Introduction to Labor Economics

1
Introduction to Labor Economics

• Chapter 2 - The Labor Market

2
National and local labor markets

• national labor market

3
National and local labor markets

• national labor market
• local labor market

4
Internal labor market

• A firm uses an internal labor market if
• external hiring is used primarily for entry-level
  jobs, and
• higher level positions are filled by promotion
  from within the firm.

5
Internal labor market
Internal labor markets exist because the use of
such markets

• reduces hiring and training costs,
• improves employee morale and motivation, and
• reduces the effect of uncertainty.

6
Primary vs. Secondary labor markets

• primary labor market - high wages and stable
  employment relationships.
• secondary labor market - low wages and unstable
  employment relationships.

7
Labor force and unemployment

• labor force noninstitutionalized individuals
  aged 16 or above who are either working or
  actively seeking work.
• unemployed those who are not working but are
  actively seeking work

8
Unemployment rate

• Discouraged workers are workers who have given
  up looking
• for work.
• An increase in the number of discouraged
  workers causes the
• unemployment rate to fall.

9
Labor force participation rate

• the labor force participation rate rises during
  an expansion and
• falls during a recession.
• fluctuations in the labor force participation
  rate over the course of
• the business cycle dampen cyclical
  fluctuations in the
• unemployment rate.

10
Trend in unemployment rates

• unemployment rates in the latter half of the 20th
  century were higher than in the first half

11
Trends in labor force participation rates

• the labor force participation rate has declined
  for males (primarily for males in their early 20s
  and over 62).
• the labor force participation rate has increased
  for females (particularly for married females).

12
Sectoral shifts in employment

• primary sector (agricultural) employment has
  declined as a share of the labor force,
• secondary sector (industrial) employment has
  declined slightly as a share of the labor force,
  but only in the past few decades, and
• tertiary sector (service sector) employment has
  increased as a share of the labor force.

13
Reasons for the shifts in employment

• the primary sector (agriculture) is characterized
  by rapid growth in labor productivity and a low
  income elasticity of demand,
• the secondary sector is characterized by rapid
  growth in labor productivity and a moderately
  high income elasticity of demand, and
• the tertiary sector is characterized by slow
  growth in labor productivity and a high income
  elasticity of demand.

14
Nominal and real wages

• Nominal wages are not adjusted for inflation and
  are said to be expressed in terms of current
  dollars.
• Real wages are wages that have been adjusted to
  take into account the effect of inflation. Real
  wages are expressed in terms of dollars from a
  given base year and are said to be expressed in
  constant dollars.

15
Price index
16
Problems with the CPI

• inflationary bias (substitution bias)
• difficulty in adjusting for quality change

17
Wages, earnings, total compensation, and income

• wage payment per unit of time
• earnings wage x hours
• total compensation earnings fringe benefits
• fringe benefits payments-in-kind deferred
  compensation
• income total compensation unearned income (or
  income earnings unearned income)

18
Demand for labor

• The labor demand curve is downward sloping due
  to
• a substitution effect, and
• a scale effect.

19
Substitution effect

• substitution effect - substitution of other
  resources for a resource that becomes relatively
  more expensive.

20
Scale effect
The scale effect associated with a wage increase
involves the following steps

• higher wages result in higher average and
  marginal costs of production,
• leading to an increase in the equilibrium price
  of the product,
• leading to a reduction in the quantity of the
  product demanded,
• leading to a reduction in the use of all inputs
  used to produce the product.

21
Slope of labor demand curve

• Both the substitution and scale effects result in
  a reduction in the quantity of labor demanded
  when the wage rate rises.
• A change in the wage changes the quantity of
  labor demanded, but does not affect labor demand.
  Labor demand changes only if the labor demand
  curve shifts in some manner (as discussed below).

22
Shifts in labor demand
Labor demand may shift due to changes in

• the demand for the product, and
• the prices of other resources.

23
Industry demand for labor

• An industry's demand for labor consists of the
  total demand for a particular type of worker in a
  given industry. (An industry consists of all of
  the firms that produce a given type of output.)
• An industry's labor demand curve is determined by
  adding together the labor demand curves for all
  of the firms in the industry.

24
Market demand for labor

• The market for a given category of labor consists
  of all of the firms that might hire a given type
  of labor, regardless of the industry in which the
  firm operates.
• The market demand for labor is determined by
  adding together all of the industry demand for
  labor curves.

25
Long-run vs. short-run labor demand
26
Market labor supply
The market labor supply curve is expected to be
upward sloping because an increase in the wage in
a particular labor market will

• cause some workers in this market to work
  additional hours,
• induce some workers to shift from other labor
  markets to this relatively more remunerative
  alternative employment, and
• will cause some individuals who are not currently
  in the labor force to enter this market.

27
Market labor supply
28
Shifts in market labor supply curve

• Shifts such as this may be due to
• changing wages in other markets, or
• changes in worker tastes and preferences

29
Labor supply to individual firms
30
Labor market equilibrium
31
Shifts in labor market equilibrium

• an increase in labor demand results in an
  increase in both the equilibrium wage and the
  equilibrium level of employment,
• a reduction in labor demand results in a decrease
  in both the equilibrium wage and the equilibrium
  level of employment,
• an increase in labor supply results in a lower
  equilibrium wage, but a higher equilibrium level
  of employment, and
• a reduction in labor supply results in a higher
  equilibrium wage, but a lower equilibrium level
  of employment.

32
Two types of unions

• industrial union
• trade union (also known as a craft union)

33
Collective bargaining agreement
34
Supply restriction
35
Overpaid and underpaid workers

• economists argue that workers are overpaid if
  their wage is above the equilibrium,
• workers are underpaid if their wage is below the
  equilibrium wage.

36
Economic rent

• Workers receive economic rent when they receive a
  payment that exceeds the opportunity cost of
  supplying their labor.
• The opportunity cost of supplying labor is the
  value of this time in its next-best alternative
  use.
• Another name for this opportunity cost is the
  "reservation wage," the lowest wage offer an
  individual will accept.

37
International comparisons of unemployment rates

• As your text notes, unemployment rates have, in
  recent decades, generally been higher in Europe
  than in the United States.
• It is argued that this is because nonmarket
  forces are more important in wage setting in
  Europe.