1. FIN 30220: Macroeconomics
Labor Markets

2. The US Labor Market by the numbers…*
Under 16 years old
Inmates of institutions (penal, mental, homes for the aged)
Active duty military
“Ineligible to work”
71M
Total Population
325M
Employed
152M
Unemployed
To be considered “unemployed”, you must have looked for work over the last 30 days. Otherwise, you are “not participating”
7.6M
Not Participating
94.4M
*As reported by the household survey (Bureau of Labor Statistics)

3. The US Labor Market by the numbers…*
Civilian Employment-Population Ratio
Total employment divided by the eligible population
Eligible Population = Employed + Unemployed + Not Participating
“Ineligible to work”
70M
153
*100 = 60.0%
255
Total Population
“Official” Unemployment Rate (U-3)
Unemployment divided by the Labor Force
Labor Force = Employed + Unemployed
325M
Employed
153M
6.9
*100 = 4.3 %
159.9
Unemployed
Participation Rate
labor force divided by the eligible population
6.9M
Not Participating
95.1M
159.9
*100 = 62.7%
255
*As reported by the household survey (Bureau of Labor Statistics)

4. Unemployment in the US Unemployment Rate Average = 5.8% Current = 4.3%
December 1982
10.8%
October 2009
10.0%
Unemployment Rate
Average = 5.8%
Current = 4.3%
May 1953
2.5%
NBER Recession Dates
*Source: Bureau of Labor Statistics

5. Alternate Measures of Unemployment in the U.S.
To be considered “employed” you only need to have a job (no distinction between full time or part time)To be considered “unemployed”, you must have looked for work over the last 30 days. Otherwise, you are “not participating”.
Discouraged Workers
Persons who are not in the labor force
Want to and are available to work
Have looked for work over the year, but not over the last 4 weeks
Specific reason cited for not looking for work is that they don’t believe there is a job available
Marginally Attached Workers
Persons who are not in the labor force
Want to and are available to work
Have looked for work over the year, but not over the last 4 weeks
Any reason cited for lack of job search
Part Time for Economic Reasons
Working less than 35 hours per week
Want to and are available to work full time
Gave an economic reason (Hours cut, unable to find full time work) for lack of a full time job

6. Alternate Measures of Unemployment in the U.S.
U-4 Unemployment Rate
Unemployed plus discouraged workers divided by the labor force plus discouraged workers
Category
May 2017
Eligible Population
255M
Labor Force
159.9M
Employed
153M
Unemployed
6.9M
Discouraged Workers
355,000
Marginally Attached Workers
1.48M
Part time for Economic Reasons
5.22M
7.26
*100 = 4.5%
160.2
U-5 Unemployment Rate
Unemployed plus discouraged workers plus marginally attached divided by the Labor Force + discouraged workers + marginally attached
8.74
*100 = 5.4%
161.7
*From the latest household survey, BLS
Recall, the “official” (U-3) unemployment rate is 4.3%
U-6 Unemployment Rate
Unemployed plus discouraged workers plus marginally attached workers plus part time for economic reasons divided by the Labor Force + discouraged workers + marginally attached workers
14.0
*100 = 8.7%
161.7
Note: U-1 unemployment deals with long term unemployment and U-2 deals with temporary jobs

7. The U6 unemployment rate includes underemployed, marginally attached workers, and discouraged workers
U6 Unemployment Rate
Current
8.7%
U3 Unemployment Rate
Current
4.3%

8. The Difference between the U3 and U6 unemployment rates would capture those that are underemployed, marginally attached, or discouraged. This is a new phenomena.
Average = 6.0%

9. Let’s look at the US over the years since the last recession…
Peak = 10.0%
October 2009
January 2007
4.6%
Current = 4.8%
Recession
Recovery

10. Monthly change in payrolls
June 2009
Average = 165,000/mo.
Average = ,000/mo.
8 million jobs lost during the recession
12 million jobs gained since the end of the recession

11. Let’s do a back of the envelope calculation…
Let’s do a back of the envelope calculation….population grows at around 1.5% per year. Let’s assume everybody enters the workforce at 16 and retires after 45 years.
Eligible population = 110M
1.1% x 110M = 1.21M Entering the workforce
1.21M
1.21M retiring
16 years ago
(2001)
Now (2017)
61 Years ago
(1956)
45 years ago
(1972)
Eligible population = 216M
1.2% x 216M = 2.59M Entering the workforce
2.59M – 1.21M = 1.38M / 12 = 115,000 per month!

12. June 2009
Average = 165,000/mo.
156,000 Jobs created
,000 to satisfy population growth
33,000 lost jobs recovered per month
165,000 Jobs created
,000 to satisfy population growth
50,000 lost jobs recovered per month
To get back to “normal”
8,000,000
50,000
= 160 months
8 million jobs lost during the recession
(~13 years )

13. For comparison purposes, during the recovery following the recession, we created almost twice as many jobs per month
265,000 Jobs created
,000 to satisfy population growth
142,000 lost jobs recovered per month
Average = 265,000
Average = -177,000
To get back to “normal”
3,000,000
142,000
= 21 months
(~2 years)
3,000,000 jobs lost

14. Lets compare the current recession/recovery to the last few
2 years
Recession Beginning
Beginning of recovery

15. Dumbest Tweet Ever!! R. David Edelman
Special Assistant to the President for Economic and Technology Policy
The streak of consecutive months with positive private sector job growth was ended in May 2016 (the streak was 74 months)
Liz Allen
Deputy Communications Director at the White House

16. Let’s look at the US over the years since the last recession…
Recovery
January 2007
October 2009
May 2017
Category
Jan 2007
Eligible Population
230M
Labor Force
153M
Employed
146M
Unemployed 7M
Employment Rate
63.5%
Unemployment Rate
4.6%
Participation Rate
66.5%
Category
Oct 2009
Eligible Population
237M
Labor Force
154M
Employed
139M
Unemployed
15M
Employment Rate
58.6%
Unemployment Rate
10.0%
Participation Rate
64.9%
Category
May 2017
Eligible Population
255M
Labor Force
159.9M
Employed
153M
Unemployed
6.9M
Employment Rate
60.0%
Unemployment Rate
4.3%
Participation Rate
62.87%
If we had the same participation rate today as we did in 2007, the unemployment rate would be 10%!
The primary reason for the decline in the unemployment rate over the past 6 years is the drop in labor force participation!

17. Beginning of Women’s Liberation Movement (1967)
This decline in labor force participation began it’s decline prior to the last recession…..
Peak = 67.2%
January 2001
Current= 62.7%
Beginning of Women’s Liberation Movement (1967)
59.7%
Recession

18. Beginning of Women’s Liberation Movement (1967)
Female vs. Male Participation
Labor Participation Rate - Men
Labor Participation Rate - Women
Beginning of Women’s Liberation Movement (1967)
59.7%

19. Some people claim that the drop is participation is baby boomers taking early retirement…not the case!!
Labor Participation Rate:
Labor Participation Rate: 55+

20. A decline is participation isn’t the only thing “new” about our current situation…
*From the Nov household survey, BLS
*From the May 2017 household survey, BLS
Category
Oct 2000
Unemployed (5.3%)
6.6M
100%
Less than 5 weeks 3M
45%
Between 5 and 14 weeks
2.3M
40%
Between 15 and 26 weeks
0.6M 9%
Over 26 weeks
0.7M 6%
Category
May 2017
Unemployed (4.3%)
6.9M
100%
Less than 5 weeks
2.1M
30%
Between 5 and 14 weeks
2.0M
29%
Between 15 and 26 weeks
1.1M
16%
Over 27 weeks
1.7M
25%
15%
40%

21. Duration Example JAN FEB MAR APR MAY JUNE JULY AUG SEPT OCT NOV DEC
Category
Unemployed 8M
6.5 weeks
2.2M
13 weeks
2.3M
26 Weeks
1.3M
52 weeks
2.2M
1.3M
1.3M
2.3M
2.3M
2.3M
2.3M
2.2M
2.2M
2.2M
2.2M
2.2M
2.2M
2.2M
2.2M
Total = 8.0
Duration of Unemployment
Category
Total
% for
Unemployed
31.6M
100%
6.5 weeks
17.6M
56%
13 weeks
9.2M
29%
26 Weeks
2.6M 8%
52 weeks
2.2M 7%
Length of unemployment spell
% of total unemployed in a year

22. It’s currently taking people almost twice as long as it used to find a job…
Duration of unemployment
Current = 25 weeks
Average = 15 weeks

23. Wages in the US…* $25/hr. $14,100/hr. $13.525/hr. $23,6509/hr.
Dara Khosrowshahi
Leslie Moonves
Philippe Dauman
$14,100/hr.
$13.525/hr.
$23,6509/hr.
Average hourly compensation
$25/hr.
**According to data compiled by the AFL-CIO, the average CEO pay at 327 of the nation's biggest companies
Average CEO Pay**
$7,000/hr.
All Time Record: Tim Cook (2011)
Minimum wage (Federal)
Minimum wage for tipped employees
$7.25/hr.
$188,000/hr.
$2.13/hr.
*In 2014, Based on a 40 hour work week, 50 weeks per year

24. Recall that since the late 1970’s we have seen the emergence of a “wage gap”. That is, we see a difference between productivity and wages. This has been a major driver of income inequality.
Index: 1947 = 100

25. Median Weekly Real Earnings (2016 Dollars)
Jan. 2000
$825/wk.
(~$20.63/hr.*)
Current
$860/wk.
(~$21.50/hr.*)
Recall the increase in participation by women? This has a lot to do with it!
*Assuming a 40 hour week

26. Median Weekly Real Earnings (2016 Dollars)
Women’s % of Men
Men
$885/wk.
(~$22/hr.)
Women
$724/wk.
(~$18/hr.*)
*Based on a 40 hour week

27. Average Weekly Hours in the US
1964
38.2hrs./wk.
12.5%
Current
33.7hrs./wk.

28. Part Time For Economic Reasons (1964-2017)

29. Real Median Household Income in the US (2015 Dollars)
January 1999 $57,909
Current (2016)
$56,516
January 1989 $53,000

30. Recall, that we are interested in understanding the business cycle…
Recession (Below Trend Growth)
Recovery (Above Trend Growth)
GDP
Trend (Average growth)
Peak
Peak
The business cycle is a repeated pattern of recessions followed by recoveries
Trough
Time

31. After removing the long term trend, we end up with a series that looks like this (% deviation from trend)
% Deviation From Trend
Recession
Recovery
Peak
Peak
GDP
Trough
Time

32. Total Employment is highly pro-cyclical…
Peak
Employment (% Deviation from Trend)
Industrial Production (% Deviation from Trend)
Correlation = .77
Trough

33. Real wages are pro-cyclical….barely!
Peak
Deviation from Trend
Trough
Correlation = .12

34. Recall the apple orchard story….
Those apples are allocated either towards consumption or investment (planting them to grow new trees)
At some point in time, you have a fixed number of trees (Capital) and workers
Those workers/capital combine with productivity to produce apples (output)
For a given capital stock and productivity level, labor markets determine total employment

35. Labor Markets Real wages Total employment (total hours worked)
Households choose how much to work
Equilibrium real wage
Businesses choose how many hours to hire
Total employment (total hours worked)
Equilibrium employment

36. Labor Markets
If real wages are too high, we have excess supply of labor…this should put downward pressure on wages
If real wages are too low, we have excess demand for labor…this should put upward pressure on wages

37. Labor Markets Recall that Output = Income
Labor Income + Capital Income = =
Labor Income
Employment will determine total production (GDP)
Predetermined

38. Labor Demand
We assume that labor markets are populated by perfectly competitive firms
Why is this important?
These firms are making hiring decisions to maximize profits.
Nominal Wage rate (fixed)
Price of Output (fixed)
Capital costs (fixed)

39. These firms use a production process that exhibits diminishing marginal productivity – that is as labor rises, its contribution to production of output shrinks
So, absent productivity growth, increasing labor will lower the marginal product of labor

40. These firms use a production process that exhibits diminishing marginal productivity – that is as labor rises, its contribution to production of output shrinks

41. These firms are making hiring decisions to maximize profits.
Consider what happens to profits if we change labor a little bit…
Value marginal product of labor
Businesses equate the nominal value of an hour of labor with the nominal wage OR
Businesses equate the real value of an hour of labor with the real wage

42. Profits are maximized when benefits and costs are equated at the margin!
Profits are increasing
Profits are Decreasing
Profits are constant (maximized)

43. So, these perfectly competitive businesses observe a real wage and make a profit maximizing decision of how much labor to hire. Those decisions are recorded in labor demand.
As wages fall, the marginal cost of labor for businesses drops. This allows them to profitably expand their workforces – even in the light of diminishing marginal returns to labor.

44. Suppose the economy experiences an increase in productivity….
This increase in productivity not only raises total output for every hour of labor worked, but increases the marginal product of every hour worked

45. As events occur that influence the value of labor at the margin these businesses re-evaluate their hiring decisions and adjust their workforce accordingly.
This increase in labor productivity increases labor demanded.

46. Labor Supply
Just as businesses make decisions to maximize profits, we make decisions to maximize our utility
Make ourselves as happy as possible
Total Utility (Happiness)
Leisure time
Real Consumption
We only have a couple requirements for utility functions
Utility is increasing in consumption (i.e. we like to buy things!)
Utility is decreasing in labor (we don’t like to work)
Utility exhibits diminishing marginal utility (the more we have of anything, the less it is worth to us at the margin)

47. Let’s suppose the following…you have a job opportunity that pays $12 an hour. You can work as much or as little as you want. Further, assume that the only good to buy is pizza and a pizza costs $10. Finally, assume that you have scholarship that pays you $20 per week (you don’t have to work for the stipend). How many hours would you choose to work?
Hours available:
24 hrs./day
- 8 hrs./day (sleep)
16 hrs./day*7 days/wk. = 112 hrs.
Nominal Wage = $12/hr.
Price (Pizza) = $10
Real Wage = 1.2 Pizza/Hr.
Non-Labor Income = $20/wk.
Real Non-Labor Income = 2 Pizza/wk.
(Real Wage)
(Real Wage)
Work 112 Hrs.
Labor Income = $1,344
Stipend = $20
Total Income = $1,364
Pizzas Bought = 136.4
Work 30 Hrs.
Labor Income = $360
Stipend = $20
Total Income = $380
Pizzas Bought = 38
No Work
Labor Income = $0
Stipend = $20
Total Income = $20
Pizzas Bought = 2

48. What you choose to do depends on your preferences!
Total Utility (Happiness)
Leisure time
Real Consumption
Value of an hour of leisure
1 hour of leisure. What's that leisure worth to you?
If you work 1 additional hour, what is it cost you?
1.2 pizzas (the real wage). How much are those pizzas worth to you?
If you work 1 additional hour, what do you gain?
Number of pizzas you get per hour of work (real wage)
Value of a pizza

49. Just like with businesses, when we maximize our utility (happiness), we equate costs and benefits at the margin)
Benefits of working
Cost of working =
Let’s rewrite this…
Marginal Rate of substitution measures the value of leisure in terms of consumption
Marginal Rate of Substitution
Pizzas per hour of leisure

50. We only have a couple requirements for utility functions
Utility is increasing in consumption (i.e. we like to buy things!)
Utility is decreasing in labor (we don’t like to work)
Utility exhibits diminishing marginal utility (the more we have of anything, the less it is worth to us at the margin)
Total Utility (Happiness)
Leisure time
Real Consumption
As you work more, leisure falls and the marginal utility of that leisure increases
High marginal utility of leisure
Low Marginal Utility of Consumption
High MRS
Low marginal utility of leisure
High Marginal Utility of Consumption
Low MRS
As you work more, consumption increases and the marginal utility of that consumption falls

51. Of all the affordable choices, the one that equates costs and benefits at the margin is the best choice!
(Real Wage)
Work 40 Hrs.
Labor Income = $480
Stipend = $20
Total Income = $500
Pizzas Bought = 50
Utility is increasing
Utility is decreasing

52. Suppose that you get a raise…your nominal wage increases to $15 (real wage is now 1.5)
The substitution effect generates a labor supply curve that’s upward sloping (normal)
Possibility #1: Labor Supply Increases (Substitution Effect)
Work 50 Hrs. (nominal wage = $15)
Labor Income = $750
Stipend = $20
Total Income = $770
Pizzas Bought = 77
Work 40 Hrs.
Labor Income = $480
Stipend = $20
Total Income = $500
Pizzas Bought = 50
(72 hours of leisure)
(62 hours of leisure)

53. Suppose that you get a raise…you nominal wage increases to $15 (real wage is now 1.5)
The income effect generates a labor supply curve that’s downward sloping (weird)
Possibility #2: Labor Supply decreases (Income Effect)
Work 40 Hrs.
Labor Income = $480
Stipend = $20
Total Income = $500
Pizzas Bought = 50
Work 35 Hrs. (nominal wage = $15)
Labor Income = $525
Stipend = $20
Total Income = $545
Pizzas Bought = 54.5

54. So, which is it?
Possibility #1: Labor Supply Increases (Substitution Effect)
Possibility #2: Labor Supply decreases (Income Effect) OR
We usually assume the substitution effect dominates!

55. Labor supplied declines (labor supply shifts left)
Suppose that your stipend increases to $200/wk. (Wage rate is still $12)
Labor supplied declines (labor supply shifts left)
This is a pure income effect (the wage didn’t change, so there is no substitution effect)
Work 40 Hrs.
Labor Income = $480
Stipend = $20
Total Income = $500
Pizzas Bought = 50
Work 30Hrs. (nominal wage = $12)
Labor Income = $360
Stipend = $200
Total Income = $560
Pizzas Bought = 56

56. Labor Markets – Equilibrium
Real Wage
Households choose how much to work
Businesses choose how many hours to hire
Total Hours
Now, we just need to put the pieces together and solve for an equilibrium wage

57. Labor Markets – Long Run dynamics
Over the long term, both productivity and capital increase which increases the marginal product of labor

58. Labor Markets – Long Run dynamics
As our incomes rise, we can afford more leisure time – labor supply drops
Long term productivity growth raises the value of labor at the margin – increasing labor demand
Over the long term, real wages and employment rise

59. Labor Markets – Long Run dynamics
As employment and productivity both rise, GDP rises

60. Labor Markets – Business cycle dynamics
During economic expansions, labor productivity is above trend…the pushes labor demand up – employment and real wages rise above trend
During recessions, labor productivity is below trend…this pushes labor demand down – employment and real wages fall below trend
An increase (decrease) in employment raises (decreases) production.

61. Predicted Correlations +
During recessions, productivity declines. Labor demand falls – employment and real wages fall.
During recoveries, productivity increases. Labor demand rises – employment and real wages increase.
% Deviation From Trend
Peak
Peak
GDP
Real Wages
Employment
Productivity
Trough
Predicted Correlations
Real Wage
Employment
Productivity
GDP +
Recession
Recovery
Time

62. Are we valuing labor contracts correctly?
Correlations With GDP
Some Suggestions
Are we valuing labor contracts correctly?
Have we calculated real wages correctly?
Do wages actually adjust (most labor contracts are fixed for extended periods)
Does minimum wage affect this analysis?
Is our story correct?
Real Wage
Employment
Productivity
Actual +
(.12)
(.77)
(.67)
Predicted
The only problem we have is explaining the low correlation between real wages and GDP
Empirically
In Theory
Our story for labor supply says that higher wages increase hours worked
At the individual level, labor supply is very inelastic
At the macro level, there is labor supply is very elastic

63. Example: Oil Price Shocks in the 1970’s
Dollars per Barrel
1979 Iranian Revolution
We can think about high oil prices as a negative shock to productivity…remember, we measure GDP as value added and (given that the US imports a lot of oil), high energy prices will lower value added
1973 Arab Oil Embargo

64. Real Compensation (1972 – 1982)
% Deviation From Trend
The high oil prices lowers the value of labor at the margin…labor demand falls and real wages drop
1979 Iranian Revolution
1973 Arab Oil Embargo

65. Employment (1972 – 1982)
The drop in labor demand also lowers the new equilibrium level of employment
% Deviation From Trend
1973 Arab Oil Embargo
1979 Iranian Revolution

66. Lower employment will lower total production (GDP)
% Deviation From Trend
Lower employment will lower total production (GDP)
1979 Iranian Revolution
1973 Arab Oil Embargo

67. Application of Labor Market Analysis: The Minimum Wage
Bernie Sanders has proposed raising the minimum wage from its current level of $7.25 per hour to $15 per our

68. The Minimum wage began in 1938. The first minimum wage was $0
The Minimum wage began in The first minimum wage was $0.25 per hour (that’s equivalent to about $4.35 today)
$7.25 (Since 2009)

69. However, in real terms, the minimum wage has consistently fallen.
Real Wage (2016 $s)

70. Minimum wages around the world*
* Exchange Rate Method Used

71. Adjusting for purchasing power changes the story a little….

73. In 2011, 77 million American workers age 16 and over were paid at hourly rates, representing around 50 percent of all wage and salary workers.
16 million hourly workers (20% of hourly workers) earn less than the proposed $10.10 per hour
1.3 million (1.5% of hourly workers) earned exactly the prevailing Federal minimum wage of $7.25 per hour.
About 1.7 million (2% of hourly workers) million had wages below the minimum ($2.13/hr. is the minimum wage for tipped employees).
Source: Department of Labor

74. Most minimum wage workers are part time
Percent of minimum wage workers
48%
Source: Department of Labor

75. 12 companies with most minimum-wage workers
Darden Restaurants
Yum Brands
DineEquity

76. Highest wage retail companies
$11.27/hr
$9.67/hr
$13.38/hr
$9.67/hr
$10.20/hr
$11/hr
$9.24/hr
$9.32/hr
$9.48/hr
$9.38/hr

77. Costco's CEO and president, Craig Jelinek, has publicly endorsed raising the federal minimum wage to $10.10 an hour, and he takes that to heart. The company's starting pay is $11.50 per hour, and the average employee wage is $21 per hour, not including overtime.

78. Microeconomic Argument for minimum wage increase: minimum wage workers are underpaid…but really, we are all “underpaid” in a competitive market!
Labor supply ranks us by the value of our free time
The equilibrium wage reflects the productivity/free time of the marginal worker
Labor demand ranks us by our productivity
For the average worker, they are being paid less than they are worth, but more than their time is worth.

79. However, can this really be an increase in income?
Macroeconomic argument for minimum wage increase: Increasing the minimum wage would put more money into the economy, but does it?
An increase to $10.10 would amount to a $2.85 per hour raise for those currently on minimum wage
For a 40 hour week, that would amount to $5700 per year
If we assume that all 16 million people affected got the full $5700, that would be an increase in income of $91.2B
$91.2B represents around .5% of the US economy
However, can this really be an increase in income?
Unless an increase in the minimum wage makes us more productive,
NO!

80. Microeconomic argument for increasing the minimum wage: We are creating a better distribution of income, but are we?
Case #1: Rise in minimum wage results in increased unemployment
So we have a transfer from one lower income group to another lower income group
Case #2: Rise in minimum wage creates no job loss and business can’t pass the higher costs onto consumers
Now we have a transfer from business owners to minimum wage workers
Case #3: Rise in minimum wage creates no job loss, but businesses can pass the increased cost onto consumers
Now we have a transfer from consumers to minimum wage workers