Actual Issues on Labour Market Economics Some Considerations

Important and extreme Labor Market Theories Neoclassical Theory Keynesian Theory

Neoclassical Labour Market Theory : Basics Microeconomic Decisions are relevant only Households decide on their supply of Hours of Work Firms decide on their demand for Working Hours The Market Clearing Wage Mechanism decides on the level of wages With a given level of market clearing wages the level of working number of hours is determined, too. That is an EQUILIBRIUM, nobody wants to change

Neoclassical Labour Market Theory : Basics At EQUILIBRIUM households are satisfied since their supply is employed At EQUILIBRIUM firms are satisfied since their demand for labour is provided There is no unwanted unemployment There are no undesired vacancies

Neoclassical Labour Market Theory : Equilibrium L w/p L* w/p*

Neoclassical Labour Market Theory : Hierarchy of Markets Neoclassical Theory : All Markets are EQUAL Prices and wages clear all markets You get a simultaneous EQUILIBRIUM

Keynesian Labour Market Theory : Basics Macroeconomic Developments are relevant Households have a more or less constant supply of Hours of Work Firms decide on their demand for Working Hours Bargaining Power decides on the level of wages Output Sales and Wages determine number of workin hours That is an EQUILIBRIUM with potentially unemployment

Neoclassical Labour Market Theory : Basics At EQUILIBRIUM neither households nor firms are satisfied since their supply is employed There is unwanted unemployment There are undesired vacancies

Keynesian Labor Market Theories: Hierarchy of Markets First there are equilibria on the goods and money markets. Then follows the labor market. Therefore labor market developments are analyzed under the assumption of a given goods and money market equilibrium. There are interdependencies

Keynesian Labor Market Theories: Wages Real Wage W 0 PS UnemploymentU0U0 Wage Setting Curve w ws Aggregate Demand Curve Small Economy A

Keynesian Labor Market Theories: Employment L L0L0 L1L1 L max Maximum Real Wage w r,0 max w r,0 L 0 N (Q 0 )L 1 N (Q 1 )Σ L i A Wage Setting Curve

Keynesian Labor Market Theories: Equilibrium L L Q LM IS L N (X 0 ) LSLS Q(L) Q0Q0 LULU L UN i IS 1 LM 1

Keynesian Results Goods and money markets determine the outcome on the labor market. This may be a disequilibrium people may want to change This can only be done by goods or money market stimulations Wage restraint does not help