Chapter 4 Flashcards
Labour Market
● Buyers = sellers:
● Labor force:
4 major flows:
…
Unemployment rate:
● Buyers = employers; sellers = workers
● Labor force: refers to all those over 16 years of age who are employed, actively
seeking work or expecting recall from a layoff. Consists of the employed and
unemployed
4 major flows:
Employed: become unemployed by quitting voluntarily or being laid off
● Unemployed: obtain employment by being newly hired or being recalled ot a job from
which they were temporarily laid off
● Those in labor force, whether employed or unemployed, can leave the labor force by
retiring or otherwise deciding against taking or seeking work for pay (dropping out)
● Those who have never worked or looked for a job expand the labor force by entering it while those who have dropped out do so by entering the labor force
- Unemployment rate: ratio of those in labor force to those who are unemployed
Unemployment rate:
ratio of those in labor force to those who are unemployed
The earnings of labor:
-
Nominal wage: what workers get paid per hour in current dollars’ nominal wages
- are most useful in comparing the pay of various workers at a given time
- Real wages: nominal wages divided by some measure of prices, suggest how much can be purchased with workers’ nominal wages.It takes inflation into account. An increase in real wages occurs when wages rise more quickly than inflation.
- Useful in comparing purchasing power of worker’s earnings over a period of time when both nominal wages and product prices are changing
○ E.g.: worker earns $64/day and shoes cost $32 then real wage = 64/32 = 2
Wages, earnings total compensation and income:
Wages: payment for a unit of time
Earnings: wages multiplied by # of time units (typically hours) worked
Total compensation: consists of earnings plus employee benefits
○Benefits that are either payments in kind or deferred
■ Payments in kind: are employer-provided health care and health insurance where in the employee receives a service or an insurance policy rather than money. Paid vacation time
■ Deferred payments: form of employer-financed retirement benefits
Income: the total command over resources of a person or family during soe time
period (includes earnings, benefits, unearned income , dividends or interest received
on investments and transfer payments received from govt, welfare payments,
unemployment compensation, and the like)
Relationship
Relationship among wages earnings, compensation and income
Major labor outcomes are due to:
- 2.
- *1. The terms of employment (wages, compensation level, working conditions)
2. Levels of employment(** number people engaged in productive activities in an economy)
Wage changes:
-
Effect on quantity of labor demanded if wage rate increased:
a. S effect:
b. S effect: - Effect on quantity of labor demand due to other forces
A D…
B S…
i
ii
1. Effect on quantity of labor demanded if wage rate increased:
a. Scale effect: decline in employment due to smaller scale of production
because higher wages mean higher costs and consumers buy less and
employers therefore reduce employment
b. Substitution effect: capital is substituted for labor in the production process
2.Effect on quantity of labor demand due to other forces
a. Demand for product increases: any output price, the product could be sold. It
would increase the labor desired at any wage level that might prevail (demand
shifts to the right)
b. Supply of capital changes: capital prices fall to 50% of their prior level; a fall
in capital prices generates 2 opposite effects on the demand curve
i. Capital prices decline: costs of producing tend to decline which
increases production and increase employment at any wage
ii. Capital prices decline with substitution effect: firm adopts
capital-intensive technologies in response to cheaper capital and labor
demand curve will shift to the left
Movement along labour curve vs shifts of labour curve:
1.
2.
Demand for labor can be analyzed at 3 levels:
1.
2.
3.
Long run vs. short run
- 1 Short run
- 2 Long run
Movement along curve vs shifts of curve:
- Movement along the curve: when wage changes and other forces are unchanged
- Shifts of curve: when other forces change as well
Demand for labor can be analyzed at 3 levels:
- Analyze demand for labor by particular firm
- Analyze effects of wage increase on employment by using an industry demand curve
- Use a market demand curve to see how wage increase would affect entire labor market for particular firm in all industries
Long run vs. short run
● Short run: hard to substitute capital for labor (or vice versa) & customers are less responsive to product demand in respect to price increase
●Long run: responses to changes in wages or other forces affecting demand for labor are larger and more complete
The supply of labor
Market supply:
● wages/salaries of certain industry rise:
● wages/salaries of other industry increase:
Supply to firms:
● The difference in slope between market supply curve and supply curve to firm is directly related to …
● Give example (paralegals)
● Horizontal supply curve
The supply of labor
Market supply:
● wages/salaries of certain industry rise: more people want to enter this industry; hence supply of labor to market is positively related to wage rate prevailing in that market
● wages/salaries of other industry increase: then less people want to be in particular industry and supply decreases
Supply to firms:
● The difference in slope between market supply curve and supply curve to firm is directly related to type of choice facing workers
● If wages for Paralegals fall (for example), not everyone would withdraw from market bc jobs of Paralegals and Lawers l are not perfect substitutes
● Horizontal supply curve: reflects supply decisions made among alternatives that are perfect substitutes for each other
- *Market clearing wage**
- *○Market demand curve**:
- *○ Market supply curve** :
Situations:
○
- (1) and (2)
Market-clearing wage:
…
○…
Market clearing wage
○ Market demand curve: shows how many workers would want at each wage
rate, holding capital prices and product demand schedule constant
○ Market supply curve: shows how many workers would enter market at each
wage level, holding wages in other occupations constant
Situations:
○ Low wage: demand exceeds supply, shortage of workers will exist. Employers would be forced to increase wage offers and 2 things would happen:
(1) more workers would enter market and look for jobs = movement along supply curve
(2) increasing wages would motivated employers to seek fewer workers = movement along demand curve
○ High wage: supply exceeds demand, surplus of workers.
Market-clearing wage:
wage rate at which demand equals supply, where there is no
surplus or shortage. The market is in equilibrium
○ Market-clearing wage, W e = going wage
Disturbing the equilibrium
● Rightward shift of demand
● Left shift of supply & rightward shift in labor demand
● Rightward shift supply/leftward shift demand
Disturbing the equilibrium
● Rightward shift of demand: would create a labor shortage
● Left shift of supply & rightward shift in labor demand: market wage rises a lot
● Rightward shift supply/leftward shift demand: fall in market-clearing wage rate
nonmarket influences:
●
○
Disequilibrium and nonmarket influences:
● Non Market forces: laws, customers, institutions constraining the choice of
individuals and firms
○ Usually serve to keep wages above market levels
Applications of theory
Who is underpaid and who is overpaid?
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○
○
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Economic rents
Applications of theory
Who is underpaid and who is overpaid?
● Above-market wages:
○ Overpaid workers are those that receive wages that are higher than the
market-clearing wage for heir job
● Wage above market: has 2 implications
○ Employers are paying more than necessary to produce their output
○ More workers want jobs than can find them
● Below-market wages:
○ Underpaid employees are receiving wages that are below market-clearing levels
○ Labor shortage exists
Economic rents
● Economic rent: the amount by which one’s wage exceeds one’s reservation wage ( wage below which worker would refuse job) in a particular job is the amount of his or her economic rent
