1 Labor Market

2 Deindustrialization? Manufacturing Wage Rate, 2005 United States

3 Wages by Education in the U.S. 15 percent of U.S. population do not have a high school degree 73 percent of U.S. population do not have a college degree

4 Merchandise exports as % of GDP In 2007 World Exports was 31% of World GDP

5 Exports from Around the World Exports from Developing Countries is now about half of world exports. Exports from China have seen explosive growth (larger than Japan).

6 What Determines Wages and Employment?

7 Diminishing Marginal Productivity of Labor n Fix A, k MPN MPN depends on A and k/n For given k and A, a rise in n leads to a fall in MPN

8 Short-Run Labor Demand 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 MPN=N d MPN & w n W* MPN 1 MPN 2 n1n1 n2n2 n* w = MPN Condition of profit maximization

9 Factors that Shift the Aggregate Labor Demand Curve 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. w n Increase in A or k

10 Does the theory work? Are real wages proportional to labor productivity over time? Are real wages proportional to labor productivity across countries? w = MPN

11 Real Wages and Productivity over time for the U.S.

12 Real Wages and Productivity Across Countries Wages and Productivity (Output per Worker) Across Countries

13 International Wage Differences

14 Productivity and Wages

15 Do real wages converge?

16 The Supply of Labor Labor is supplied by households Aggregate labor supply increases with wages Higher wealth lowers labor supply at any wage w n nsns Supply curve is drawn for a fixed level of wealth

17 Short-Run Labor Market Equilibrium (fix k) Real wage is determined so that labor demand equals labor supply at point X. An increase in TFP shifts the MPN curve to MPN*. The new equilibrium is at point Z with higher real wage and employment. MPN* MPN w n X Z

18 Recession Sharp oil price rise Lowers A Lowers demand for labor Lowers real wages and real GDP This is a recession. w n MPN* MPN nsns This theory implies that supply shocks drive the business cycle.

19 Price of Oil and Recessions Price of West Texas Intermediate Crude Shaded Regions are Periods of Recession

20 Price of Oil and the 2008/09 Recession Source: James Hamilton, 2009, “Causes and Consequences of the Oil Shock of ,” NBER Working Paper.

21 Jobless Recoveries For the 1990/91 and 2001 recessions, unemployment remained high for 18 months after GDP recovered. How about 2008/09? Shaded Regions are Periods of Recession

22 The Great Moderation? Recessions seem to be milder as of the early 1980s. Shaded Regions are Periods of Recession

23 European Unemployment

24 Labor Market Dynamics and Structural Transformation

25 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.

26 Job Creation and Destruction in the US Job creation and destruction is significantly higher than net job creation. Job creation: net employment change of establishments expanding employment Job destruction: net employment change of establishments reducing employment 2006Q2 7.8 million jobs created 7.3 million jobs destroyed 0.5 million net change in number of jobs

27 Productivity and Resource Reallocation Churning is the key to economic growth. Source: John Haltiwanger, “New Ideas for Measuring Labor Productivity,” Census Brief, 1998.

28 Structural Transformation and Development Source: Bah El-hadj, The University of Auckland, “Structural Transformation in Developed and Developing Countries,” 2008.

29 Farm and Non-farm Productivity in the U.S.

30 Urbanization and Development Source: World Development Report 2009.

31 Urbanization and Development

32 Real Wages and Hours Worked

33 Labor Market and Wealth 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). MPN* MPN w n X Z ns*ns* nsns

34 Aggregate Labor Supply and Wealth Aggregate Labor Supply Permanent w Period of rising labor force participation rate and hours worked Reduction in hours worked

35 Income Inequality

36 Rise in Real Wage Dispersion Two potential explanations –Open trade (greater globalization) –Technological improvements

37 Skill Biased Technical Change w N_unskilled ND_unskilled ND’_unskilled NS_unskilled N_skilled w ND_skilled ND’_skilled NS_skilled Skill biased technical change increases demand for skilled workers and hence their wages The opposite is true for unskilled workers.

38

39 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

40 Source: Bils and Klenow, “Does School Cause Growth“, American Economic Review, 2000 Skill Premia Across Countries Skill premia are highest for poor countries.

41 Income Inequality in the U.S. Source: Emmanuel Saez, “Striking it Richer: The Evolution of Top Incomes in the United States", 2009 Technology and education as drivers of income inequality

42 Income Inequality by Country Source: CIA FactbookGini Coef. = A/(A+B) Range from 0 to 1 (100) 0 = complete equality

43 Income Inequality by Region Over Time Is world growth driven by technology or education?