Frank

1
Frank Bernanke

• Ch. 9 Workers, Wages and Unemployment

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Labor Market Trends

• During the last century real wages in the
  industrialized world increased substantially.
• Since the 70s, the rate of growth of real wages
  slowed.
• Wage inequality rose substantially in the recent
  decades in US.
• In the US, recent decades saw substantial job
  creation.
• Western Europe has experienced high unemployment
  rates in recent decades.

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Real Wages

• Compared to before the Great Depression, an
  average American worker earns four times as much.
• Real wages grew at a rate of 2.5 between 1960
  and 1973 but at a rate of 1.2 between 1973 and
  1999.
• Real wages for unskilled labor declined by
  one-fourth since the 70s.
• Real wages for bachelors and masters degree
  holders increased substantially a masters
  holder earns twice the highschool graduate.
  (http//www.census.gov/population/socdemo/educatio
  n/tableA-3.txt)

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http//www.census.gov/statab/www/employ.html
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http//www.census.gov/statab/www/govtsoclaw.html
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http//www.census.gov/statab/www/edu.html
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Employment/Unemployment

• In 1970, 57 of over 16 population had jobs in
  1999, 64 had jobs.
• Between 1980 and 1999, US economy created more
  than 34 million new jobs.
• Many of the EU countries experienced very high
  (some double digit) unemployment rates for over
  ten years job creation has been very low.

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Explaining The Trends

• The labor market trends mentioned will be
  explained using the traditional supply-demand
  analysis.
• The product demanded is the labor of the
  worker. The horizontal axis can be measured in
  terms of number of workers or number of hours
  worked.
• The price on the vertical axis is the real wage
  - what firms pay to acquire labor.

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Deriving the Demand for Labor

• Demand for labor comes from employers/firms.
• An employer will have to do the marginal benefit
  vs. marginal cost calculation to determine how
  many people (or many hours of work) to hire.

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Demand for Labor
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Demand for Labor
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Bobs Demand for Labor

• How do we define the demand curve?
• At each and every price how much is demanded in
  the market.
• Apply this to Bob.
• At each and every real wage, how much labor will
  Bob hire?

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Shifts in Demand
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Shifts in Demand
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Supply of Labor

• The decision to work or not to work, again,
  depends on the cost-benefit principle.
• If your reservation price (how much you would pay
  another to do the job) is less than what you are
  offered to do the job, you should take the job.
• In this view, the higher the real wage, the more
  hours of work will be offered by workers.

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Shifts in Supply of Labor

• Any thing that changes the size of the working
  age population.
• Increase in domestic birth rate.
• Immigration.
• Emigration.
• Change in the age a typical person enters the
  work force.
• Change in the age a typical person retires.

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Explaining Political Stands

• Employers usually favor immigration while labor
  unions oppose it. Given our simple Supply and
  Demand analysis, explain why.
• What happens to real wages due to immigration?
• Supply curve shifts right, depressing real wages.

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Immigration
Real Wages
Labor
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Why Did Real Wages Rise Fourfold During 20th
Century

• Average labor productivity rose shifting the
  demand for labor to the right.
• The reasons for average labor productivity growth
  were
• technological advances
• increases in capital stock
• increases in human capital.

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Rise in Average Labor Productivity
Real wage
L
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Why Did Real Wages Rose Much Slowly After 1973

• Average labor productivity slowed down
  significantly, eliminating the large rightward
  shifts in the demand for labor.
• Labor supply increased (labor participation rates
  rose) shifting the supply to the right.

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After 1973
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Increasing Wage Inequality

• Technological changes in services favored skilled
  labor against unskilled labor unlike the
  technological changes in manufacturing.
• Looking at two labor markets, skilled and
  unskilled, the changes in demand would create the
  observed gap.

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Technological Change
S
S
D
D
Unskilled Labor
Skilled Labor
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Increasing Wage Inequality

• Trade dependent on comparative advantage, lowers
  the demand for labor by importing industry but
  raises the demand for labor by exporting
  industry.
• Unskilled labor loses in the process.
• However, the bulk of the trade is between
  industrialized countries, buying and selling
  similar products.

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Globalization
Real wage
Pharmaceutical Industry
L
Furniture Industry
(Exporting)
(Importing)
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Outsourcing

• Even at the best of times, the American economy
  has a tremendous rate of churnover 2m jobs a
  month. ... The process allocates resourcesmoney
  and peopleto where they can be most productive,
  helped by competition, including from
  outsourcing, that lowers prices. In the long run,
  higher productivity is the only way to create
  higher standards of living across an economy.

The Economist, Feb. 19, 2004
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Sucking Sound?
Between 1980 and 2002, America's population grew
by 23.9. The number of employed Americans, on
the other hand, grew by 37.4. Today, 138.6m
Americans are in work, a near-record, both in
absolute terms and as a proportion of the
population.
The Economist, Feb. 19, 2004
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Should Technology and Globalization Be Stopped?

• Specialization increases the total amount
  produced.
• Free trade increases the total amount available.
• Increasing worker mobility from shrinking to
  expanding industries would help.
• Providing government help during transition
  should be easy because of the increasing pie.

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Churning Productivity

• In 1960 only one in 25 workers was employed in
  the business-services and health-care industries.
  Today, one in six is. In terms of output,
  manufacturing has risen, but, thanks to that
  productivity spurt, these goods are produced by
  fewer people12 of the workforce, less than half
  the proportion of three decades ago.

The Economist, Feb. 19, 2004
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The Economist, Feb. 19, 2004

• The best-known report, by Forrester Research, a
  consultancy, guesses that 3.3m American
  service-industry jobs will have gone overseas by
  2015barely noticeable when you think about the
  7m-8m lost every quarter through job-churning.
  And the bulk of these exports will not be the
  high-flying jobs of IT consultants, but the
  mind-numbing functions of code-writing.
• Even at their peak in 2001, the number of all
  trade-related layoffs represented a mere 0.6
  of American unemployment.

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Types of Unemployment

• Frictional unemployment - the short-term
  unemployment when people are searching for a job
  that match their wishes.
• Structural unemployment - long-term mismatch
  between the skills and jobs.
• Cyclical unemployment - unusually high rates of
  unemployment experienced during recessions.

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Unemployment

• Total unemployment is the sum of frictional,
  structural and cyclical unemployment.
• Even if the economy is producing at full
  employment, there will be structurally and
  frictionally unemployed.

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Barriers That Create Structural Unemployment

• Minimum wage laws.
• Labor unions.
• Unemployment insurance.
• Other governmental regulations.

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Do Minimum Wage Laws Alleviate Poverty?

• Minimum wage laws affect unskilled labor.
• Higher wages should increase the income of the
  unskilled labor.
• If the labor market is in equilibrium, a minimum
  wage law that sets the wage above equilibrium
  will create unemployment and solve the poverty of
  some by making other poor worse off.

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Labor Unions

• It could work as a minimum wage law.
• It could increase unemployment.
• In a perfectly competitive labor market with low
  costs of searching for a job, labor unions would
  increase unemployment.
• In monopsony situations labor unions improve
  efficiency.

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Unemployment Insurance

• A state that pays unemployment insurance for 13
  weeks will force the unemployed to search for a
  job more vigorously than a state that pays
  unemployment insurance for 52 weeks.

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Other Regulations

• Some health and safety regulations increase the
  cost of labor significantly.
• It works similar to minimum wage laws.
• Employment cost index keeps track of the benefits
  plus wages.

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Why Unemployment Rates Are Very High in EU?

• Structural barriers are very strong in EU because
  of political commitment to social safety laws.
• Higher percentage of workers are unionized.
• Unemployment insurance is very generous.
• Benefits and severance pay provisions are much
  higher than US.

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Why Did EU Unemployment Rates Soar the Last 20
Years?

• Technological change with skill bias.
• Globalization.
• Both of these forces reduced the demand for
  unskilled labor yet social safety laws kept the
  wages high.