Wages, Labor Markets and Unemployment News Item Five Important Labor Market Trends Demand for and upply of Labor Real Wages Grow Primarily because Workers Become More ive Explaining Wage Inequality Unemployment and the Unemployment Rate What Have We Learned? News Organizing Theme Five Labor Market Trends Real Wages have grown over the 2 th Century ince 197, U real wage growth has slowed. Wage inequality in the U has increased in recent decades. The number of U people with jobs has grown substantially over recent decades. The unemployment rate has been high in Europe for two decades. The Real Wage The real wage is the ratio of the dollar wage to a relevant price level. For the firm, the relevant price is the price of goods and services the firm produces. For the firm, the real wage measures the amount of product the firm must produce to pay for a unit (hour, month or year) of labor. 1
The Real Wage The real wage is the ratio of the dollar wage to a relevant price level. For the worker, the relevant price is the price of goods and services the worker consumes. For the worker, the real wage measures the amount of goods they receive by supplying a unit (hour, month or year) of labor. The Real Wage Real Wage = W/P ($/Hour)/($/Unit Good) Goods per Hour Firm: Worker: The goods that must be produced to pay for an hour of labor. Goods that may be obtained by supplying and hour of labor. Demand for Labor The demand for labor gives the quantity of labor the firm will hire as a function of the real wage rate. The cost benefit principle and diminishing marginal productivity of labor imply that the demand for labor is inversely related to the real wage. Demand for Labor at Banana Computers The Price of a Computer is $3 Worker Years 1 2 3 4 5 6 7 8 Computers Per year 25 48 69 88 15 12 133 144 Marginal 25 23 21 19 17 15 13 11 Value of Marginal $75, $69, $63, $57, $51, $45, $39, $33, 2
Demand for Labor If a Banana Computer Worker has a wage of $6, per year, how many workers will Banana find it optimal to hire? If the wage falls, why will the optimal quantity of labor employed rise? Use Your Clickers to Answer The Following Graded Question. If the price of a computer is $3 and the dollar wage of a worker is $6, per year, it is optimal for the Banana computer company to hire worker years. Demand for Labor A. 1 B. 2 C. 3 D. 4 E. 5 Worker Years 1 2 3 4 5 6 7 8 Computers Per year 25 48 69 88 15 12 133 144 Marginal 25 23 21 19 17 15 13 11 Value of Marginal $75, $69, $63, $57, $51, $45, $39, $33, Real wage W/P N Demand Labor Employed 3
The upply of Labor The supply of labor gives the quantity of labor that workers are willing and able to supply as a function of the real wage. The incentive principle implies that the supply of labor is (usually) directly related to the real wage. upply of Labor Real wage W/P N D Labor Employed The Demand for and upply of Labor Determine the Real Wage and Employment Real wage Equilibrium W/P Equilibrium N D Labor Employed Real Wages Increase Over Time Because Workers Grow More ive as Time Passes 4
Increased ivity Causes Increased Labor Demand (The Price of a Computer is $3) Worker Years 1 2 3 4 5 6 7 8 Marginal 25 23 21 19 17 15 13 11 New Marginal 37.5 34.5 31.5 28.5 25.5 22.5 19.5 16.5 VMP $75, $69, $63, $57, $51, $45, $39, $33, New VMP $112,5 $13,5 $94,5 $85,5 $76,5 $67,5 $58,5 $49,5 Increased ivity Causes Increased Labor Demand Real wage Equilibrium W/P Equilibrium N Demand Demand after ivity Increase Labor Employed Real Wages Have Grown Along with ivity But Recently Real Wage Growth Has lowed Even Though ivity Has Not. 5
Wage Inequality Has Increased Wage Inequality Has Increased The data show that wage inequality increased between 22 and 28. We will use our labor demand and supply model to provide an explanation. The explanation is that recent technology advances have benefited high skill but not low skill workers. A Technology Advance that Affects All Workers Increases Labor Demand and the Real Wage Real wage A Technology Advance that Affects Only High killed Workers Can Increase Wage Inequality Real Wage D w w D D D D D Unskilled workers killed workers N N Labor Employed 6
Wage Inequality Has Increased Fed an Francisco Economic Letter (8,22) Wage Inequality Has Increased Fed an Francisco Economic Letter (8, 22) Wage Inequality Has Increased Monthly Labor Review, (6, 29) The Number Employed in the U Has Grown ubstantially Between 1947 and 29 Civilian Employment (Thousands) 16 14 12 1 8 6 4 2 Jan-48 Jan-5 Jan-52 Jan-54 Jan-56 Jan-58 Jan-6 Jan-62 Jan-64 Jan-66 Jan-68 Jan-7 Jan-72 Jan-74 Jan-76 Jan-78 Jan-8 Jan-82 Jan-84 Jan-86 Jan-88 Jan-9 Jan-92 Jan-94 Jan-96 Jan-98 Jan- Jan-2 Jan-4 Jan-6 Jan-8 7
Measuring Unemployment The Bureau of Labor tatistics (BL) surveys about 6, randomly selected households each month. The BL places each person, 16 years or older, into one of three categories: Employed Unemployed Out of the Labor Market Measuring Unemployment The Labor Force is the total number of employed and unemployed people in the economy. The Unemployment Rate is the number of unemployed people divided by the labor force. The Participation Rate is the percentage of the working-age population in the labor force. Measuring Unemployment 12. Civilian Unemployment and Participation Rates 68. 66. unemployed Unemployme nt rate = labor force 1. 8. Participation Rate (Right Axis) 64. 62. Participat ion rate = labor force population 16 and over Percent 6. 4. 2.. Jan-48 Jan-5 Jan-52 Jan-54 Jan-56 Jan-58 Jan-6 Jan-62 Jan-64 Jan-66 Jan-68 Jan-7 Jan-72 Jan-74 Jan-76 Jan-78 Jan-8 Jan-82 Jan-84 Jan-86 Jan-88 Jan-9 Jan-92 Jan-94 Jan-96 Jan-98 Jan- Jan-2 Jan-4 Jan-6 Jan-8 Unemployment Rate (Left Axis) 6. 58. 56. 54. 52. 8
Use Your Clickers to Answer The Following Graded Question. A rising unemployment rate may understate the impact of a recession on the economy because A. The unemployment rate does not typically rise in a recession. B. Inflation typically increases during a recession. C. ome workers may leave the labor force and not be reflected in the unemployment rate. D. The unemployment rate does not include unemployment among female workers. European Employment Has Been High U and European Unemployment Rates 12. 1. 8. Europe What Have We Learned? 6. U 4. 2.. Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan- Jul- Jan-1 Jul-1 Jan-2 Jul-2 Jan-3 Jul-3 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 9
Wages, Labor Markets and Unemployment Economists use Demand for and upply of Labor to predict real wages and employment. Real Wages Grow Primarily because Workers Become More ive Rising Wage Inequality can be explained by technological advances that benefit high skill but not low skill workers. The unemployment rate rose and the participation rate fell during the recession. 1