Chapter 2.

The Labor Market: Definitions, Facts, and Trends .

Labor Force Measures

• (Adult) Civilian noninstitutional population.

– persons 16 years of age and older – residing in the 50 States & DC – not inmates of institutions (e.g., penal and mental facilities, homes for the aged), – not on active duty in the Armed Forces.

Labor Force Measures

• Employed persons. – during the reference week, • did any work at all (at least 1 hour) as paid employees, • worked in their own business, profession, or on their own farm, • or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family, • all those who were not working but who had jobs or businesses from which they were temporarily absent

Labor Force Measures

• Unemployed persons. – no employment during the reference week, – available for work, except for temporary illness, and made specific efforts to find employment some time during the 4-week period ending with the reference week. – Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.

Labor Force Measures

• Labor force. employed + unemployed • Unemployment rate. • Unemployed / Labor Force • Labor Force Participation rate. Labor Force / Civ. NonInst. Pop • Employment-population ratio. Employed/ Civ. Noninst. Pop. Historical Data Report) (Table B35 from Econ.

1994/2008 Data

Adult Civilian Noninst. Population (230.133 / 232.616 m.) Labor Force (136.297 / 153.824 m.) Not in labor force (66.836 / 78.792) Employed (129.558 / 146.248 m.) Unemployed (6.739 / 7.576)

Labor force measures

1994 2005 Unemployment rate Labor force participation rate Employment rate

• Start with  U=10 million, E=90 million, CNIP=200 million • What would happen to unempl rate, lfpr, and empl rate if – 10 million people out of labor force begin looking for work and 6 million find jobs.

– 1 million unemployed people become “discourage” and quit looking for work?

– 1 million unemployed people find new jobs?

– 1 million employed people lose jobs and .5 million choose to retire while the other .5 million begin search for new jobs.

Variation in unemployment rates

• Employment Situation from bls.gov

– Sex – Age – Education • Why is there a correlation between these characteristics and unemployment rates?

Draw maps at this link

Labor Earnings

• Wage rate X hours worked =Earnings • Earnings + Benefits = Total Compensation • Total compensation + unearned (non labor) income = Total Income

Earnings Measures

Real versus Nominal Wages.

• CPI t = 100 *

Cost Cost of of bundle bundle in in t baseyear

• Real Wage t =

Nom

.

Wage t

(

CPI t

/ 100 ) • Nominal Wage represents earnings in current dollars.

• Real Wage represents earnings in constant (base year) dollars.

Real versus Nominal Wages.

• Issues with Indexing – The bundle • Varies across people/time.

• Evidence that CPI over-states growth in cost of living by 1 to 1.5 percent per year.

– Quality of goods – Substitution effects • Point in time adjustments versus across time – Comparable salary in city j = salary in city k * city j cpi city k cpi

Real versus Nominal Wages.

• CPI data (available from BLS) • If a person earned $8 per hour in 1980, what would yield the equivalent purchasing power in 2009?

• If a person’s nominal wage rose from $10 per hour in 2000 to $11 per hour by 2009, what happened to her real wage (in 1982-84 dollars)?

Earnings Measures

• Cost of Living by City (ACCRA) • If a person moved from Cincinnati to Washington DC and their earnings rose from $50,000 to $60,000, did their real earnings rise or fall?

• What are some of the problems with the Cinci/DC comparison?

Labor Demand

• Changes in wages (move along D-curve) – scale effect – substitution effect • Changes in other factors (shift D-curve) – demand for product • scale effect, no substitution effect – supply of other inputs (e.g. capital) • scale effect and substitution effect

Labor Demand

• Market, Industry, and Firm Demand.

– different ways of measuring labor demand.

• Long run versus short run demand.

– substitution effects tend to be larger in the long run, making labor demand more elastic in the long run.

Labor Supply

• Labor supply curve.

– Market supply curve: upward sloping.

– Firm supply curve: horizontal in competitive market.

• Factors shifting labor supply: – population.

– alternative opportunities (other employment, nonemployment) – taxes – non-pecuniary aspects of job (fringes, risk, night shifts, etc.)

Labor Market Equilibrium

• If wage is below equilibrium: shortage.

• If wage is above equilibrium: surplus (unemployment).

• Shortages put upward pressure on wages. Surpluses put downward pressure on wages.

Labor Market Equilibrium

• Effect of – Increased population – Increased tax on employers – Increased tax on employees – Cheaper capital – Cheaper imports – Increased demand for product