Future of Work/Globalization Key Concepts

Question 1

Arbitrage

Answer 1

Arbitrage: A situation where people take advantage of different buying and selling prices in different markets to make small amounts of profit
-The difference between buying and selling price should be large enough to cover the costs involved in executing the trades (i.e. transaction costs)

Question 2

Industrial Revolutions and Labor Markets

Answer 2

??

Question 3

Wage and Productivity

Answer 3

Wage =- P x MPL

• MPL = Marginal Product of Labor: how many units of the product/service this worker contributes to production per extra hour of work (when w is wage per hour)
• The wage is equal to value of the marginal product of a worker in perfect competition
• > A skilled worker is paid a higher wage than a less skilled worker because his/her MPL is higher

-Suppose production requires medium-skilled inputs and skilled workers
-Medium-skilled inputs come in two firms:
Medium- skilled workers
Computers
-These forms of medium-skilled inputs are substitutes
-Medium-skilled inputs complement the work of skilled workers: a lawyer is more efficient with the help of a legal assistant searching for the relevant cases
-Skilled workers perform complex (non-routine) tasks that computers are unable to do but computers help them with these tasks
-MPL ^S (M): marginal product of skilled labor depends on medium-skilled inputs (M)
–Greater M, the higher MPL^S (M)
-MPL^M (M): the marginal product of medium-skilled input does not directly depend on skilled labor

Question 4

Effect of computers on market for skilled labor

Answer 4

If computers become more efficient than medium skilled labor doing the same job then:

• MPL^S (M) shifts to the right
• Everything else being equal, a skilled worker becomes more productive with computers than with staff
• With computers, a firm does not need as many staff members to run efficiently
• Given a supply of skilled labor, the real wage of skilled labor rises (w* -> w’)

Question 5

Effect of computers on market for semi-skilled labor

Answer 5

M = LM + C, where

• M: Medium-skilled inputs
• LM: medium-skilled labor
• C: Computer
  
  • > As computers get cheaper, easier to use and can perform more tasks, the demand for medium-skilled labor falls and so does the real wage of medium-skilled labor

Since people also choose occupations

• If wages fall in medium-skilled occupations and wage rise in skilled occupations, more and more people choose skilled occupations and this irrespective of the distribution of talents
• As price of computer/computing goes down, more and more people choose skilled occupations
• This describes the relative situation between skilled, medium-skilled and unskilled labor until the beginning of the 4th industrial revolution
• > The hollowing of labor market and inequalities coming with it has important consequences on a society in absence of policies addressing these issues

Question 6

Elasticity of demand

Answer 6

• Elasticity of Demand: The % change in QD for as product for each % increase in price of this product
• -Example 1: Suppose the demand elasticity of a product is high, equal to -5. Hence, a 1% price reduction leads to a 5% increase in the volume sold to consumers. The total revenue of the firms/industry selling this product must rise and more labor will be hired to satisfy this higher demand
• -Example 2: Suppose the demand elasticity is low, equal to -0.5: A 1% price reduction leads to 0.5% increase in the volume demanded. The total revenue of the firms/industry must fall resulting in a lower overall demand for labor in this industry
• -Example 3: Demand elasticity equal to -1: the price effect and the volume effect cancel each other. No change in labor employed in this industry
• Markets with inelastic demands:
• -Household lighting: The price of household lighting has decreased over a thousand-fold since electricity, but the household consumption has not increased to the same extent, nor the labor employed to produce lighting products
• -Gasoline (in the short run at least)
• -Products from established industries have fairly inelastic demands
• -Sin goods: alcohol, tobacco, sugar, caeine…
• Markets with elastic demands: new products/services (once habits of consuming them are established, the elasticity tends to decrease)

Question 7

Net employment effects

Answer 7

• The timing issue leads to temporary unemployment as long as workers have time to adjust their skills, entrepreneurs invent new businesses, new firms get created to absorb newly developed skills and institutions are flexible enough to make all this possible
• This takes time, typically decades
• But what if technological changes pile up so that new skills get obsolete soon after they are acquired?

-If this happens, nothing prevents an economy to have fewer jobs than the number of people wanting to work
-Nothing prevents a developed economy to have permanently a high level of (technological) unemployment
-Humans could become permanently unemployed when workers and firms do not have enough time to adjust!
⇒ Accelerating technological changes increase the risk of technological unemployment
-But if unemployment is high, demand for goods might be low…
-And if unemployment is doomed to be high, should we consider a universal basic income system? Free people from work?