Slide 9 - 0
Workers, Wages, and
Unemployment in the
Modern Economy
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 1
Modernization
One of the most striking features of
the modern world
The close juxtaposition of rapid
economic and technological change
with traditional values and customs
Some countries are comfortable
combining the traditional and the
modern
Some countries are not comfortable
(Modernization has widen the gap
between the “haves” and the “havenots”)
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 2
Importance of
Labor Markets
Most people rely almost entirely on
wages and salaries to consume and save
So, it is in the labor market where most
people see the benefits of growth
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
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Trends in Real Wages
1. Over the 20th century, all industrial
countries have enjoyed substantial growth in
real wages
1999 U.S. workers earnings commanded 4 times
that of 1929
2. Since the early 1970s however, the rate of
real wage growth has slowed
1960-1973 2.57% increase in income
1973-1996 0.93% increase in income
1996-1999 3.33% increase in income
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 4
Trends in Employment and
Unemployment
3. Recent decades have brought a
pronounced increased in wage inequality in
the U.S.
Growing gap between skilled and unskilled
4. In the U.S., the number of people with jobs
has grown substantially in recent decades
34% increase in employment 1980-1999
5. Western European countries have been
suffering high rates of unemployment for
almost 2 decades
Double-digit unemployment was common
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
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Supply and Demand in the
Labor Market
“Price”
The wage paid to workers--measured per hour or
per year
“Quantity”
The amount of labor firms use--measured by the
number employed
“Demanders”
Firms and employers
“Suppliers”
laborers
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 6
Wages and the Demand for
Labor
Demand for labor depends upon
The productivity of labor
The market price of the output
Employers want to hire more
employees when
Workers are more productive
Goods and services workers produce
become more valuable
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 7
Diminishing Returns to
Labor
Marginal Product
The extra production gained by adding one more
worker
Diminishing returns to labor
If the amount of capital and other inputs in use is
held constant,
Then the greater the quantity of labor already
employed,
And the less each additional worker adds to
production
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 8
Value of Marginal Product
Value of marginal product
The amount of extra revenue that each
worker generates for the firm
Equals the worker’s marginal product
multiplied by the price of the output
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 9
Fig. 9.1
The Demand Curve for Labor
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
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Shifts in Demand for Labor
Increases in the value of marginal
product will increase the demand for
labor
Two main factors shift labor demand
1. Increase in the price of the output
2. Increase in the productivity of workers
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
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Fig. 9.2
A Higher Relative Price of Output
Increases the Demand for Labor
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 12
Fig. 9.3
Higher Productivity Increases the
Demand for Labor
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
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Supply of Labor
The total number of people who are
willing to work at each real wage is the
supply of labor
At any given real wage, potential
suppliers of labor must decide if they
are willing to work
Your reservation price is the minimum
payment you would be willing to accept
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Fig. 9.4
The Supply of Labor
Slide 9 - 14
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 15
Shifts in the Supply of
Labor
For macroeconomists
The most important factor shifting the
supply of labor is the size of the workingage population
Domestic birthrate
Immigration and emigration rates
Age of entering and leaving the labor force
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 16
Trends in Real Wages and
Employment
Why have real wages increased by so
much in the industrial countries?
Increases in productivity increase the
demand for labor
Increases in the demand for labor increase
real wage rates
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Fig. 9.5
An Increase in Productivity
Raises the Real Wage
Slide 9 - 17
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 18
Trends in Real Wages and
Employment
Since the 1970s, real wage growth in the
U.S. has slowed, while employment has
expanded rapidly. What accounts for
these trends?
Slowdown in the pace of productivity
gains
Simultaneous increases in the supply of
labor
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 19
Trends in Real Wages and
Employment
Why has the gap between the wages of
skilled and unskilled workers widened
in recent years?
Globalization
Technological change
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 20
Globalization
Globalization
Markets for many goods and services are
becoming international, rather than national or
local
It’s easier for goods to cross borders
Globalization brings increased specialization
Makes consumers better off
May make domestic workers and firm owners
worse off
Globalization encourages worker mobility
The movement of workers between jobs, firms,
and industries
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
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Fig. 9.6
The Effect of Globalization on the
Demand for Workers in Two Industries
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
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Technological Change
Skill-biased technological change
Technological change that affects the
marginal products of higher-skilled
workers differently from those of lowerskilled workers
Simplest jobs are taken over by robots and
computer-controlled machinery
maintained by skilled operators
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 23
Fig. 9.7
The Effect of Skill-Biased Technological
Change on Wage Inequality
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
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Unemployment
Labor force includes
Employed
Unemployed
Unemployment rate
The percentage of the labor force that is
unemployed
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
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Frictional Unemployment
Frictional unemployment
The short-term unemployment associated with
the process of matching workers with jobs
The labor market is dynamic
New jobs are constantly being created and others ended
People move, gain new skills, leave the labor force to
rear children
The costs are low (maybe negative)
Better matches for firms and workers
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 26
Structural Unemployment
Structural unemployment
The long-term and chronic unemployment that
exists even when the economy is producing at a
normal rate
Lack of skills
Language barriers
Discrimination
Structural features of the labor market (e.g., unions,
minimum wage laws)
The costs are high
Long periods of unemployment are hard to recover
from
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
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Cyclical Unemployment
Cyclical unemployment
The extra unemployment that occurs
during periods of recession
Increases in unemployment in recessions
Decreases in unemployment in expansions
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 28
Total Unemployment
Total unemployment is the sum of
Frictional unemployment
Structural unemployment
Cyclical unemployment
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 29
Impediments to Full
Employment
A surplus of workers
Minimum wage laws
Labor unions
Unemployment insurance
Incentive for longer searches
Other government regulations
Costs of complying with regulations can
be high
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Fig. 9.8
A Legal Minimum Wage
May Create Unemployment
Slide 9 - 30
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 9 - 31
Fig. 9.9
Unemployment Rates in Western
Europe, 1980-1999
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.