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Unformatted text preview: been suﬀering high rates of
unemployment for almost two decades. Unlike the United States,
many European countries have high unemployment (nearly double the
U.S.) and slow job creation.
6. Following the Great Recession many countries have had
persistently high unemployment rates. Additionally, many of the
unemployed have been unemployed for a long period of time (more than
27 weeks). Ryan W. Herzog (GU) Labor Market February 5, 2014 5 / 40 Trends in the Labor Market Labor Market The foundation of our analysis will be the supply and demand
functions applied the labor market.
Firms constitute the demand for labor. Firms hire workers as long as
the marginal beneﬁt (additional output) exceeds the cost (wage).
Households constitute the supply of labor. Households must choose
the utility maximizing level of labor and leisure. Ryan W. Herzog (GU) Labor Market February 5, 2014 6 / 40 Trends in the Labor Market Labor Market in Equilibrium (Figure 5.1) Figure : Labor Market in Equilibrium
Ryan W. Herzog (GU) Labor Market February 5, 2014 7 / 40 Supply and Demand in the Labor Market Labor Demand
Firms are the demanders of labor. First must choose the optimal level
of labor which comes down to the marginal beneﬁt and marginal cost
of each additional worker.
The marginal beneﬁt of hiring the next worker is referred to as the
marginal productivity of labor or (MPL).
The marginal productivity of labor represents how much additional
output the next worker produces (∆Output /∆Labor ).
We assume the MPL is decreasing. Each worker is less productive
than the previous worker. A concept called diminishing marginal
A ﬁrm will hire the next worker as long as the value of the MPL is
greater than the wage. Ryan W. Herzog (GU) Labor Market February 5, 2014 8 / 40 Supply and Demand in the Labor Market Constructing Labor Demand (Table 5.1) Table : Production and Marginal Product for Computers
Number of workers
8 Ryan W. Herzog (GU) Computers Produced
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