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 (vacation, sick)
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-weekperiod 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 (Table B35 from Econ.
Report)
1990/2011 Data
Adult Civilian Noninst.
Population
(189.164 m / 238.618m.)
Civilian Labor Force
(125.840m / 153.617
m.)
Employed
(118.793m./ 139.869 m.)
Not in labor force
(63.324m /
85.001m)
Unemployed
(7.047m / 13.747m)
Labor force measures
1990
Unemployment rate
Labor force participation rate
Employment rate
2011
1. Between 2010 & 2011, unemployment rate and employment rate both fell.
How is this possible?
2. Based on the growth in Civilian Non-institutional Population between 2010
and 2011, how many jobs would have to be added over the year to keep the
unemployment rate at 9.6% if LFPR
a. stayed at 2010 level (64.7%)?
b. drops to 2011 level (64.1%)?
c. rises to level prior to recession (66.0%)?
• 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?
• Unemployment and employment rates by
state.
Labor Earnings
• Wage rate X hours worked =Earnings
• Earnings + Benefits = Total Compensation
• Total compensation + unearned (nonlabor) income = Total Income
Earnings Measures
Real versus Nominal Wages.
• CPIt = 100 *
Cost of bundle in t
Cost of bundle in baseyear
Nom. Waget
• Real Waget = (CPI / 100)
t
• 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
2010?
• If a person’s nominal wage rose from $10 per
hour in 2000 to $11 per hour by 2010, 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 San
Francisco and his earnings rose from
$50,000 to $70,000, did his real earnings
rise or fall?
• What are some of the problems with the
Cinci/San Francisco 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 (consumer versus
intermediate goods)
– Increased demand for product