Labor Market

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Labor Market. Deindustrialization?. U.S. Manufacturing Employment Millions of Jobs. Manufacturing Wage Rate, 2005. Wages by Education in the U.S. Marginal Product of Labor. Firms employ workers to produce good and services. - PowerPoint PPT Presentation

Transcript of Labor Market

  • Labor Market

  • Deindustrialization?U.S. Manufacturing EmploymentMillions of JobsManufacturing Wage Rate, 2005

  • Wages by Education in the U.S.

  • Marginal Product of LaborMarginal Product of Labor is the additional output produced by a workerFirms employ workers to produce good and services

  • Diminishing Marginal ProductivityDiminishing marginal productivity of labornFix kMPNMPN depends on A and k/n For given k and A a rise in n leads to a fall in MPN

  • The Determination of Short-Run Labor Demandw = real wage rate

    To maximize profits the firm shouldIncrease n if MPN > w*Decrease n if MPN < w*

    It follows that the demand for labor function equals the MPN functionMPNMPN & wnW*MPN1MPN2n1n2n*w = MPNCondition of profit maximization

  • Factors that Shift the Aggregate Labor Demand CurveAn increase in TFP causes the labor demand curve to shift right.

    An increase in the capital stock causes the labor demand curve to shift right. wnIncrease in A or k

  • The Supply of LaborLabor is supplied by households

    Aggregate labor supply increases with wages

    Higher wealth lowers labor supply at any wagens

  • Short-Run Labor Market Equilibrium(fix k)Real wage is determined so that labor demand equals labor supply at point X.

    An increase in TFP shifts the MPN curve to MPN*.

    The new equilibrium is at point Z with higher real wage and employment.MPN*MPNXZ

  • RecessionSharp oil price riseLowers ALowers demand for laborLowers real wages and real GDPThis is a recession.MPN*MPNns

  • Oil PriceRealNominal

  • Unemployment

  • Wages across countries and time

  • Does the theory work?

    Are real wages proportional to labor productivity over time? Are real wages proportional to labor productivity across countries?

  • Real Wages and Productivity over time

  • International Wage Differences

  • Productivity and Wages

  • Real Wages and Productivity Across CountriesWages and Productivity(Output per Worker) Across Countries

  • Do real wages converge?

  • Size Distribution of Firms in the USOver half of all employment is in small firms.Source: Brian Headd, The Characteristics of Small-Business Employees, Monthly Labor Review, 2000.

  • Job Creation and Destruction in the USJob creation and destruction is significantly higher than net job creation. 2006Q2: - 7.8 million jobs created - 7.3 million jobs destroyed - .5 million net change in number of jobsJob creation: net employment change of establishments expanding employment

    Job destruction: net employment change of establishments reducing employment

  • Productivity and Resource Reallocation Churning is the key to economic growth.Source: John Haltiwanger, New Ideas for Measuring Labor Productivity, Census Brief, 1998.

  • Structural Transformation and DevelopmentSource: Bah El-hadj, The University of Auckland, Structural Transformation in Developed and Developing Countries, 2008.

  • Real Wages and Hours Worked

  • Labor Market and WealthA permanent rise in A raises MPN and thus shifts out the labor demand curve.

    A permanent rise in A raises wealth and thus shifts left the labor supply curve.

    The new equilibrium is at point Z with higher real wage and possibly lower employment.

    Note, though, that hours worked per person may fall, but a rise in wages may lead to a rise in the labor force participation rate (especially for relatively poor countries).MPN*MPNXZns*ns

  • Income Inequality

  • Rise in Real Wage DispersionTwo potential explanationsOpen trade (greater globalization)Technological improvements

  • Skill Biased Technical ChangewN_unskilledND_unskilledND_unskilledNS_unskilledN_skilledwND_skilledND_skilledNS_skilledSkill biased technical change increases demand for skilled workers and hence their wagesThe opposite is true for unskilled workers.

  • Key MessageWage premium for skills have gone up and relative supply have been catching up

    The information technology (IT) revolution is biased toward skilled labor

  • Skill Premia Across CountriesSkill premia are highest for poor countries

    Poor countries have a shortage of skilled workers

    Why?