor union costs – Reduced worker – Introduces exploitation inefficiency into – Support progressive competitive markets labor legislation – May keep companies – Increase productivity from competing – Promote democracy globally in the workplace – Increase labor supply in non-union sector – Decreases wages for non-union workers 13-36
    37. 37. Structural Barriers to Employment• Unemployment insurance is a government transfer to unemployed workers – Helps to reduce the costs of unemployment – May give the unemployed an incentive to search longer and less intensely• To work efficiently, unemployment benefits should be – For a limited time – Less than the income received when working 13-37
    38. 38. Other Government Regulations• Health and safety regulations can reduce the demand for labor by – Increasing employer costs – Reducing productivity• The reduction in demand will increase unemployment and lower wages 13-38
    39. 39. Wages and Unemployment Four Trends Labor Market Unemployment CostsDemand for Supply of Types Labor Labor 13-39