Joydeep Bhattacharya - Department of Economics · The Labor Market Labor Demand Labor Supply Labor...
Transcript of Joydeep Bhattacharya - Department of Economics · The Labor Market Labor Demand Labor Supply Labor...
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Labor Markets and Unemployment
Joydeep Bhattacharya
Iowa State
March 23, 2009
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
US employment
1 unemployment very high during depressions (1980-82); much lowerduring booms (1994-2000)
2 unemployment far from zero even when economy is doing well
We need to study what factors change the quantity of labordemanded and supplied.
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Labor demandY = AK αN1�α; hold A and K �xed; MPN > 0; MPN falls as N rises
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Labor demand: Supply shocks
All else same, if A goes down, Y goes down. So, same number ofworkers using the same amount of capital produce less output.reduces MPN at every N.
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Labor market
Imagine a world where
1 all workers are identical,
2 large number of �rms; each pay going nominal (in $) market wage(W ); competitive
3 �rms are only interested in maximizing pro�ts when it comes tohiring/�ring workers, and
4 there is only one good and all �rms sell this good at per unit price P.
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Notation
MPN = marginal product of labor
P = price of output
MRPN = marginal revenue product of labor =
P �MPNW = nominal wage
w = real wage =WP
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
OptimumWhat does MPN measure? the extra bene�t of employing anadditional worker in terms of extra output produced.What does MRPN measure? the extra bene�t in $ of employing anadditional worker in terms of extra revenue produced.What is the $ cost associated with employing an additional worker?the wage W .Therefore, optimal employment (from the point of view of the �rm)occurs when MRPN = W , or
MPN =WP
(1)
this de�nes the labor demand curve in the labor marketTo maximize pro�ts, the �rm should increase employment ifMRPN > W . Why?
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Labor demand curve
Optimal employment is at N�.
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Cobb-Douglas example
Fix K = K , A = A. Then,
Y = A�K�αN1�α
MPN = (1� α)hA�K�αiN�α
N� =
0@ (1� α)hA�K�αi
w
1A1α
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Labor supplyCompare the costs and bene�ts of working: cost of working an extrahour is the loss of an hour of leisure; bene�t is an increase in realincome of W/P. If bene�ts exceed the cost, then increase theamount of time you work.
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Increase in wage
Two opposite e¤ects on labor supply:
1 substitution e¤ect: an increase in real wages raises the bene�t ofworking which makes the worker want to supply more labor (andsubstitute away from leisure)
2 income e¤ect: an increase in real wages makes people �wealthier�:same amount of work earns them a higher real income means theycan now a¤ord to buy more leisure.
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Examples
Example: U(c , z) = c0.5z0.5; c = wl ; l = labor supply, z = leisure;l + z = 1; result: inelastic labor supply
Example: U(c , z) = 1000c + 10000z � c2; c = wl ; 10 < w < 20,w > 20
backward-bending labor supply?
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Trend in hours worked
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Cross country evidence
income e¤ect of wage change on labor supply explains why richcountries have shorter work-weeks.Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Equilibrium
why is it an equilibrium? because wages are �exible in both directionsJoydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Equilibrium
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Notion of e¢ ciency wages
Workers may choose to shirk; unobservable to employer; gets �red ifcaught but gets re-hired at market clearing wage
e¢ ciency wage raises the opportunity cost of shirking; higher wagesassociated with low labor demand and may cause unemployment
induces worker discipline in two ways
explains why unemployment does not go to zero even during booms
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Wage inequality
Between 1945-1970, real wages in the US grew at a steady pace.Since 1970,
1 overall growth in real wages has slowed considerably
2 real wages have become more unequal
Figure: takes 1970 as the starting point (0). Then looks at thechange in real wages relative to 1970 for all groups of workers.
Notion of wage distribution.
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Wage inequality
The line1-10 shows the change in the average real wage of workerswhose wages are in the bottom 10% of the wage distribution in anygiven year.
Points to note: lowest-paid workers have su¤ered signi�cant declinesin their real wages; even the top-paid 40% of workers have seen onlymodest gains in real wages. What are some explanations for this?
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
skill-biased technical change
To understand this, we introduce the notion of skill-biased technicalchange.
Assume there are two types of workers: skilled and unskilled.
Skill-biased technical change refers to a change in A that raises theproductivity of highly trained workers more than that of the unskilled.
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Initial equilibrium: Point A in left �gure is higher than point A inright �gure
Introduction of computers is a bene�cial shock to the skilled, and anegative shock to the unskilled.
It has been seen that workers who can use computers in their jobsenjoy a 10-15% wage premium over similar workers who are nottrained to use computers.
Fact: unskilled workers have responded to the very low wagesavailable to them by signi�cantly reducing the amount of labor theysupply; e¤ects on welfare.
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
De�nitionsEvery body is either employed, unemployed, or not in the labor force.
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Flows
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
22% of unemployed people in a typical month will be employed thefollowing month and 13% of the unemployed people will leave thelabor force (say become homemakers or go back to school)
Why is there some unemployment even though the economy may bedoing well?
Natural rate of unemployment: the average rate of unemploymentaround which the unemployment rate in the economy �uctuates
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Natural rate
We want to know what determines and changes the natural rateJoydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Job Loss, Job Finding and the Natural Rate
Let
N = total population
L = labor force
E = number of employed
U = number of unemployed
L = U + E (2)
Unemployment rate isUL
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
E = L� ULet s = rate of job separation (fraction of employed workers who losetheir jobs every month)
Let f = rate of job �nding (fraction of unemployed individuals who�nd a job each month)
If the rate of unemployment is not changing, then the number ofpeople losing jobs (sE ) must equal the number of people �nding jobs(fU), or
fU = sE (3)
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
Since E = L� U, implies
fU = s (L� U) (4)
UL=
s[f + s ]
(5)
or, the rate of unemployment (i.e., UL ) depends on the rate of job�nding (f ), and rate of job separation (s).
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment
The Labor Market Labor Demand Labor Supply Labor Market Equilibrium Technical change and wage inequality Unemployment
higher f implies lower U/Lhigher s implies higher U/LFor the US: when unemployment is high, the proportion ofunemployed workers �nding jobs is low; also, a higher proportion ofworkers lose their jobs.
Joydeep Bhattacharya Iowa State
Labor Markets and Unemployment