topic5.pdf - Macroeconomics 33040 Fall 2012 Topic 5 The Labor Market Loukas Karabarbounis University of Chicago Booth School of Business Where Are We

topic5.pdf - Macroeconomics 33040 Fall 2012 Topic 5 The...

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Macroeconomics 33040 - Fall 2012 Topic 5: The Labor Market Loukas Karabarbounis University of Chicago, Booth School of Business
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Where Are We Headed: Y = C + I + G + NX 1 Y = AF ( K , N ) is the total supply of goods and services LRAS or “Potential Output”: what is produced under flexible wages and prices. LRAS changes over time because of A , K and N . Over the long-run: K (physical, intangible, human) and A (technology, institutions, trade) are the primary sources of growth (Topic 4) For business cycles (think K as fixed): N and A are the primary sources of fluctuations (Topic 5) SRAS: what is produced under sticky wages and prices (Topic 12). SRAS changes over time for same reasons that LRAS changes but also because of price changes . 2 C + I + G + NX is the total demand for goods and services Topics 6-9 analyze the determinants of demand Topic 5 (Labor Market) Macroeconomics 33040 - Fall 2012 2 / 92
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1 Labor Demand 2 Labor Supply 3 Labor Market Equilibrium 4 Potential Output and the LRAS 5 Unemployment: Sticky Wages 6 Productivity 7 Unemployment: Search (Optional) 8 Summary, Readings and Exercises
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Firm’s Profit Maximization Problem Representative firm operating aggregate production function: Y = AF ( K , N ) Firm hires labor at wage W and sells output at price P (taking prices as given, i.e. competitive firm) to maximize profits Π Profits Π equal revenues ( PY ) minus costs ( WN ) Profits maximized when marginal product of labor (MPN) equals real wage: MPN = W / P Intuition: marginal benefit of additional worker equals marginal cost Topic 5 (Labor Market) Macroeconomics 33040 - Fall 2012 3 / 92
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Labor Demand: Intuition If MPN > W / P Δ N = 1: revenues increase by P * MPN and costs increase by W Because revenues increase more than costs, profits increase If MPN < W / P Δ N = - 1: revenues decrease by P * MPN and costs decrease by W Because revenues decrease less than costs, profits increase If MPN = W / P , profits cannot increase anymore (are maximized) MPN > W / P : demand more labor MPN < W / P : demand less labor Topic 5 (Labor Market) Macroeconomics 33040 - Fall 2012 4 / 92
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Optional: Firm’s Profit Maximization Problem Where does this come from? Firm hires labor at wage W and sells output at price P (taking prices as given, i.e. competitive firm) to maximize profits Π: max N Π = PY - WN First-order condition for profit maximization: P Y N = W = MPN = W / P The solution to the first-order condition is the labor demand : N d ( W / P ; A , K ) Topic 5 (Labor Market) Macroeconomics 33040 - Fall 2012 5 / 92
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Labor Demand: Example I Workers Output and Revenue (P=1) Costs (W=10) Profit 1 30 10 20 2 55 20 35 3 75 30 45 4 89 40 49 5 100 50 50 6 105 60 45 7 109 70 39 8 112 80 32 9 114 90 24 10 115 100 15 Topic 5 (Labor Market) Macroeconomics 33040 - Fall 2012 6 / 92
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Labor Demand: Example II Y = AK α N 1 - α MPN = (1 - α ) AK α N - α MPN = W / P = (1 - α ) AK α N - α = W / P N d ( W / P ; A , K ) = K parenleftbigg (1 - α ) A W / P parenrightbigg 1 α Topic 5 (Labor Market) Macroeconomics 33040 - Fall 2012 7 / 92
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Labor Demand: Summary MPN ( N ; A , K ) = W P = N d ( W / P ; A , K ) 1 Downward sloping in ( W / P , N ) space if W / P , we need MPN for first-order condition to hold for MPN , we need N (diminishing returns) 2
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