Topic5-Labor_AAP - Labor Supply and the Labor Market Labor...

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Unformatted text preview: Labor Supply and the Labor Market Labor Supply, Labor Market Equilibrium, Unemployment Topic 5 (Text: 3.3-3.5; Pres Topics #1 & #2 1 Figure 3.10 The workweek and real GDP per person in 36 countries 5 Figure 3.09 Average weekly hours, U.S. manufacturing 6 1 1 Individual Labor Supply • We saw labor demand is given by the MPL demand MPL schedule of a profit maximizing, competitive firm • The labor supply decision is made by supply households • Benefit to an individual of working: working Income earned can be used for consumption Income consumption • Cost to an individual of working: working Less time available for leisure Less leisure 7 Individual Labor Supply What matters to the decision of Work ⇔ Leisure ? • Wealth Wealth = PV(Future Income + Current Assets) Wealth Current • The wage rate (temporary increase) A permanent increase in wages ⇒ wealth permanent increase 8 Individual Labor Supply (cnt.) cnt.) • Effect of a temporary increase in the real wage temporary (i.e., holding wealth constant) The Substitution effect: The Substitution When current real wage (w = W/P) ↑, opportunity cost of When leisure ↑ This tends to ↑ labor supplied This The Income effect: The Income Higher wages imply that you can work less and make the same Higher income as before This tends to ↓ labor supplied This We assume that the substitution effect dominates We • Therefore, the labor supply curve of an individual worker is assumed to be upward sloping 9 2 2 Individual Labor Supply (cnt.) cnt.) • Some factors that shift the individual labor supply curve (changes the labor supplied at a given level of current real wage): Wealth ↑ shifts the labor supply curve to the left Wealth –northwest– (lower supply) can afford to enjoy more leisure can Expected future real wage ↑ makes one Expected effectively wealthier, and causes the curve to shift northwest Long run elasticity of the labor supply is likely to be Long small for permanent changes in real wages 10 Individual Labor Supply (cnt.) cnt.) To clarify possible confusion: • When wages rise temporarily, say for one temporarily year, there is an income effect because of the high there income wages there is a substitution effect because leisure there substitution becomes more costly The substitution effect dominates The Labor supply slopes up Labor The implied wealth change is small The 11 Individual Labor Supply (cnt.) cnt.) To clarify possible confusion: • When wages rise permanently, permanently The income and substitution effects are still The income substitution there But the income effect is for now and the future But and So we think of it as a wealth effect So wealth effect It is the present value of all future income increases It The wealth effect dominates. It is represented as The a shift in the labor supply curve shift • Empirically higher permanent income results in lower labor supply 12 3 3 Example #1 • How would the following affect Helena Handbasket’s supply of labor? Handbasket’ The value of Helena’s home triples The Helena’ unexpectedly Helena acquires skills that give her access to a Helena higher-paying job higherA temporary income tax surcharge raises the % temporary of her income she must pay in taxes, for the current year only A well-paying short term consulting wellopportunity becomes available to Helena 13 Aggregate Labor Supply • The aggregate labor supply curve is also aggregate upward sloping (by the earlier assumption) • When w ↑, currently working people work more, and people not in the labor force are enticed to work Recent estimates suggest that the overall wage Recent elasticity of labor supply is high ~ 3.0 14 Aggregate Labor Supply (cnt.) cnt.) • Some factors that shift the aggregate labor aggregate supply curve: Increase in population (increased birth rate, Increase immigration, etc.) increases aggregate labor supplied –southeast shift Increased labor force participation (e.g. entry of Increased women into labor force, elimination of mandatory retirement age, etc.) increases aggregate labor supplied southeast shift How about increase in wages? 15 4 4 Employment, Labor Force & Population Employment, Labor Force & Population in 1,000 250,000 230,000 210,000 190,000 170,000 Population 150,000 130,000 110,000 90,000 70,000 Labor Force Employment 50,000 08 04 00 96 92 88 84 80 76 72 68 64 60 56 52 48 nnnnnnnnnnnnnnnnJa Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja 18 Labor Market Equilibrium • Classical (full employment) labor market equilibrium is at the intersection of the labor supply and demand curves Labor Demand = Labor Supply Labor Labor Demand: the sum of individual Labor employers’ choices employers’ Labor Supply: the sum of individual workers’ Labor workers’ choices 20 Labor Market Equilibrium (cnt.) cnt.) • Real wage adjusts to set labor supply equal to labor demand • Otherwise, there will be workers who are willing to work at there a lower wage, or firms that are willing to pay higher wage firms 21 5 5 Shifts in Labor Market Equilibrium Examples of Shocks to the Labor Market: • A temporary adverse productivity (supply) shock For example: unusually bad weather For • MPL ↓ at every level of employment Demand curve shifts southwest Demand Equilibrium w and L ↓ Equilibrium • ↑ in immigration Shifts labor supply outward (southeast) in the short run Shifts Equilibrium w ↓ and L ↑ Equilibrium 22 Example #2 • Suppose the marginal product of labor is MPL = 520 - 1.0L where L is aggregate MPL employment. The aggregate quantity of labor supplied is 300 + 10w, where w is the real wage. What is the equilibrium real wage? What What is the equilibrium level of employment? What 23 Employment/Unemployment • Full employment model has zero unemployment • Classical economists believe unemployment is basically frictional frictional • Keynesians believe unemployment is a consequence of market failure Stickiness (rigidity) of wages is pointed to as Stickiness the main market failure 26 6 6 Unemployment • The Bureau of Labor Statistics (BLS) surveys households Bureau and assigns each person over 16 to one of three categories: Employed: worked full or part time during the past week Employed (144.3M in January 2007) Unemployed: did not work the past week, but looked for Unemployed work during the past four weeks (7.6M) Not in the labor force: did not work the past week and Not did not look for work during the past four weeks (78.7M) • Labor force: employed + unemployed workers (151.9M) 27 Unemployment (cnt.) cnt.) • Participation rate: Labor force as a percentage of adult population; adult (151.9 / (151.9 + 78.7)) = 65.9% (151.9 • Unemployment rate: Percentage of labor force labor that is unemployed; 7.6 / 151.9 = 5.0% • Duration of unemployment spells: Most unemployment spells are of short duration, about Most two months or less But, the majority of unemployment is due to people But, experiencing long unemployment spells • Policy: ↓ overall U or help more people? 28 Employment Population Ratio 29 7 7 Figure 3.14 Changes in employment status in a typical month 1.5m 0.9m 2.9m 2.3m 1.4m 1.5m 30 Unemployment (cnt.) cnt.) • The unemployment rate is never zero. Long run natural rate of unemployment due to: natural Frictional Unemployment: Workers search for suitable Frictional search jobs and firms search for suitable workers search In a dynamic economy with In continuous job creation and destruction, and continuous continuous entry into and exit out of the labor force continuous there is always some frictional unemployment as workers are there matched with appropriate jobs matched Structural Unemployment: Industry/Sectoral Structural Industry/Sectoral reallocation; chronically unemployed 31 Unemployment (cnt.) cnt.) • Short run U at business cycle frequencies is called cyclical unemployment cyclical When economy is booming, U is < natural rate When In a recession U is > natural rate In 32 8 8 Total Unemployment Rate Total Unemployment Rate 11 10 9 8 7 6 5 4 3 2 08 04 00 96 92 88 84 80 76 72 68 64 60 56 52 48 nnnnnnnnnnnnnnnnJa Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja 33 Unemployment (cnt.) cnt.) • Classical position: An adverse productivity shock ↓ MPL & shifts down labor demand Both equilibrium wages and labor supply ↓ People voluntarily substitute labor supply People during bad times for labor during good times • Keynesian position: wages are slow to adjust. At the going wage, supply > demand Leads to job rationing Leads No point in searching No 38 Unemployment (cnt.) cnt.) • Minimum wages Tune in to the 1st presentation Tune • Unemployment insurance: A government-provided scheme aimed at easing governmentthe pain of unexpected unemployment Tune in to the 2nd presentation Tune • Also, technology and outsourcing technology outsourcing labor implications have Presentations #3 & #5 Presentations 39 9 9 Figure 19: Labor force participation rate of men age 22-65 by educational group 100% 95% 90% 85% 80% PG 75% CG SC 70% HSG HSD 65% 60% 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 42 Unemployment rate of males age 22-65 by educational group 14% HSD HSG SC CG PC 12% 10% 8% 6% 4% 2% 0% 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 43 Figure 20: Labor force participation rate of women age 22-65 by educational group 100% PG CG SC HSG HSD 90% 80% 70% 60% 50% 40% 30% 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 44 10 10 College Wage Premium Source: Head in the clouds, The Economist, Sep 8th 2005 45 Jobs Facts During the 1992-2000 expansion: 1992• Job gains rose from ~ 5.5 million/quarter to ~ 7 million/quarter 5.5 • Job losses also rose from ~ 5.5 million/quarter to ~ 7 million/quarter • Of the 7 million jobs, 1/6th are created by new companies 46 Jobs Facts (cnt.) cnt.) • Job creation continuous and job destruction is In recessions job gains may slow a little but In mostly job losses increase The opposite is true in expansions The Business Employment Dynamics data; BED data Business Published by the BLS Published 47 11 11 Jobs Facts 49 Example #3 • The economy initially has a labor force of 2,000 workers. Of these workers, 1,900 are employed and each works 40 hrs/wk 1,900 10 units of output are produced by 1 labor hour 10 Total No. of hours worked/week? Total Unemployment rate? Unemployment 50 Example #3 (cnt.) cnt.) • The economy initially has a labor force of 2,000 workers We enter a recession. Employment ↓4%, We 0.2% of the labor force becomes discouraged 0.2% What is now the size of the labor force? What Employment? Employment? Unemployment rate? Unemployment 53 12 12 Glossary of Terms MPL w U Marginal product of labor Real wage = W / P Unemployment rate 58 THE END 59 13 13 ...
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