Transcript Introduction to Labor Economics

Introduction to Labor
Economics
Chapter 2 - The Labor
Market
National and local labor
markets
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national labor market
National and local labor
markets
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national labor market
local labor market
Internal labor market
A firm uses an internal labor market if:
 external hiring is used primarily for
entry-level jobs, and
 higher level positions are filled by
promotion from within the firm.
Internal labor market
Internal labor markets exist because the use of such
markets:
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reduces hiring and training costs,
improves employee morale and
motivation, and
reduces the effect of uncertainty.
Primary vs. Secondary labor
markets
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primary labor market - high wages and
stable employment relationships.
secondary labor market - low wages
and unstable employment relationships.
Labor force and
unemployment
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labor force = noninstitutionalized
individuals aged 16 or above who are
either working or actively seeking work.
unemployed = those who are not
working but are “actively seeking work”
Unemployment rate
• Discouraged workers are workers who have given up looking
for work.
• An increase in the number of discouraged workers causes the
unemployment rate to fall.
Labor force participation rate
• the labor force participation rate rises during an expansion and
falls during a recession.
• fluctuations in the labor force participation rate over the course of
the business cycle dampen cyclical fluctuations in the
unemployment rate.
Trend in unemployment rates
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unemployment rates in the latter half of
the 20th century were higher than in
the first half
Trends in labor force
participation rates
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the labor force participation rate has
declined for males (primarily for males
in their early 20s and over 62).
the labor force participation rate has
increased for females (particularly for
married females).
Sectoral shifts in employment
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primary sector (agricultural) employment has
declined as a share of the labor force,
secondary sector (industrial) employment has
declined slightly as a share of the labor force,
but only in the past few decades, and
tertiary sector (service sector) employment
has increased as a share of the labor force.
Reasons for the shifts in
employment
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the primary sector (agriculture) is
characterized by rapid growth in labor
productivity and a low income elasticity of
demand,
the secondary sector is characterized by rapid
growth in labor productivity and a moderately
high income elasticity of demand, and
the tertiary sector is characterized by slow
growth in labor productivity and a high
income elasticity of demand.
Nominal and real wages
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Nominal wages are not adjusted for inflation
and are said to be expressed in terms of
“current dollars.”
Real wages are wages that have been
adjusted to take into account the effect of
inflation. Real wages are expressed in terms
of dollars from a given base year and are said
to be expressed in “constant dollars.”
Price index
Problems with the CPI
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inflationary bias (substitution bias)
difficulty in adjusting for quality change
Wages, earnings, total
compensation, and income
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wage = payment per unit of time
earnings = wage x hours
total compensation = earnings + fringe
benefits
fringe benefits = payments-in-kind +
deferred compensation
income = total compensation + unearned
income (or income = earnings + unearned
income)
Demand for labor
The labor demand curve is downward sloping
due to:
 a substitution effect, and
 a scale effect.
Substitution effect
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substitution effect - substitution of
other resources for a resource that
becomes relatively more expensive.
Scale effect
The scale effect associated with a wage increase
involves the following steps:
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higher wages result in higher average and
marginal costs of production,
leading to an increase in the equilibrium
price of the product,
leading to a reduction in the quantity of the
product demanded,
leading to a reduction in the use of all inputs
used to produce the product.
Slope of labor demand curve
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Both the substitution and scale effects result
in a reduction in the quantity of labor
demanded when the wage rate rises.
A change in the wage changes the quantity of
labor demanded, but does not affect labor
demand. Labor demand changes only if the
labor demand curve shifts in some manner
(as discussed below).
Shifts in labor demand
Labor demand may shift
due to changes in:
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the demand for
the product, and
the prices of
other resources.
Industry demand for labor
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An industry's demand for labor consists of the
total demand for a particular type of worker
in a given industry. (An industry consists of all
of the firms that produce a given type of
output.)
An industry's labor demand curve is
determined by adding together the labor
demand curves for all of the firms in the
industry.
Market demand for labor
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The market for a given category of
labor consists of all of the firms that
might hire a given type of labor,
regardless of the industry in which the
firm operates.
The market demand for labor is
determined by adding together all of
the industry demand for labor curves.
Long-run vs. short-run labor
demand
Market labor supply
The market labor supply curve is expected to be
upward sloping because an increase in the wage
in a particular labor market will:
 cause some workers in this market to work
additional hours,
 induce some workers to shift from other
labor markets to this relatively more
remunerative alternative employment, and
 will cause some individuals who are not
currently in the labor force to enter this
market.
Market labor supply
Shifts in market labor supply
curve
Shifts such as this may be
due to:
• changing wages in other
markets, or
•changes in worker tastes
and preferences
Labor supply to individual firms
Labor market equilibrium
Shifts in labor market
equilibrium
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an increase in labor demand results in an
increase in both the equilibrium wage and the
equilibrium level of employment,
a reduction in labor demand results in a
decrease in both the equilibrium wage and
the equilibrium level of employment,
an increase in labor supply results in a lower
equilibrium wage, but a higher equilibrium
level of employment, and
a reduction in labor supply results in a higher
equilibrium wage, but a lower equilibrium
level of employment.
Two types of unions
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industrial union
trade union (also known as a craft
union)
Collective bargaining
agreement
Supply restriction
Overpaid and underpaid
workers
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economists argue that workers are
overpaid if their wage is above the
equilibrium,
workers are underpaid if their wage is
below the equilibrium wage.
Economic rent
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Workers receive economic rent when they
receive a payment that exceeds the
opportunity cost of supplying their labor.
The opportunity cost of supplying labor is the
value of this time in its next-best alternative
use.
Another name for this opportunity cost is the
"reservation wage," the lowest wage offer an
individual will accept.
International comparisons of
unemployment rates
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As your text notes, unemployment rates
have, in recent decades, generally been
higher in Europe than in the United
States.
It is argued that this is because
nonmarket forces are more important in
wage setting in Europe.