Labor Market
1
Deindustrialization?
U.S. Manufacturing Employment
Manufacturing Wage Rate, 2005
Millions of Jobs
2
Wages by Education in the U.S.
3
Marginal Product of Labor
•Firms employ workers to produce good and services
• Marginal Product of Labor is the additional output
produced by a worker
4
Diminishing Marginal Productivity
• Diminishing marginal productivity of labor
MPN
k
MPN  0.7  A   
n
0.3
• MPN depends on A and k/n
• For given k and A a rise in n
leads to a fall in MPN
Fix k
n
5
The Determination of
Short-Run Labor Demand
MPN & w
MPN1
•
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 function
W*
MPN2
MPN
n1
n*
n2
n
w = MPN
Condition of profit maximization
6
Factors that Shift the Aggregate Labor Demand Curve
w
Increase in
A or k
• 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.
n
7
The Supply of Labor
w
ns
• Labor is supplied by households
• Aggregate labor supply increases
with wages
• Higher wealth lowers labor
supply at any wage
n
8
Short-Run Labor Market Equilibrium
(fix k)
w
• Real wage is determined so that labor
demand equals labor supply at point
X.
Z
X
MPN*
MPN
• An increase in TFP shifts the MPN
curve to MPN*.
• The new equilibrium is at point Z with
higher real wage and employment.
n
9
Recession
Sharp oil price rise
• Lowers A
• Lowers demand for
labor
• Lowers real wages and
real GDP
• This is a recession.
w
ns
MPN
MPN*
n
10
Oil Price
Real
Nominal
11
Unemployment
12
Wages across countries and time
13
Does the theory work?
• Are real wages proportional to labor productivity
over time?
• Are real wages proportional to labor productivity
across countries?
14
Real Wages and Productivity over time
15
International Wage Differences
16
Productivity and Wages
17
Real Wages and
Productivity Across Countries
Wages and Productivity
(Output per Worker) Across Countries
18
Do real wages converge?
19
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.
20
Job Creation and Destruction in the US
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
Job creation and destruction is significantly higher than net job creation.
21
Productivity and Resource Reallocation
Churning is the key to economic growth.
Source: John Haltiwanger, “New Ideas for Measuring Labor Productivity,” Census Brief, 1998.
22
Structural Transformation and Development
Source: Bah El-hadj, The University of Auckland, “Structural Transformation in Developed and Developing Countries,” 2008.
23
Real Wages and Hours Worked
24
Labor Market and Wealth
ns *
w
Z
•
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).
ns
X
MPN*
MPN
n
25
Income Inequality
26
Rise in Real Wage Dispersion
• Two potential explanations
– Open trade (greater globalization)
– Technological improvements
27
Skill Biased Technical Change
w
w
NS_unskilled
ND_unskilled
ND’_unskilled
N_unskilled
NS_skilled
ND’_skilled
ND_skilled
N_skilled
•Skill biased technical change increases demand for skilled workers and hence their wages
•The opposite is true for unskilled workers.
28
29
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
30
Skill Premia Across Countries
• Skill premia are highest for poor countries
• Poor countries have a shortage of skilled
workers
• Why?
31