In this chapter we examine this tradeoff more closely. The relationship between inflation and unemployment is a topic that has attracted the attention of some of the most important economists of the last half century. The best way to understand this relationship is to see how thinking about it has evolved over time.
Wages and Unemployment Chapter 17 McGrawHill/Irwin Copyright © 2015 by McGrawHill Education (Asia). All rights reserved 171 Learning Objectives Discuss the four important trends that have characterized labor markets in industrialized countries Apply a supply and demand model to understand the labor market Explain how changes in the supply of and the demand for labor explain trends in real wages and employment since 1960 Define and calculate the unemployment rate and the participation rate Differentiate among the three types of unemployment defined by economists and the costs associated with each 172 Trend 1: Increasing Real Wages • Common in industrialized countries in the 20th century 173 Trend 2: Slower Wage Growth Since 1973 • • The annual rate of real wage growth is uneven Data on real wage growth in the United States: – – – – 1960 – 1973 1973 – 1996 1996 – 2010 1973 – 2010 2.5% per year -1.1% per year 2% per year 0% per year 174 Hourly Wage Index in Manufacturing, 1990–2011 (2005 = 100.0) Year U.S.A Japan Canada S Korea 1990 75.3 86.0 77.6 36.9 1995 86.2 95.0 90.9 70.2 2000 86.5 96.4 88.9 65.1 2005 100.0 100.0 100.0 100.0 2010 112.4 97.1 106.4 124.1 2011 114.4 99.2 109.8 126.2 Rate of Increase (1990-2011) 1.52 1.15 1.4 3.42 175 Trend 3: Increased Wage Inequality in US and many industrialized countries • Between 1960 and 2010 – Average real weekly earnings of production workers decreased • – • Real wages of the least-skilled, least-educated workers decreased 25 to 30% Best-educated, highest-skilled workers' real wages increased Income with an advanced university degree is – – Three times the income of a high school graduate Four times the income of a worker who did not graduate from high school 176 Trend 4: Increasing Employment in US and Asian Economies • In 2007, 146 million people in the US had jobs – • In 1970, 57% of the over-16 population had jobs – • 46 million new jobs since 1980 In 2007, 63% worked Between 1980 and 2007 employment increased 46% – At the same time over-16 population increased 38% 177 The Labor Market • Supply and demand analysis can be used to find the price of labor (real wages) and the quantity (employment) – • Labor market is an input market – • Analysis will consider the number of workers employed, not work-hours per year Firms hire labor to produce goods and services Macroeconomics look at aggregate levels of employment and real wages – Microeconomics looks at wage determination for a category of workers 178 Wages and Demand for Labor • The demand for labor depends upon: – The productivity of workers • – The price of the worker’s output • • A higher real price increases employment Diminishing returns to labor – – • Greater productivity increases employment Assumes non-labor inputs are held constant Adding one worker increases output but by less than the previous worker added Value of Marginal Product (VMP) is extra revenue that an added worker generates 179 Banana Computers (BCC) • BCC can sell all its computers for $3,000 each Number of Workers Computers per Year Marginal Product Value of Marginal Product 25 25 $75,000 48 23 69,000 69 21 63,000 88 19 57,000 105 17 51,000 120 15 45,000 133 13 39,000 144 11 33,000 1710 Skill-Biased Technological Change Unskilled Workers Skilled Workers SU Real Wage SS W' S WS WS W'S D'S DU DS D'U N' N U U Employment NS N'S Employment 1726 Unemployment Statistical authorities around the world estimate employment and unemployment monthly In US: Population Age 16+ Employed • • • Unemployed • Out of the Labor Force Labor force = employed + unemployed Unemployment rate = unemployed / labor force Participation rate = labor force / population 16+ 1727 U.S Employment Data, June 2013 Employed Unemployed Labor Force Not in the Labor Force Working-Age Population Unemployment Rate Participation rate 144.84 million 12.25 million 157.09 million 88.46 million 245.55 million 7.8% 64.0% 1728 2010 2005 2000 1995 1990 1985 1980 1975 1970 1965 1960 Unemployment Rate (%) US Unemployment Rate 1960 - 2012 12 10 Year 1729 Costs of Unemployment • Economic costs – – • Psychological costs – – • Lost wages and production Decreased taxes and increased transfers Individual self-esteem Family stress of decreased income and increased uncertainty Social costs – Potential increases in crimes and social problems • Social resources spent to address these 1730 Duration of Unemployment • Costs of unemployment are directly related to the length of time a person has been unemployed – – • Unemployment spell is the period during which an individual is continuously unemployed Duration of unemployment is the length of the unemployment spell The unemployed population in US in June 2013 Duration (weeks) % of unemployed or less 23% – 14 24% More than 14 53% 1731 Duration of Unemployment • • Long-term unemployed have been out of work for months or longer Short-term unemployed have several possible outcomes – Find a permanent job after searching a few weeks • – – Economic costs are low Leave the labor force Short-term or temporary job that leads to unemployment again • These chronically unemployed have costs similar to the long-term unemployed 1732 Other Unemployment Issues • • • Discouraged workers would like to have a job but they have not looked for work in the past four weeks – Counted as out of the labor force – Willing and ready to work – Could be counted as unemployed but they are not Involuntary part-time workers are people who like to work full-time but cannot find a full-time job – Counted as employed June 2013 unemployment rate in US was 7.8% – Including discouraged workers and involuntary parttime workers would make the rate much higher 1733 Types of Unemployment • Frictional unemployment occurs when workers are between jobs – – • Short duration, low economic cost May increase economic efficiency Cyclical unemployment is the increase in unemployment during economic slow-downs – – Usually short duration Economic cost is the decline in real GDP 1734 Types of Unemployment • Structural unemployment is long-term, chronic unemployment in a well-functioning economy – – – Lack of skills, language barriers, or discrimination Structural shifts in production create a long-term mismatch between workers and market needs Barriers to employment such as • • – – Minimum wages ■ Unions Unemployment Insurance High economic, psychological, and social costs Example: U.S steel, telecommunications manufacturing 1735 Structural Barriers to Employment Minimum Wage Laws Real Wage S Wmi n W A § B D N N NB A Employment § Setting a minimum wage (Wmin) above equilibrium (W) creates (NB – NA) unemployment Workers who find a minimum-wage job get a higher wage § Others are unemployed 1736 Structural Barriers to Employment • Labor union benefits – – – – Reduced worker exploitation Support progressive labor legislation Increase productivity Promote democracy in the workplace • Labor union costs – – – – Introduces inefficiency into competitive markets May keep companies from competing globally Increase labor supply in non-union sector Decreases wages for non-union workers 1737 Structural Barriers to Employment • Unemployment insurance is a government transfer to unemployed workers – – • Helps to reduce the costs of unemployment May give the unemployed an incentive to search longer and less intensely To work efficiently, unemployment benefits should be – – For a limited time Less than the income received when working 1738 Other Government Regulations • Health and safety regulations can reduce the demand for labor by – – • Increasing employer costs Reducing productivity The reduction in demand will increase unemployment and lower wages 1739 Wages and Unemployment Four Trends Labor Market Unemployment Costs Demand for Labor Supply of Labor Types 1740 ... demand The productivity of the workers • • • Greater quantity of non-labor inputs Organizational change Training and education 17 12 Price of Output Increases If the price of computers increases,... produce goods and services Macroeconomics look at aggregate levels of employment and real wages – Microeconomics looks at wage determination for a category of workers 17 8 Wages and Demand for Labor... earnings of production workers decreased • – • Real wages of the least-skilled, least-educated workers decreased 25 to 30% Best-educated, highest-skilled workers' real wages increased Income with an