workers, wages and unemployment in the modern economy chapter 8
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Workers, Wages and Unemployment in the Modern
Economy
Chapter 8
Two Themes
• Globalization
• Technological change
Five Labor Market Trends
• Over the long period real wages have increased.• Real wage growth started to slow in the early
1970’s.• Wage inequality has increased. • Employment has grown faster than the working
age population.• Since about 1980 western European nations
have experienced high rates of unemployment.
Three Factors of Production
Land
Labor
Capital
Derived Demand
The demand for factors of production is derived from the demand for the end products.
For example, if computer software is in high demand, then demand for computer programmers will be high.
Figure 1 The Versatility of Supply and Demand
Copyright©2003 Southwestern/Thomson Learning
Quantity ofApples
0
Price ofApples
Demand
Supply
Demand
Supply
Quantity ofApple Pickers
0
Wage ofApple
Pickers
(a) The Market for Apples (b) The Market for Apple Pickers
P
Q L
W
Definitions
Marginal product of labor (MPL): output of the last worker
Value of marginal product of labor (VMPL): value of output of the last worker
VMPL = P x MPL
Figure 2 The Production Function
Copyright©2003 Southwestern/Thomson Learning
Productionfunction
Quantity ofApple Pickers
0
Quantityof Apples
300280
240
180
100
1 2 3 4 5
Copyright©2004 South-Western
Figure 3 The Value of the Marginal Product of Labor
Copyright©2003 Southwestern/Thomson Learning
0 Quantity ofApple Pickers
0
Value of the
MarginalProduct
Value of marginal product(demand curve for labor)
Marketwage
Profit-maximizing quantity
Shift Factors for Labor Demand
• Output Price
• Technological Change
• Supply of Other factors
Labor Supply
Labor supply reflects a trade-off between earnings from work and enjoyment of leisure.
Opportunity cost of leisure is foregone earnings.
Shift Factors for Labor Supply Curve
• Changes in Tastes
• Changes in Alternative Opportunities
• Immigration/ Outsourcing
Figure 5 A Shift in Labor Supply
Copyright©2003 Southwestern/Thomson Learning
Wage(price of
labor)
0 Quantity ofLabor
Supply, S
Demand
2. . . . reducesthe wage . . .
3. . . . and raises employment.
1. An increase inlabor supply . . .
S
W
L
W
L
Figure 6 A Shift in Labor Demand
Copyright©2003 Southwestern/Thomson Learning
Wage(price of
labor)
0 Quantity ofLabor
Supply
Demand, D
2. . . . increasesthe wage . . .
3. . . . and increases employment.
D
W
L
W
L
1. An increase inlabor demand . . .
Types of Unemployment
– Frictional
– Cyclical
– Structural
Unemployment
• Labor Unions– Benefits
• Reduced worker exploitation• Support progressive labor legislation• Increase productivity• Promote democracy in the workplace
Unemployment
• Labor Unions– Costs
• Unions cause otherwise competitive labor markets to function inefficiently.
• Unions may prevent companies from competing in the global economy.
Unemployment
• Unemployment Insurance:– Helps to reduce the costs of unemployment.– May give the unemployed an incentive to
search longer and less intensely.– Unemployment benefits must balance the
benefit of providing support to the worker with the cost of reducing the incentive to work.
Unemployment
• Other Government Regulations– Health and Safety Regulations
• These regulations can reduce the demand for labor by:
– Increasing employer costs.– Reducing productivity.
• The reduction in demand will:– Increase unemployment.– Lower wages.
Unemployment Rates in Western Europe, 1980 - 2001
Reasons for high unemployment
– Structural Rigidities• Regulated labor markets• High minimum wages• Generous unemployment benefits• Powerful labor unions
Five Labor Market Trends
• Over the long period real wages have increased.• Real wage growth started to slow in the early
1970’s.• Wage inequality has increased. • Employment has grown faster than the working
age population.• Since about 1980 western European nations
have experienced high rates of unemployment.