1. MBMC Workers, Wages, and Unemployment in the Modern Economy

2. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 2 Introduction What Do You Think? Has everyone benefited equally from economic growth and increased productivity?

3. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 3 Five Important Labor Market Trends Trends in Real Wages Over the 20th century, all industrial countries have enjoyed substantial growth in real wages. Since the early 1970s, however, the rate of real wage growth has slowed. Recent decades have brought a pronounced increase in wage inequality in the U.S.

4. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 4 Five Important Labor Market Trends Trends in Employment and Unemployment In the U.S., the number of people with jobs has grown substantially in recent decades. Western European countries have been suffering high rates of unemployment for almost two decades.

5. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 5 Five Important Labor Market Trends Observation Increasing wage inequality in the U.S. and persistent unemployment in Europe indicate that many workers have not been sharing in the recent economic growth and prosperity.

6. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 6 Supply and Demand in the Labor Market Wages and the Demand for Labor The demand for labor depends upon:  The productivity of workers.  The price of the worker’s output.

7. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 7 Production and Marginal Product for Banana Computers 0 125 248 369 488 5105 6120 7133 8144 Value of Number ofComputersMarginalmarginal product workersproduced per yearproduct(at $3,000/computer 25$75,000 2369,000 2163,000 1957,000 1751,000 1545,000 1339,000 1133,000 How many workers will Banana hire? Observations: Marginal product diminishes Value of marginal product (VMP) = Price ($3,000) x Marginal product (MP)

8. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 8 Production and Marginal Product for Banana Computers 0 125 248 369 488 5105 6120 7133 8144 Value of Number ofComputersMarginalmarginal product workersproduced per yearproduct(at $3,000/computer 25$75,000 2369,000 2163,000 1957,000 1751,000 1545,000 1339,000 1133,000 How many workers will Banana hire? Hiring rule: Hire if VMP > W If the wage is: $60,000, hire 3 workers $50,000, hire 4 workers Banana will hire more workers at lower wages

9. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 9 The Demand Curve for Labor Employment Wage Labor demand The lower the wage, the greater the number of workers hired. The wage can be measured in nominal or real terms.

10. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 10 Supply and Demand in the Labor Market Shifts in the Demand for Labor Two factors determine the demand (VMP) for labor:  The relative price of the company’s output.  The productivity of the workers.

11. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 11 Production and Marginal Product for Banana Computers after an Increase in Computer Prices 0 125 248 369 488 5105 6120 7133 8144 Value of Number ofComputersMarginalmarginal productmarginal product workersproduced per yearproduct(at $3,000/computer(at $5,000/computer) 25$75,000$125,000 2369,000115,000 2163,000105,000 1957,00095,000 1751,00085,000 1545,00075,000 1339,00065,000 1133,00055,000 Relative price = $3,000 If real wage was $60,000 -- hire 3 If real wage was $50,000 -- hire 4 Relative price = $5,000 If real wage was $60,000 -- hire 7 If real wage was $50,000 -- hire 8

12. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 12 A Higher Relative Price of Output Increases the Demand for Labor Employment Real wage Labor demand (before relative price increase) An increase in the relative price of workers’ output increases the demand for labor. Labor demand (after relative price increase)

13. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 13 Production and Marginal Product for Banana Computers after an Increase in Worker Productivity 0 137.5 272 3103.5 4132 5157.5 6180 7199.5 8216 Value of Number ofComputersMarginalmarginal product workersproduced per yearproduct(at $3,000/computer 37.5$112,500 34.5103,500 31.594,500 28.585,500 25.576,500 22.567,500 19.558,500 16.549,500 Assume 50% increase in productivity Relative price = $3,000 If real wage: $60,000, employment = 6 $50,000, employment = 8

14. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 14 Higher Productivity Increases the Demand for Labor Employment Real wage Labor demand (before productivity increase) Increases in productivity increases VMP. Employers will hire more workers at any given wage. Demand curve shifts right. Labor demand (after productivity increase)

15. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 15 The Supply of Labor Employment Real wage Labor supply The labor supply curve is upward sloping because, in general, the higher the real wage, the more people are willing to work.

16. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 16 Supply and Demand in the Labor Market Shifts in the Supply of Labor Macroeconomic determinants of the supply of labor:  Size of the working age population; determined by: oDomestic birthrate oImmigration and emigration oAges when people enter and retire from the workforce

17. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 17 Supply and Demand in the Labor Market Shifts in the Supply of Labor Macroeconomic determinants of the supply of labor:  Percent of working age population seeking employment; determined by: oSocial changes

18. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 18 Supply and Demand in the Labor Market Shifts in the Supply of Labor All else being equal, the supply of labor will increase when:  The working age population increases.  The percent of the working age population looking for work increases.

19. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 19 Explaining the Trends in Real Wages and Employment Economic Naturalist Why have real wages increased by so much in the industrial countries?

20. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 20 An Increase In Productivity Raises The Real Wage Employment Real wage S D w N D’ w’ N’

21. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 21 Explaining the Trends in Real Wages and Employment Economic Naturalist Factors contributing to productivity growth:  Technological progress  Increase in capital stock

22. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 22 Growth Rates in Productivity and Real Earnings 1960 - 19702.332.89 1970 - 19800.840.79 1980 - 19901.381.15 1990 - 20001.891.92 Observations Reduced growth in productivity reduces the demand for labor and real wage growth Increases in the supply will cause employment to increase and hold real wages down Annual Growth Rate (%) ProductivityReal Earnings

23. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 23 Explaining the Trends in Real Wages and Employment Economic Naturalist Why has the gap between the wages of skilled and unskilled workers widened in recent years?

24. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 24 The Effect of Globalization on the Demand for Workers in Two Industries Employment Real Wage Employment Importing industryExporting industry S textiles D textiles w N textiles S software D software N software Initially, wages are equal D’ textiles w’ textiles N’ textiles Demand for workers in importing industry (textiles) declines, lowering wages and employment D’ software w’ software N’ software Demand for workers in exporting industry (software) increases, raising wages and employment.

25. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 25 Explaining the Trends in Real Wages and Employment Increasing Wage Inequality: The Effects of Globalization When wages in “losing” industries fall and wages in “winning” industries rise, wage inequality increases. Low-skill industries in the U.S. face the toughest international competition.

26. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 26 Explaining the Trends in Real Wages and Employment Increasing Wage Inequality: The Effects of Globalization High-skill industries in the U.S. tend to do the best in international competition. This relationship between low-skill and high-skill industries will exacerbate the wage inequality created by increasing trade.

27. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 27 Explaining the Trends in Real Wages and Employment What Do You Think?’ Why would it be difficult to reduce wage inequality by stopping globalization? What could be done to reduce the impact of globalization on wage inequality?

28. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 28 Explaining the Trends in Real Wages and Employment Economic Naturalist Why has the gap between the wages of less-skilled and higher-skilled workers widened in recent years?

29. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 29 The Effect of Skill-Biased Technological Change on Wage Inequality Employment Real Wage Employment Unskilled workersSkilled workers D’ unskilled w’ unskilled N’ unskilled The decrease in demand for unskilled workers reduces their wages. The increase in demand for skilled workers raises their wages. D’ skilled N’ skilled w’ skilled S unskilled D unskilled N unskilled S skilled N skilled Initially, wages are equal. w unskilled w’ skilled D skilled

30. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 30 Explaining the Trends in Real Wages and Employment Increasing Wage Inequality: Technological Change Technological change that is biased in favor of skilled workers will increase wage inequality.

31. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 31 Explaining the Trends in Real Wages and Employment What Do You Think? Should we try to slow technological change to reduce wage inequality?

32. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 32 Unemployment Measuring Unemployment: Revisited Monthly survey estimates the number of people who are employed and unemployed. Labor force = employed + unemployed

33. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 33 Unemployment Types of Unemployment and Their Costs Frictional Unemployment  The short-term unemployment associated with the process of matching workers with jobs

34. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 34 Unemployment Types of Unemployment and Their Costs Characteristics of Frictional Unemployment  Short-term  May lead to a better match between the worker and job  Necessary in a dynamic economy

35. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 35 Unemployment Types of Unemployment and Their Costs Structural Unemployment  Long-term and chronic unemployment that exists even with the economy is producing at a normal rate

36. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 36 Unemployment Types of Unemployment and Their Costs Causes of Structural Unemployment  Lack of skills, language barrier, discrimination  Long-term mismatch  Structural features of the labor market

37. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 37 Unemployment Types of Unemployment and Their Costs Cost of Structural Unemployment  Loss in economic output  May not develop new skills  Psychological

38. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 38 Unemployment Types of Unemployment and Their Costs Cyclical Unemployment  The extra unemployment that occurs during periods of recession

39. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 39 A Legal Minimum Wage May Create Unemployment Employment Real Wage D S N W A w min NANA B NBNB Minimum wage = W min Quantity of workers demanded = N A Quantity of workers supplied = N B Unemployment = N B - N A No minimum wage Wage = W Employment = N No unemployment

40. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 40 Unemployment Impediments to Full Employment Minimum Wage Laws:  Benefit workers who are employed.  Hurt those who lose their jobs.  Create economic inefficiency.

41. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 41 A Legal Minimum Wage May Create Unemployment Employment Real Wage D S N W A w min NANA B NBNB Labor unions can push the union wage above the equilibrium -- W min Union workers are employed at high wages Nonunion unemployment increases

42. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 42 Unemployment Labor Unions Benefits  Reduced worker exploitation  Support progressive labor legislation  Increase productivity  Promote democracy in the workplace

43. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 43 Unemployment Labor Unions Costs  Unions cause otherwise competitive labor markets to function inefficiently.  Unions may prevent companies from competing in the global economy.

44. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 44 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.

45. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 45 Unemployment Other Government Regulations Health and Safety Regulations  These regulations can reduce the demand for labor by: oIncreasing employer costs. oReducing productivity.  The reduction in demand will: oIncrease unemployment. oLower wages.

46. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 46 Unemployment Other Government Regulations The cost-benefit criterion should be used to determine the feasibility of proposed legislation.

47. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 47 Unemployment Economic Naturalist Why are unemployment rates so high in western Europe?

48. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 48 Unemployment Rates in Western Europe, 1980 - 2001

49. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 49 Unemployment Economic Naturalist Structural Rigidities  Regulated labor markets  High minimum wages  Generous unemployment benefits  Powerful labor unions

50. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 8: Workers, Wages, and Unemployment in the Modern Economy Slide 50 Unemployment Economic Naturalist Globalization and skill-biased technology have exposed the inefficiency of labor market rigidity.

51. MBMC End of Chapter End of Chapter