ch09 all macro__lecture_ppt

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Chapter 9 Employment and Unemployment


9 Employment and Unemployment

Chapter Outline

9.1 Measuring Employment and Unemployment9.2 Equilibrium in the Labor Market9.3 Why Is There Unemployment?9.4 Job Search and Frictional Unemployment9.5 Wage Rigidity and Structural UnemploymentEBE What happens to employment and unemployment

if local employers go out of business?



Key Ideas

1. Potential workers fall into three categories: employed, unemployed, and not in the labor force.

2. The level of employment and the level of wages are determined by firms’ labor demand, workers’ labor supply, and various wage rigidities.

3. Frictional unemployment arises because it takes time for an unemployed worker to learn about the condition of the labor market and find a new job.



Key Ideas

4. Structural unemployment arises because wage rigidities prevent the quantity of labor demanded from matching the quantity of labor supplied.

5. Cyclical unemployment is the difference between the unemployment rate and its long-term average.


9.1 Measuring Employment and Unemployment

Unemployment takesa terrible toll on the economic, social, and psychological well-being of the unemployed.

In this chapter, we look at how the unemployment rate is measured and why it rises during recessions.



Potential workers Everyone in the general population except: • Children under 16 years• Active military personnel• Institutionalized persons



Children + active mili-tary + insti-tutionalized

persons, 69.8

Potential workers, 248.4



Potential workers are divided into three categories:

1. Employed persons hold a paid full-time or part-time job.

2. Unemployed persons are without a job and are actively searching for one.

3. Not in labor force persons are without a paid job and not actively searching for one.



What is the classification of each of these people?• Unionized electrician• Part-time coffee-shop barista• Former auto worker seeking new employment• Former auto worker collecting disability• Full-time college student• Retired grandmother• Stay-at-home father



Not in Labor force, 92.6

Employed persons, 146.6

Unemployed persons, 9.3



Labor force = Employed + Unemployed

Unemployed Unemployment rate = 100% Labor force

Labor force Labor force participation rate = 100% Potential workers



Example 1: Calculate the actual labor force participation and unemployment rates.

United States (in millions) Sep-08 Sep-14National Population 305.9 318.2 Children + active military + institutionalized persons 71.5 69.8 Potential workers 234.4 248.4 Not in Labor force 79.8 92.6 Labor force 154.6 155.8 Employed persons 145.1 146.6 Unemployed persons 9.5 9.3

Labor force population rate = ___._% ___._%Unemployment rate = ___._% ___._%



Solution: Calculate the actual labor force participation and unemployment rates.



Example 2: Consider a different situation, an alternative that economists call a counterfactual.

Calculate the unemployment rate today and in September 2008 if labor force participation had stayed the same.



Calculate the counterfactual unemployment rate:


Labor force population rate = 66.0% 66.0%Unemployment rate = 6.1% ___._%




Labor force population rate = 66.0% 66.0%Unemployment rate = 6.1% 10.7%

Answer to Example: Calculate the counterfactual unemployment rate:



Question: What happens to the unemployment rate during the following situations:

1. A recession, when firms tend to fire workers.

2. An expansion, when firms tend to hire workers.

3. A “normal period” when firms do neither.



Exhibit 9.2 The U.S. Unemployment Rate from 1948 to 2014



Question: Who would be more likely to be unemployed?

• A high school-educated tax driver • A college-educated electrical engineer

Hint: Think about the opportunity cost of not working for each person.



Question: Who would be more likely to be unemployed?

Answer: A high school-educated tax driver is more likely to be unemployed because he or she faces a lower opportunity cost of not working.



Exhibit 9.3 Unemployment Rates for Different Educational Groups


The labor market is where the equilibrium real wage and quantity of labor are determined.

The demand for labor is determined by firms that want to maximize profits.

The supply of labor is determined by workers who want to maximize utility.

9.2 Equilibrium in the Labor Market


Firms seek to maximize profits.

A firm will hire as long as the marginal benefit is greater than or equal to the additional cost.


Marginal benefit Marginal cost ≥


The marginal benefit is the value of the marginal product of labor—the increase in revenue resulting from hiring an additional worker.

The marginal cost is the market wage.



A profit-maximizing firm will hire the amount of labor that makes the value of the marginal product of labor equal to the market wage.


Value of the marginal

product of labor

Market wage ≥


Question: Given the following information, how many barbers will the firm hire?

Number of Barbers

Total

Revenue

Value of the Marginal Product

of LaborMarket Wage

1 $25 $15 2 $45 $15 3 $55 $15 4 $60 $15



Answer: The firm will hire two barbers:


Number of

Barbers

Total

Revenue

Value of the Marginal Product of Labor

Market Wage

1 $25 $25 > $15 2 $45 $20 > $15 3 $55 $10 < $15 4 $60 $5 < $15


Question: How many cooks will the firm hire?

We need to calculate total revenue first:

Number of Cooks

Total Meals

ProducedPrice per

MealTotal

Revenue1 4 $10 2 7 $10 3 9 $10 4 10 $10



Number of Cooks

Total Revenue

Value of the Marginal Product of Labor

Market Wage

1 $40 $20 2 $70 $20 3 $90 $20 4 $100 $20


Question: How many cooks will the firm hire?


Answer: The firm will hire three cooks:

Number of

CooksTotal Revenue

Value of the Marginal Product of

LaborMarket Wage

1 $40 $40 > $20 2 $70 $30 > $20 3 $90 $20 = $20 4 $100 $10 < $20



Labor demand curve A curve that depicts the relationship between the quantity of labor demanded and the wage.

The labor demand curve is the value of the marginal product of labor because profit-maximizing firms hire workers until that value equals the wage.



The labor demand curve slopes downward because the marginal product of labor diminishes as more labor is used.




Exhibit 9.4 The Value of the Marginal Product of Labor Is the Labor Demand Curve


The labor demand curve shifts when a change in any of the following occurs:

1. Output price of the good or service2. Demand for the good or service3. Technological progress and high productivity 4. Input prices of labor, capital, and land




Exhibit 9.5 Downward-Sloping Labor Demand Curve


Each of the following will shift the labor supply curve to the left in our cook example

1. A decrease in labor force participation

2. An increase in child care costs

3. A decrease in immigration



Workers supply labor to optimally allocate their time between paid work, leisure, and other activities, like child care and other home production.

Question: What will happen if the worker is offered a higher wage?

Answer: The worker will work more, play less, and try to reduce home production.



Labor supply curve A curve that depicts the relationship between the quantity of labor supplied and the wage.

The labor supply curve slopes upward because workers respond to higher wages by wanting to work more hours.




Exhibit 9.6 Upward-Sloping Labor Supply Curve


The labor supply curve shifts when a change in any of the following occurs:

1. Tastes or preferences2. Opportunity cost of time3. Population and demographics



Equilibrium in a competitive labor market occurs at the intersection of the labor demand and labor supply curves.

At the equilibrium wage (w*), the quantity of labor demanded is equal to the quantity of labor supplied.




Exhibit 9.7 Equilibrium in the Labor Market


Answer 1: Job seekers looking for the right job (frictional unemployment).

9.3 Why Is There Unemployment?


Answer 2: Unemployed workers would be willing to work at the prevailing wage rate but are unable to find employers who will hire them (structural unemployment).

9.3 Why Is There Unemployment?


Firms do not have complete information on the skills, experiences, and preferences of job seekers.

9.4 Job Search and Frictional Unemployment


Job seekers do not have complete information on the specifics of each job opening.



As a result, workers must undertake a time-consuming job search (i.e., sending resumes, interviewing, networking) to find the right job.

Unemployment that arises because workers have imperfect information about job openings and need to engage in a time-consuming job search is called frictional unemployment.



There also could be wage rigidity, where the market wage, w, is held above the market-clearing level, w*.

Unemployment that results from a persistent gap between the quantity of labor supplied, L, and the quantity of labor demanded, L*, is called structural unemployment.

9.5 Wage Rigidity and Structural Unemployment



Exhibit 9.8 Labor Supply and Labor Demand in a Market with a Minimum Wage


Question: What can cause wage rigidity?

• Minimum wage laws are imposed.• Labor unions negotiate higher wages.• Firms pay higher wages to raise worker

productivity.• Workers resist wage reductions.



The U.S. federal government, most states, and a few cities have minimum wage laws, which prohibit employers from hiring workers for less than a given (or minimum) hourly wage rate.

Minimum wage laws can keep the wage above the market-clearing wage, w*, and thus create structural unemployment.



Exhibit 9.8 Labor Supply and Labor Demand in a Market with a Minimum Wage



Minimum wage laws cannot be the main cause of unemployment.

Why? In 2013, 1.5 million workers (1% of total) were paid the minimum wage.

There were 1.6 million unemployed college graduates whose median hourly wage rate was close to $30 per hour.



Labor unions negotiate contracted wage rates through collective bargaining that may be above the market-clearing wage, w*.



Collective bargaining cannot be the main cause of unemployment.

Why? In 2013, only 14.5 million workers (11% of total) were members of public- and private-sector unions.



Firms may willingly pay above the market-clearing wage to increase worker productivity.

These efficiency wages increase productivity by:

1. Reducing worker turnover2. Reducing shirking 3. Motivating workers to work harder4. Improving the quality of job applicants



Efficiency wages cannot be the main cause of unemployment.

Why? Although there are large wage differences across industries and professions, most of this is explained by productivity differences.



Workers are highly adverse to reductions in wages, resulting in what economists call downward wage rigidity.

As a result, most firms would rather fire some workers than cut wages of all or many workers.




Exhibit 9.9 Shifts in Labor Demand Affect Equilibrium in the Labor Market


We can see the importance of downward wage rigidity by looking at the distribution of wage increases at one large firm in 2008 during the Great Recession.




Exhibit 9.10 The Distribution of Wage Increases at One Large Firm in 2008


Evidence-Based Economics Example

Question: What happens to employment and unemployment if local employers go out of business?

Data: Community-level data on employment, unemployment, and industry composition plus national data on industry-by-industry growth in Chinese imports from 1990 to 2007.



From 1990 to 2007, the unemployment rate in Pittsburgh, Pennsylvania, fell from 7.3% to 5.5%.

From 1990 to 2007, the unemployment rate in Raleigh-Durham, North Carolina, rose from 4.0% to 5.9%.

Why the difference?




Exhibit 9.11 A Tale of Two Cities


Pittsburgh specialized in industries such as paper, printing, and metal products that had “low exposure” to competition from Chinese imports.

Raleigh-Durham specialized in industries such as textiles, apparel, and electronic products that had “high exposure” to competition from Chinese imports.



As a result, the labor demand curve in Raleigh-Durham shifted more to the left than in Pittsburgh, and this, combined with wage rigidity, led to more unemployment in Raleigh-Durham.



Evidence-Based Economics Example:

Question: What happens to employment and unemployment if local employers go out of business?

Answer: Communities with a high level of exposure to competition from Chinese imports between 1990 to 2007 experienced an increase in the local rate of unemployment relative to communities with low exposure.
