1 labor market. 2 deindustrialization? u.s. manufacturing employment millions of jobs manufacturing...
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1
Labor Market
2
Deindustrialization?
U.S. Manufacturing EmploymentMillions of Jobs
Manufacturing Wage Rate, 2005
3
Wages by Education in the U.S.
4
Marginal Product of Labor
• Marginal Product of Labor is the additional output produced by a worker
•Firms employ workers to produce good and services
5
Diminishing Marginal Productivity
• Diminishing marginal productivity of labor
3.0
7.0
n
kAMPN
n
Fix k
MPN• MPN depends on A and k/n
• For given k and A a rise in n leads to a fall in MPN
6
The Determination of Short-Run Labor Demand
• w = real wage rate
• To maximize profits the firm should– Increase n if MPN > w*– Decrease n if MPN < w*
• It follows that the demand for labor function equals the MPN functionMPN
MPN & w
n
W*
MPN1
MPN2
n1 n2n*
w = MPNCondition of profit maximization
7
Factors that Shift the Aggregate Labor Demand Curve
• An 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.
w
n
Increase in A or k
8
The Supply of Labor
• Labor is supplied by households
• Aggregate labor supply increases with wages
• Higher wealth lowers labor supply at any wage
w
n
ns
9
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*
MPN
w
n
X
Z
10
Recession
Sharp oil price rise• Lowers A• Lowers demand for
labor• Lowers real wages and
real GDP
• This is a recession.
w
n
MPN*
MPN
ns
11
Oil Price
Real
Nominal
12
Unemployment
13
Wages across countries and time
14
Does the theory work?
• Are real wages proportional to labor productivity over time?
• Are real wages proportional to labor productivity across countries?
15
Real Wages and Productivity over time
16
International Wage Differences
17
Productivity and Wages
18
Real Wages and Productivity Across Countries
Wages and Productivity(Output per Worker) Across Countries
19
Do real wages converge?
20
Size Distribution of Firms in the US
Over half of all employment is in small firms.Source: Brian Headd, “The Characteristics of Small-Business Employees,” Monthly Labor Review, 2000.
21
Job Creation and Destruction in the US
Job 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 jobs
Job creation: net employment change of establishments expanding employment
Job destruction: net employment change of establishments reducing employment
22
Productivity and Resource Reallocation
Churning is the key to economic growth.
Source: John Haltiwanger, “New Ideas for Measuring Labor Productivity,” Census Brief, 1998.
23
Structural Transformation and Development
Source: Bah El-hadj, The University of Auckland, “Structural Transformation in Developed and Developing Countries,” 2008.
24
Real Wages and Hours Worked
25
Labor Market and Wealth
• A 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*
MPN
w
n
X
Z
ns
*ns
26
Income Inequality
27
Rise in Real Wage Dispersion
• Two potential explanations– Open trade (greater globalization)– Technological improvements
28
Skill Biased Technical Change
w
N_unskilled
ND_unskilled
ND’_unskilled
NS_unskilled
N_skilled
w
ND_skilled
ND’_skilled
NS_skilled
•Skill biased technical change increases demand for skilled workers and hence their wages
•The opposite is true for unskilled workers.
29
30
Key Message
• Wage premium for skills have gone up and relative supply have been catching up
• The information technology (IT) revolution is biased toward skilled labor
31
Skill Premia Across Countries
• Skill premia are highest for poor countries
• Poor countries have a shortage of skilled workers
• Why?
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