Productivity, Output and Employment

1
Productivity, Output and Employment

• Part I

2
Overview

• The Production Function
• Labour Demand
• Labour Supply
• Unemployment

3
The Production Function

• Factors of Production
• Total Factor Productivity
• Y AF(K,N)
• Y real output
• A overall productivity
• K capital stock
• N labour employed

4
Iso-quant

• Locus of points representing combinations of
  inputs that yield a given level of output.

Suppose
To construct an iso-quant, fix Y. Let Y 100
5
Y 100
6
Y 200
Y100
7
The Shape of the Production Function
Y

• Production function is upward-sloping
• The slope of the production function decreases
  as capital increases.

400 350 250
0 100 200 300
K
8
The marginal product of capital
Y
400 350 250
B
A

• MPK is positive
• Diminishing marginal productivity of capital

0 100 200 300
K
9
The marginal product of labour
Y
270 240 180
B
A

• MPN is positive
• Diminishing marginal productivity of labour

0 100 200 300
N
10
Total factor productivity
Remember the property of exponents. The 0.3
represents the elasticity of total output with
respect to capital. It also represents the share
of income received by owners of capital. The 0.7
represents the share of income received by labour.
11
An adverse supply shock that lowers the MPN
12
Marginal Product of Labour and Labour Demand
Marginal Revenue Product of Labour (MRPN) The
increment to revenue of employing an additional
worker. MRPN P x MPN assuming that the firm
is a price-taker.
13
In order to maximize profits, the firm should
increase the number of workers employed if MPN gt
W/P w and reduce the number of workers if MPN lt
W/P w where W nominal wage w real
wage P price of output
14
Determination of Labour Demand
15
Example Rivendells Production Function
16
Total Output
MPN
17
MRPN PxMPN
Nominal Wage 900
N5
18
Beneficial Supply Shock
19
Rivendells New Production Function
20
MRPNnew
MRPNold
Nominal Wage 900
N 7
21
Factors that Shift Aggregate Labour Demand

• Productivity
• Shifts MRPN/Labour Demand curve to the right
• Reduction in payroll taxes (employer
  contributions)
• Reduces nominal wage. Shift wage line down.
• Size of the capital stock
• Shifts MRPN/Labour Demand curve to right.

22
Labour Supply

• The Income-Leisure Trade-off
• Real Wages
• Income Effect of a change in the real wage
• Substitution Effect of a change in the real wage
• Total Effect Substitution Effect Income Effect

The income and substitution effects of a high
real wage change work in opposite directions.
23
Factors that Shift Aggregate Labour Supply

• Wealth ( - )
• Expected future real wage ( - )
• Working-age population ( )
• Participation rate ( )

24
Aggregate Labour Supply
Daily Labour Supply for Household
25
Aggregate Labour Supply
Amber
Ben
Total
w
w
w
NSA
NSB
NST
20
12
7
8 18
8 16 22
8 24 40
N
N
N
Individual Workers
Aggregate Labour Supply
26
Average weekly hours, Canadian Manufacturing
27
The workweek and real GDP per person in 36
countries