copyright © 2001 by the mcgraw-hill companies, inc. all rights reserved. slide 9 - 0 workers,...

1

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

Workers, Wages, and Unemployment in the

Modern Economy

2


ModernizationOne of the most striking features of the modern world

The close juxtaposition of rapid economic and technological change with traditional values and customsSome countries are comfortable

combining the traditional and the modern

Some countries are not comfortable (Modernization has widen the gap between the “haves” and the “have-nots”)

3


Importance of Labor Markets

Most people rely almost entirely on wages and salaries to consume and saveSo, it is in the labor market where most

people see the benefits of growth

4


Trends in Real Wages

1. Over the 20th century, all industrial countries have enjoyed substantial growth in real wages1999 U.S. workers earnings commanded 4 times

that of 19292. Since the early 1970s however, the rate of

real wage growth has slowed1960-1973 2.57% increase in income1973-1996 0.93% increase in income1996-1999 3.33% increase in income

5


Trends in Employment and Unemployment

3. Recent decades have brought a pronounced increased in wage inequality in the U.S.Growing gap between skilled and unskilled

4. In the U.S., the number of people with jobs has grown substantially in recent decades34% increase in employment 1980-1999

5. Western European countries have been suffering high rates of unemployment for almost 2 decadesDouble-digit unemployment was common

6


Supply and Demand in the Labor Market

“Price” The wage paid to workers--measured per hour or

per year“Quantity”

The amount of labor firms use--measured by the number employed

“Demanders”Firms and employers

“Suppliers”laborers

7


Wages and the Demand for Labor

Demand for labor depends uponThe productivity of laborThe market price of the output

Employers want to hire more employees whenWorkers are more productiveGoods and services workers produce

become more valuable

8


Diminishing Returns to Labor

Marginal ProductThe extra production gained by adding one more

workerDiminishing returns to labor

If the amount of capital and other inputs in use is held constant,

Then the greater the quantity of labor already employed,

And the less each additional worker adds to production

9


Value of Marginal Product

Value of marginal productThe amount of extra revenue that each

worker generates for the firmEquals the worker’s marginal product

multiplied by the price of the output

10


Fig. 9.1The Demand Curve for Labor

11


Shifts in Demand for Labor

Increases in the value of marginal product will increase the demand for labor

Two main factors shift labor demand1. Increase in the price of the output2. Increase in the productivity of workers

12


Fig. 9.2A Higher Relative Price of Output Increases the Demand for Labor

13


Fig. 9.3Higher Productivity Increases the

Demand for Labor

14


Supply of Labor

The total number of people who are willing to work at each real wage is the supply of labor

At any given real wage, potential suppliers of labor must decide if they are willing to workYour reservation price is the minimum

payment you would be willing to accept

15


Fig. 9.4The Supply of Labor

16


Shifts in the Supply of Labor

For macroeconomistsThe most important factor shifting the

supply of labor is the size of the working-age populationDomestic birthrateImmigration and emigration ratesAge of entering and leaving the labor force

17


Trends in Real Wages and Employment

Why have real wages increased by so much in the industrial countries?Increases in productivity increase the

demand for laborIncreases in the demand for labor increase

real wage rates

18


Fig. 9.5An Increase in Productivity

Raises the Real Wage

19



Since the 1970s, real wage growth in the U.S. has slowed, while employment has expanded rapidly. What accounts for these trends?Slowdown in the pace of productivity

gainsSimultaneous increases in the supply of

labor

20



Why has the gap between the wages of skilled and unskilled workers widened in recent years?GlobalizationTechnological change

21


GlobalizationGlobalization

Markets for many goods and services are becoming international, rather than national or local

It’s easier for goods to cross bordersGlobalization brings increased specialization

Makes consumers better offMay make domestic workers and firm owners worse

offGlobalization encourages worker mobility

The movement of workers between jobs, firms, and industries

22


Fig. 9.6The Effect of Globalization on the

Demand for Workers in Two Industries

23


Technological Change

Skill-biased technological changeTechnological change that affects the

marginal products of higher-skilled workers differently from those of lower-skilled workers

Simplest jobs are taken over by robots and computer-controlled machinery maintained by skilled operators

24


Fig. 9.7The Effect of Skill-Biased Technological

Change on Wage Inequality

25


Unemployment

Labor force includesEmployedUnemployed

Unemployment rate The percentage of the labor force that is

unemployed

26


Frictional Unemployment

Frictional unemploymentThe short-term unemployment associated with

the process of matching workers with jobsThe labor market is dynamic

New jobs are constantly being created and others endedPeople move, gain new skills, leave the labor force to

rear children

The costs are low (maybe negative)Better matches for firms and workers

27


Structural Unemployment

Structural unemploymentThe long-term and chronic unemployment that

exists even when the economy is producing at a normal rateLack of skillsLanguage barriersDiscriminationStructural features of the labor market (e.g., unions,

minimum wage laws)The costs are high

Long periods of unemployment are hard to recover from

28


Cyclical Unemployment

Cyclical unemploymentThe extra unemployment that occurs

during periods of recessionIncreases in unemployment in recessionsDecreases in unemployment in expansions

29


Total Unemployment

Total unemployment is the sum ofFrictional unemploymentStructural unemploymentCyclical unemployment

30


Impediments to Full Employment

A surplus of workers Minimum wage lawsLabor unions

Unemployment insuranceIncentive for longer searches

Other government regulationsCosts of complying with regulations can

be high

31


Fig. 9.8A Legal Minimum Wage

May Create Unemployment

32


Fig. 9.9Unemployment Rates in Western

Europe, 1980-1999

copyright © 2001 by the mcgraw-hill companies, inc. all rights reserved. slide 9 - 0 workers,...

Documents

income slide

production slide

output slide

common slide

valuable slide

mcgrawhill companies

benefits of growth slide

labor demand