Workers, Wages and Unemployment in the Modern Economy Chapter 8

Two Themes Globalization Technological change

Five Labor Market Trends Over the long period real wages have increased. Real wage growth started to slow in the early 1970’s. Wage inequality has increased. Employment has grown faster than the working age population. Since about 1980 western European nations have experienced high rates of unemployment.

Three Factors of Production Land Labor Capital

Derived Demand The demand for factors of production is derived from the demand for the end products. For example, if computer software is in high demand, then demand for computer programmers will be high.

Figure 1 The Versatility of Supply and Demand Copyright©2003 Southwestern/Thomson Learning Quantity of Apples 0 Price of Apples Demand Supply Demand Supply Quantity of Apple Pickers 0 Wage of Apple Pickers (a) The Market for Apples(b) The Market for Apple Pickers P QL W

Definitions Marginal product of labor (MPL): output of the last worker Value of marginal product of labor (VMPL): value of output of the last worker VMPL = P x MPL

Figure 2 The Production Function Copyright©2003 Southwestern/Thomson Learning Production function Quantity of Apple Pickers 0 Quantity of Apples

Copyright©2004 South-Western

Figure 3 The Value of the Marginal Product of Labor Copyright©2003 Southwestern/Thomson Learning 0 Quantity of Apple Pickers 0 Value of the Marginal Product Value of marginal product (demand curve for labor) Market wage Profit-maximizing quantity

Shift Factors for Labor Demand Output Price Technological Change Supply of Other factors

Labor Supply Labor supply reflects a trade-off between earnings from work and enjoyment of leisure. Opportunity cost of leisure is foregone earnings.

Shift Factors for Labor Supply Curve Changes in Tastes Changes in Alternative Opportunities Immigration/ Outsourcing

Figure 5 A Shift in Labor Supply Copyright©2003 Southwestern/Thomson Learning Wage (price of labor) 0 Quantity of Labor Supply,S Demand reduces the wage and raises employment. 1. An increase in labor supply... S W L W L

Figure 6 A Shift in Labor Demand Copyright©2003 Southwestern/Thomson Learning Wage (price of labor) 0 Quantity of Labor Supply Demand,D increases the wage and increases employment. D W L W L 1. An increase in labor demand...

Types of Unemployment –Frictional –Cyclical –Structural

Unemployment Labor Unions –Benefits Reduced worker exploitation Support progressive labor legislation Increase productivity Promote democracy in the workplace

Unemployment Labor Unions –Costs Unions cause otherwise competitive labor markets to function inefficiently. Unions may prevent companies from competing in the global economy.

Unemployment Unemployment Insurance: –Helps to reduce the costs of unemployment. –May give the unemployed an incentive to search longer and less intensely. –Unemployment benefits must balance the benefit of providing support to the worker with the cost of reducing the incentive to work.

Unemployment Other Government Regulations –Health and Safety Regulations These regulations can reduce the demand for labor by: –Increasing employer costs. –Reducing productivity. The reduction in demand will: –Increase unemployment. –Lower wages.

Unemployment Rates in Western Europe,

Reasons for high unemployment –Structural Rigidities Regulated labor markets High minimum wages Generous unemployment benefits Powerful labor unions

Five Labor Market Trends Over the long period real wages have increased. Real wage growth started to slow in the early 1970’s. Wage inequality has increased. Employment has grown faster than the working age population. Since about 1980 western European nations have experienced high rates of unemployment.