The Labor Market : Wages … Prices … Wages
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Transcript of The Labor Market : Wages … Prices … Wages
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The Labor MarketThe Labor Market: Wages … Prices … Wages: Wages … Prices … Wages
Higher production requires an increase in Higher production requires an increase in employmentemploymentHigher employment reduces unemploymentHigher employment reduces unemploymentLower unemployment puts pressure on wagesLower unemployment puts pressure on wagesHigher wages increase production costs and Higher wages increase production costs and pricespricesHigher prices lead workers to ask for higher Higher prices lead workers to ask for higher wages….wages….Prices and wages (the labor market) adjust Prices and wages (the labor market) adjust over the medium run and influence outputover the medium run and influence output
Medium Run Response to an Increase in Demand
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The Labor Market: The Medium RunThe Labor Market: The Medium Run
A Tour of the Labor Market
U.S. Population 2003 291.0 million Minus: Pop. under 16, -69.8 million Armed forces and
Incarcerated
Civilian Noninstitutional Pop. 221.2 million Civilian Labor Force 146.5 million Employed 137.7 million Unemployed 8.8 millionOut of the Labor Force 74.7 million
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The Labor Market: The Medium RunThe Labor Market: The Medium Run
A Tour of the Labor Market
)2003(%3.662.2216.146
PopulationtionalNoninstitu
ForceLaborThe participation rate=
The unemployment rate =The unemployment rate =
)2003(%0.65.146
8.8
ForceLaborUnemployed
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The Labor Market: The Medium RunThe Labor Market: The Medium Run
Employment127 million
Job Change3.5 million
Unemployment7.0 million
Out of laborforce
66.7 million
1.1
1.3
1.7
1.51.5
1.8
Labor Force Data, 1994 – 1999 (monthly flows)
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A Tour of the Labor MarketA Tour of the Labor Market
Differences Across Workers
Monthly Separation Rates for Different Groups, 1968-1986
Category
Male: Ages 16-19 35-44
Female: Ages 16-19 35-44
Monthly Separation Rate (%)(Quits and Layoffs)
15.91.6
16.15.0
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Movements in Unemployment
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88
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Movements in Unemployment
High Unemployment:•Increases the probability of workers losing their jobs•Reduces the probability of the unemployed finding a job•Increases the duration of unemployment
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Wage Determination
1. Workers’ wages exceed theirreservation wage
2. Wages depend on labor-marketconditions:•How easily can a worker be replaced?•How easily a worker can find another job?
•Efficiency Wages: Wages above the reservation wage that increase productivity and reduce the turnover rate.
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Wages and Unemployment
Wage determination:
),(),(
zuFPW e
W = WagePe = Expected price levelu = The unemployment ratez = Other variables that affect the wage setting
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The expected price level, Pe & wages
Wage Setting Behavior:
),(),(
zuFPW e
•Workers base their wage request on the purchasing power of their wages or real wage W/P•Employers base the wage they pay on the price of the product they sell or the real wage W/P•Therefore, if Price (P) increases, wages (W) increase
The unemployment rate, and wagesu
• Higher unemployment reduces bargaining power of labor and wages• Higher unemployment reduces the efficiency wage
The other factors and wages)(z• Unemployment insurance: higher benefits higher wages• Structural Economic Change: wages increase when jobs created exceed jobs destroyed
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Price Determination and the Production FunctionAssume labor is the only input, then
Output (Y) = ANN = EmploymentA = Labor Productivity
Assume A=1Y = N
If Y=N: then marginal cost = Wage (W)In non-competitive markets:
P=(1+µ)W µ= Markup of price over cost
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PW If markup (µ) increases
• Price (P) increases, given wages (W)
• Real wage falls
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The wage-setting relation
Pe = P in medium run, soW =P F(u,z)
),( zuFPW
),(
The higher the unemployment rate (u), the lowerthe real wage
PW
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The wage-setting relation:
),( zuFPW
),(
WS
Unemployment Rate, u
Rea
l Wag
e, W
/P
Wage-setting relation(W/P varies inversely with u)
The Price-setting relation:
1
1PW
Unemployment Rate, u
Rea
l Wag
e, W
/P
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PS
Price-setting relation(W/P is independent of u)
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Unemployment Rate, u
Rea
l Wag
e, W
/P
un – The natural rate of unemployment
Natural Rate of Unemployment …Structural Rate … Equilibrium Rate … NAIRU
Equilibrium Real Wages, Employment and Unemployment
Labor Market Equilibrium
WS
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PS
Wage-setting, F(u, Z) = Price-setting,
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A
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WS´ = F(u, Z´)
The Natural Rate of Unemployment / Structural Rate of Unemployment
= The unemployment rate at which wage-setters accept the real wage they must accept, given markup μ.
Is the natural rate of unemployment “natural”?Scenario: Increase unemployment benefits (z increases)
Unemployment Rate, u
Rea
l Wag
e, W
/P
WS = F(u, Z)
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PS
un
A B
un´The increase in Z increases un
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The Natural Rate of Unemployment
Scenario: More stringent antitrust legislation (µ decreases)
Rea
l Wag
e, W
/P
WS = F(u, Z)1
1PS
un un´The decrease in µ reduces un
´11 PS´
Unemployment Rate, u
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From Unemployment to Output
U = unemploymentN = employmentL = labor forceu = unemployment rate
LN
LNL
LUu
1
Rearranging for N: N=L(1-u)The Natural Level of Employment
N=L(1-u)un = natural rate of unemploymentNn = natural level of employmentNn = L(1-un)
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From Unemployment to Output
Equilibrium Unemployment Rate:
1
1),( zuF n
Natural level of output: )1()( nn uLY
11),1( z
LYF n
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Equilibrium Real Wages, Employment, and Unemployment
At Yn the associated
LYu
nn /
1
and the real wage chosen in wage settingequals the real wage implied by price setting.
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Short-Run • Price level may not equal the expected price
• Unemployment may not equal natural unemployment level
• Output may not equal natural output
Medium-Term
• Price level tends to equal expected prices
•Unemployment tends to the natural rate
•Output moves toward the natural rate
The Appropriate Time Frame