Labor market and unemployment
The Labor Market: Workers, Wages, and Unemployment
Five Important Labor Market Trends
Trend 1: Real Wage Growth
Over the 20th century, all industrialized countries have seen substantial growth in real wages
- US 2016 real earnings about double earnings from 1960
- US 2016 real earnings > 5x real earnings in 1929
Trend 2: Slowdown
Real wage growth has stagnated since 1973. A timeline of growth rates for the US looks as follows:
- 1960-1973: 2.5% (quick growth)
- 1973-1995: 0.9% (odd microprocessor slowdown)
- 1996-2007: 1.8% (resurgence despite 2001 recession)
- 2007-2016: 0.7% (slowdown following housing market crash)
- For the whole period 1973-2016: 1.1% per year
Trend 3: Inequality
- Growing gap in real wages between skilled and unskilled workers
- Economists worried of US becoming two-tier market: good jobs for highly skilled, lack of jobs for unskilled
- Wage inequality less pronounced in rest of world
- Median household income in 2016 was $59,149, mean was $83,143
Trend 4: Job Growth
- Number of people with jobs was grown in last 50 years
- Rate of job growed has slowed as of late; rate below the population growth rate since ~2000
Trend 5: High European Unemployment
Faced much worse unemployment than US
- From 1990-2001 it was 10.9% vs USA 5.5%
- In 2017, France at 9.8% vs USA 4.4%
Labor Market
- Supply and demand analysis can find price of labor (real wages) and quantity (employment)
- Demand for labor depends on
- Productivity of workers
- Price the worker’s output produces
- A firm will hire you if your marginal benefit to the company exceeds their marginal cost to acquire you i.e. . and the firm will continue to hire until the marginal benefit of the last labor unit is equal to its marginal cost
- Value of marginal product (VMP) is the revenue an added worker (unit of labor) earns for a firm, the firm’s MB from employing that worker
- Wage is the firm’s MC for employing a worker
- Thus, firm’s hire until VMP equals the wage rate
- , i.e. price times quantity of marginal product of labor
- Marginal revenue product (MRP) is additional revenue generated from employing additioal unit of labor
- i.e. marginal revenue of product times marginal product of labor
- Under a perfectly competitive market, the marginal revenue is equal to the price: .
Shifts in Demand Curve
Factors increasing demand for labor (rightward shift in demand curve) are
- Rise in price of output of company product
- Rise in labor productivity
Individual Labor Supply
Reservation wage is lowest wage a worker would accept for given job
- Substitution effect (SE): wage goes up, leisure becomes more expensive; W up, L up -> SE > IE
- Income effect (IE): wage foes up, leisure becomes less expensive; W up, L down -> IE > SE
Aggregate Labor Supply
Determinants of labor supply include
- Size of working age population
- Share of working age population willing to work i.e. increasing LFPR
These are reasons for which a shift in labor supply might occur, given other factors held constant
Explaining labor market trends
- US problems are the stagnant growth in real wages since 1973, and increasing wage inequality
Trend 1: Increases in real wages of industrialized countries
- Demand for labor increased due to labor productivity increases
- LP went up due to increases in capital and technological progression
- Demand for labor curve shifts right
Trend 2: Stagnant Wage Growth since 1970
- Stagnant growth in real wages due to either
- Slower growth in labor demand
- Faster growth in labor supply i.e. more people than available jobs
- Record rates of new jobs from 1973-1990, but stagnant growth in real wages. So must be explained by corresponding fast growth in labor supply thanks to
- Increased participation by women
- Baby Boom
- High rates of immigration
- In future the labor supply growth will slow down (baby boomers retire, no mass movement of women in market)
Trend 3: Increased Wage Inequality in US
- Wages in industries that compete with imports fall and wages in industries competing with exports rise, wage inequality increases
- Worker mobility is movement of workers between jobs, firms, industries
- Tech. change can cause increase in wage inequality
- Skill-biased tech change, increasing demand for skilled workers and less demand for unskilled workers
- Globalization is expansion of many markets to worldwide supply, increases ease of goods and services across borders
Types of Unemployment
- Frictional unemployment: short-term unemp. during process of matching workers to jobs
- Cyclical unemployment: extra unemp occurring during recession periods; associated with significant declines in real GDP
- Structural Unemployment: long-term chronic unemp in otherwise well-functioning economy
- Lack of skills or discrimination
- Barriers to employment like minimum wages, unions, unempmloyment insurance
Impediments to Full Employment
Structural features of market leading to long-term unemployment
- Min. wage laws: can look at basic SD plot, as wages are structurally increased more people are willing to work for that price which cause demand for labor to decrease. Thus, among those looking for employment less are able to find it, increasing unemployment. In theory, those that want to work but can’t find it want to “bid down” the minimum wage so less people are willing to work for the price and there is less competition, more jobs.
- Labor unions: raise wages for represented individuals, work same way as described above
- Unemployment insurance: needs to be short term and less than income received when working
- Govt regulations like health and safety regulations
Explaining European Unemployment
- Many of impediments above explain diff between Europe and USA emplyment
- Europe labor markets highly regulated
- High min wage
- Generous unemp benefits -> people not incentivized to work
- Powerful unions