chapter 4 from book: overview of the labor market Flashcards
the labor market
market that allocates workers to jobs and coordinates employment decisions
national labor market
buyers of labor and sellers of labor are searching throughout the entire nation for each other
local labor market
buyers of labor and sellers of labor are searching tlocally for each other
when is an internal labor market said to exist?
When a formal set of rules and procedures guides and constrains the employment relationship within a firm
the labor force
all those over 16 years of age who are employed
all those over 16 years of age actively seeking work,
all those over 16 years of age expecting recall from a layoff
Those in the labor force who are not employed for pay
the unemployed
are people who are not employed and are neither looking for work nor waiting to be recalled from layoff by their employers counted as part of the labor force?
nah boy
the total labor force
the employed and the unemployed
what are the 4 major flows of the labor market?
- Employed workers become unemployed by quitting voluntarily or being laid off (being involuntarily separated from the firm, either temporarily or permanently).
- Unemployed workers obtain employment by being newly hired or being recalled to a job from which they were temporarily laid off.
- Those in the 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 reentering the labor force.
labor force participation rate
labor force divided by population
unemployment rate
The ratio of those unemployed to those in the labor force
when is the labor market considered tight?
When the unemployment rate is around 5 percent
when jobs in general are plentiful and hard for employers to fill
most of those who are unemployed will find other work quickly
when is the labor market considered loose?
When the unemployment rate is 5 percent or higher
workers are abundant and jobs are relatively easy for employers to fill
which industries have experience a drop in labor?
goods-producing industries (largely manufacturing)
which industries have experience a boom in labor?
private-sector services
The wage rate
the price of labor per working hour
The nominal wage
what workers get paid per hour in current dollars
what do you want to compare with nominal wages?
the pay of various workers at a given time
Real wages
suggest how much can be purchased with workers’ nominal wages
nominal wages divided by some measure of prices
when are real wages useful
useful in comparing the purchasing power of workers’ earnings over a period of time when both nominal wages and product prices are changing
The most widely used measure for comparing the prices consumers face over several years
the Consumer Price Index (CPI)
why are the bundles used for pricing purposes in the CPI updated periodically?
because consumers change what they buy over the years
the payment for a unit of time
wages
wages multiplied by the number of time units (typically hours) worked
earnings
depend on both wages and the length of time the employee works
total compensation
earnings plus employee benefits
employee benefits
either payments in kind or deferred
what type of benefits are the following
employer-provided health care and health insurance
Paid vacation time
payments in kind
Deferred payments
can take the form of employer-financed retirement benefits
employers set aside money now that enables their employees to receive pensions later
income
the total command over resources of a person or family during some time period
includes earnings, benefits, and unearned income
unearned income
dividends or interest received on investments
transfer payments received from the government in the form of food stamps
welfare payments
unemployment compensation
etc
what are the three markets firms have to opperate in order to survive?
labor market
capital market
product market
terms of employment
wages
compensation levels
working conditions
what are major labor outcomes related to?
(a) the terms of employment
(b) the levels of employment
these in turn determine demand and supply
on which forces do a firm’s total output and the way it combines labor and capital depend on?
product demand
the amount of labor and capital they can acquire at given prices
the choice of technologies available to them
What would happen to the quantity of labor demanded if the wage rate were increased?
first, higher wages imply higher costs and, usually, higher product prices
consumers buy less, sellers reduce their output
in turn, they reduce their employment
Second, as wages increase (assuming the price of capital does not change, at least initially), employers have incentives to cut costs by adopting a technology that relies more on capital and less on labor
the scale effect created by higher wages
reducing employment due to higher wages
substitution effect created by higher wages
employment would fall because of a shift toward a more capital-intensive mode of production
wages increased so capital is substituted for labor in the production process
what happens to the demand curve for labor if the demand for a firm’s product increases?
demand curve shifts to the right
what happens to the demand for labor if the demand for a firm’s product increases? why?
assuming that wages and capital costs remain constant
demand for labor at every wage level is increased
firms wanna to increase their output, so they need more labor
scale effect created by higher demand of a product if capital and wage remain unchanged
increase the demand for labor at any given wage rate
Output levels would clearly rise as firms in the industry sought to maximize profits
substitution effect created by higher demand of a product if capital and wage remain unchanged
does not exist
how would the demand for labor be affected if capital prices fell to 50 percent of their prior level (change the supply of capital)
we must consider the scale and substitution effects
when capital prices decline, the costs of producing tend to decline
increases in production, and these increases tend to raise the level of desired employment at any given wage
The scale effect of a fall in capital prices thus tends to increase the demand for labor at each wage level
then it is the substitution effect where firms adopt more capital-intensive technologies in response to cheaper capital
firms would substitute capital for labor and would use less labor to produce a greater amount of output than before
scale effect created by a drop of capital prices considering wages remain unchanged
want to produce more because of reduced costs
hire more people
substitution effect created by a drop of capital prices considering wages remain unchanged
after the scale effect, firms will want to use more capital-intensive technologies in response to cheaper capital
firms would substitute capital for labor and would use less labor to produce a greater amount of output than before
what happens to demand curve for labor when there is a drop of capital prices considering wages remain unchanged?
the scale effect makes the curve shift to the right
we want more labor to produce more goods due to reduced production costs
then, the substitution effect makes the curve shift to the left
we focus more on capital intensive technologies and they replace labor
what happens to demand curve for labor when there is a rise of capital prices considering wages remain unchanged?
the scale effect makes the curve shift to the left
we want to cut costs at first and the fastest way to do that is by reducing labor
then, the substitution effect makes the curve shift to the right
we focus less on capital intensive technologies and refocus on labor
what are the three levels the demand for labor can be analyzed?
by a particular firm (firm demand curve)
in an entire industry (industry demand curve)
entire labor market of a certain profession (market demand curve)
all of these demand curves vary in shapes because of the different strengths of the scale of substitution effects, but they all slope downwards
how does the market supply curve of a profession react wages change in that same profession?
movement along the curve
higher wages means more people want that job (more Qs)
lower wages means less people want that job (less Qs)
how does the market supply curve of a profession react when wages change in another profession?
the supply curve shifts to the left when wages of another profession rise
the supply curve shifts to the right when wages of another profession decrease
why is the supply curve for a firm horizontal?
it is the going wage
the firm could get all the workers it needs at that going wage
paying lower wages will make the firm lose all applicants or get those of lesser quality
paying more will only increase costs
furthermore, the choice to which firm to work for is purely based on compensation
are individual firms wage takers or wage setters?
wage takers
market clearing wage
The wage rate at which demand equals supply
the going wage that individual employers and employees must face
what happens to the labor market equilibrium if the supply stayed the same, the demand curve shifted to the right?
going wage would rise
employment would rise
what happens to the labor market equilibrium if the supply stayed the same, the demand curve shifted to the left?
going wage would fall
employment would fall
what happens to the labor market equilibrium if the supply curve shifted to the left and the demand curve stayed the same?
going wage would rise
employment would fall
what happens to the labor market equilibrium if the supply curve shifted to the left and the demand curve stayed the same?
going wage would fall
employment would rise
what happens to the labor market equilibrium if the supply curve shifted to the left and the demand curve shifted to the right?
dramatic increase in wages
not enough info for the employment level
what happens to the labor market equilibrium if the supply curve shifted to the right and the demand curve shifted to the left?
dramatic decrease in wages
not enough info for the employment level
non-market barriers to market adjustment
laws, customs, or institutions constraining the choices of individuals and firms
market barriers to reaching adjustments at a particular labor market?
workers needing to learn the skill or new skills
costs coming with recruiting and training
do non-market forces usually leave the wage above or below equilibirum?
usually above
below happens, but rarely
main examples of non market keeping wages above equilibrium?
minimum wage laws
unions
what can create widespread unemployment?
f enough markets are experiencing above-market wages
overpaid workers
their wages are higher than the market-clearing wage for their job
benefits of getting rid of overpaid workers
could cut wages and still find enough qualified workers for their job openings
expand output and make their product cheaper and more accessible to consumers
more disappointed workers could find work
underpaid workers
wage is below market-clearing levels
benefits of paying more underpaid workers
output would rise and more workers would be attracted to the market
an increase would benefit the people in society in both their consumer and their worker roles
reservation wage
the wage below which the worker would refuse (or quit) the job in question
The amount by which one’s wage exceeds one’s reservation wage in a particular job
amount of economic rent
