9-10 Flashcards
Working-age population
individuals aged 15-64
Labor Force
those who are of working age and are willing and able to work
Participation Rate=
Labor Force/Working age Population
Employed
those who are willing to work and have a job
Employment rate=
Employed / Labor Force
Unemployment rate=
Unemployed / Labor Force
1 - Employment rate
MPL
demand curve for labor
MPL > real wage
hire more labor
MPL < real wage
hire less labor
If real wage falls …
firms want to hire more labor
If technology improves …
firms want to hire more labor
Labor Supply depends on
Demographics
labor force
hours worked by people
what is the opportunity cost of working?
time (leisure, education, home work)
What is the labor supply sensitive to?
Government policy (income taxes)
Labor market institutions (unemployment benefits)
If real wage increases…
- Leisure more expensive (opportunity cost) –> word more attractive –> Labor supply up –> Substitution Effect
- Worker is richer for given amount of work –> work less attractive –> Labor supply down –> Income Effect
How is the labor supply in the long run?
Income Effect = Substitution Effect
Short run Labor Supply?
Substitution Effect > Income Effect
What is labor demand?
firms set the price of the good equal to its marginal cost (MC) of production
If we only use labor to produce output
P=MC , P=W/MPL, W/P=MPL
When is there no unemployment?
Labor demand = Labor supply
When can workers ask Real wage > MPL
- strong bragaining position (monopoly power) –> unions strengthen, very special hard-to-come-by skills, unemployment benefits better
- unemployment rate is los –> finding and hiring a replacement is more costly, vacant positions disrupt workflow
Workers ask for the real wage (formula)
W/P = B - c*u
W/P… Real Wage
B… bargaining position
c… influence of u on wage demands
u… unemployment rate
Natural rate of unemployment (NRU)
u*= ( B-1 / (1 + m)) / c
m… product market power
c… sensitivity of wage demands to u
B… monopoly power of workers
Beveridge Curve
- measures efficiency of the labor market in matching workers with firms
- firms creating vacancies (Labor Demand)
- unemployed workers searching for jobs (Labor Supply)
How to lower unemployment?
active labor market spending
- assist the unemployed in job searching
- training to the unemployed
-subsidize the creation of jobs and hiring
- loans to start a business
What is the idea of the beveridge curve?
if there are many unemployed and many vacancies at the same time, the matching process cannot be very efficient
–> shift outward: less efficient
High Employment Protection Legislation
Harder to lay off worker
- lower probability of losing a job p
- lower unemployment
but if you hire somebody who is not productive, or if your business goes badly?
- lower expected profits
- lower vacancy creation
- lower probability of finding a job f
- higher unemployment
