1. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 0 Workers, Wages, and Unemployment in the Modern Economy

2. 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 “have- nots”)

3. 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

4. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 3 Trends in Real Wages  1. Over the 20 th 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

5. 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

6. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 5 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

7. 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

8. 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

9. 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

10. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 9 Fig. 9.1 The Demand Curve for Labor

11. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 10 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

12. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 11 Fig. 9.2 A Higher Relative Price of Output Increases the Demand for Labor

13. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 12 Fig. 9.3 Higher Productivity Increases the Demand for Labor

14. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 13 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

15. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 14 Fig. 9.4 The Supply of Labor

16. 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 working- age population  Domestic birthrate  Immigration and emigration rates  Age of entering and leaving the labor force

17. 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

18. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 17 Fig. 9.5 An Increase in Productivity Raises the Real Wage

19. 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

20. 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

21. 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

22. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 21 Fig. 9.6 The Effect of Globalization on the Demand for Workers in Two Industries

23. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 22 Technological Change  Skill-biased technological change  Technological change that affects the marginal products of higher-skilled workers differently from those of lower- skilled workers  Simplest jobs are taken over by robots and computer-controlled machinery maintained by skilled operators

24. 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

25. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 24 Unemployment  Labor force includes  Employed  Unemployed  Unemployment rate  The percentage of the labor force that is unemployed

26. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 25 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

27. 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

28. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 27 Cyclical Unemployment  Cyclical unemployment  The extra unemployment that occurs during periods of recession  Increases in unemployment in recessions  Decreases in unemployment in expansions

29. 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

30. 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

31. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 30 Fig. 9.8 A Legal Minimum Wage May Create Unemployment

32. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 9 - 31 Fig. 9.9 Unemployment Rates in Western Europe, 1980-1999