Week 17 - Labour Market, Inequality and Unemployment Flashcards
Trends in the labour market
- Industrialised countries have had real wage growth since the 20th century
- Rate of real wage growth has slowed since 1973 however number of people with jobs and percentage of population employed has substantially increased.
- Wage inequality has increased in the US. Average weekly wages for workers at lower end of income distribution has decreased and best-educated, highest skilled workers real wages have increased. College graduates earn significantly more than people without degrees.
- Number of people with jobs has grown over the past 50 years but the rate of job growth has slowed recently.
- Western Europe has higher unemployment than the US.
Labour market
Labour market shows the supply and demand of labour.
It is an input market - firms buy labour to produce goods/services.
Supply and demand analysis can be used to find the price of labour (real wages) and the quantity (employment)
Macroeconomics looks at aggregate levels of employment and real wages whereas microeconomics looks at wage determination for a category of workers.
Wages and demand for labour
Demand for labour depends on the productivity of workers and the price of workers’ output.
Higher productivity increases employment demand through cost reduction, business expansion and new investments.
More productive workers produce more with the same amount of time which results in higher revenues which can be used to increase wages for workers.
Higher real price of workers output increases employment through profit motives. Higher wages can lead to increased consumer spending which can in turn increase demand for goods and services and create more jobs.
Diminishing returns to labour
Assuming all non-labour inputs are constant, adding one worker will increase output but not as much as the increase from adding the previous worker.
Adding more labour to a fixed amount of capital can lead to overcrowding and reduced efficiency.
Value of marginal product (VMP)
The extra revenue that an added worker generates. It decreases as more workers are hired because of diminishing returns to labour.
Labour demand curve
A new worker is hired only if VMP > wage paid.
Lower wages means more workers are hired before VMP < wage paid.
Higher wages increases costs, reducing demand for additional workers.
Wage increases until it is no longer profitable for employers to continue hiring.
There is an inverse relationship between labour demand and wages meaning labour demand curve is downwards sloping.
Shifting demand
Demand shifts when VMP of a worker changes.
2 factors determine VMP for labour:
- Price of the companies output.
- Productivity of the workers.
How does price of output shift labour demand
An increase in the price of a product shifts the labour curve to the right because it allows firms to generate higher profits per unit sold, which incentivizes them to hire more workers to increase production to meet increased demands.
This means that the increase in price of output increases demand for labour.
How does productivity of workers shift labour demand
Increases in productivity increase VMP as each working is producing more from the same input. This causes employers to want to hire more workers at the same or increased wage.
This causes the demand curve to shift right and therefore demand for labour to increase.
Reservation wage
The lowest wage a worker would accept for a given job
Opportunity cost of working
Opportunity cost of working is your leisure activity.
Jobs with unpleasant or dangerous working conditions have higher wages to keep the benefit of working above the opportunity cost - cost-benefit principle.
Aggregate labour supply
Macroeconomic determinants of labour supply are:
- Size of the working age population - depends on domestic birth-rate, immigration/emigration ages of entering and retiring from the workforce and hours worked by employees.
- Share of working age population willing to work
- Wage rate (the amount of money paid to a worker for their work, usually per hour or day) - higher wage can convince workers to supply labour and work for longer hours.
- Education and training - educated and trained workers are more productive and are also able to command higher wages.
Labour supply curve
The labour supply curve slopes up because at a higher real wage, more people are willing to work.
Shifts in Labour Supply
Shift in labour supply is caused by any change in the number of workers willing to work at each wage.
Shifts can be caused by:
- Increase / decrease in the working-age population.
- Increase / decrease in the share of working-age population willing to work.
- Job availability - when job opportunities are plentiful, workers may be more willing to supply labour and work longer hours.
- Education and training.
Increasing real wages [trends in the labour market]
Industrialised countries have had growing productivity in 20th century caused by increased productivity from technical change and increases in capital.
This has caused increased demand for labour and increases in real wages and employment.
Slower wage growth since 1970 [trends in the labour market]
Slower growth is caused by either slower growth in demand for labour or faster growth in supply of labour.
Slower demand growth explains slower wage growth but does not explain rapid growth in employment.
Supply of labour has increased from increased female employment and high birth and immigration rates. Increased labour supply causes reduced wages as more people are competing for the same job.
Globalisation
It is the flow of goods, services, capital, and labour across international borders.
Globalisation allows for comparative advantage meaning countries can specialise in producing the goods they can produce at low costs. The country can then export the specialised goods for profit and import necessary goods.
Can cause shrinking of domestic sectors and job losses in some industries from competition from more efficient foreign producers. Also has environmental concerns from the production and transportation of goods across borders.
Increased wage inequality in U.S [trends in the labour market]
Consumers benefit from globalisation as prices are lower however it also can cause job losses due to competition from more efficient foreign producers. This decreases demand for labour in the U.S. which leads to lower wages.
When wages in importing industries fall and wages in exporting industries rise, wage inequality increases.
Technological change can also cause increasing wage inequality as new innovations replace the need for older skills - skill-biased technological change.
Mechanisms for the Effects of Globalization
Merchandise trade - importing goods from low skilled workers and exporting goods from high skilled workers.
This lowers wages of unskilled workers relative to skilled workers and makes income distribution less equal.
Outsourcing: production of goods/services are moved from to a foreign country to take advantage of lower wages/production costs.
Trade in services: middle-skill services are imported as it is cheaper than doing it in-house.
Technological Change and Inequality
Technological change in the last 30 years has eliminated low-skill/low-wage jobs in countries.
Technological change has a “winner takes all” aspect which likely favours a small group of individuals.
If technological change causes inequality if it favours high-skilled workers over low-skilled workers.
Technological change increases rewards for those with significant labour market skills by giving them bargaining power which results in higher wages. It also increases rewards for owners over workers as they can have power on governments to introduce policies that favour the wealthy and restrict labour bargaining.
Drivers of inequality
- Technology – some industries have gained massively from technological advancements such as the finance and technology industries whereas some have been negatively impacted such as manufacturing and retail.
- Globalisation – worldwide competition has caused job losses in certain industries.
- Labour market policies – erosion in workers bargaining power.
- Tax policies – cuts to social safety nets and reduced taxes for higher income earners.
- Differences in education and skill levels.
- Discrimination.
Importance of inequality
Too much inequality Reduces individual motivation, Limits economic mobility (due to barriers to education, training and job opportunities), Limits access to healthcare and Slows economic growth.
Too little inequality Reduces individual motivation, Slows economic growth, Reduces incentives to take risks and create new products/tech and Limits philanthropy (desire to promote the welfare of others) and charitable giving. It can also divide society, distort political environment and reduce political participation and reduce investment in public goods like education and environmental protections.
Problems with inequality
Economic issues: evidence that inequality slows economic growth, evidence that inequality concentrates resources among investors and that attempts to reduce inequality through taxation can have negative economic effects and result in fewer job opportunities.
Noneconomic issues: Values, ethics and morals will drive individual evaluations of the level of inequality. E.g., rewarding people who have met a target will create inequality as not everyone will get equal rewards however this could be seen as fair inequality because of the reason behind it.
Immediate policy solutions to inequality [addressing inequality]
- Progressive taxation and transfer programs funding investment and education.
- Strengthen labour laws - policies favouring labour over business owners, minimum wages, social safety nets, anti-monopoly laws.
- Targeted social programs - food assistance, housing subsidies, healthcare to lower income households. Improves health and education which results in a more productive labour force.
- Policies deigned to support sustainable and inclusive economic growth while also addressing the negative effects of inequality.
- Pro competition policies aimed at reducing regulatory barriers for small businesses and entrepreneurs.
- Employment services - job training, interview skills, or assistance with day-to-day issues
Long term solutions to inequality [addressing inequality]
Focus on access to resources
- Education - improve public education, decrease differences in quality of public schools, improve counselling in low-income schools, target investment at disadvantaged communities, address discrimination and bias.
- Improve/introduce opportunities for wealth building
- Improve housing
Types of unemployment
Frictional, Cyclical and Structural unemployment
Frictional unemployment
When workers are between jobs.
It has a short duration and low economic cost but may increase economic inefficiency.
Cyclical unemployment
Increase in unemployment during economic slowdowns.
Usually short duration and has an economic cost of the decline in real GDP.
Structural unemployment
Long-term, chronic unemployment in a well-functioning economy.
Can be caused by lack of skills, language barriers, discrimination, structural shifts in economies (creates long term mismatch in worker and market needs) or barriers to unemployment (minimum wages, unions, unemployment insurance)
It has a high economic, psychological, and social costs.
How does minimum wage laws create structural barriers to unemployment
Setting a minimum wage above equilibrium creates unemployment because there is in increase in supply of workers because wages are higher however businesses have decreased demand for labour because of the increased costs.
Unemployment insurance
A government transfer to unemployed workers to help cover the cost of unemployment.
However if the insurance is too high, it can reduce incentives to search for work or to search less intensively as they can live off the insurance well enough to not want to work.
For unemployment insurance to be efficient, it needs to be for a limited time and be less than the income received when working.
How does health and safety regulations increase unemployment
Health and safety regulations can reduce demand for labour costs by increasing employer costs and reducing productivity.
The reduced demand will increase unemployment and decrease wages.
Difference in US and Europe employment
Europe’s labour markets are highly regulated with high minimum wages, flexible benefits and powerful unions.
This as well as globalization and skill-biased technological change has reduced employment in Europe as the regulations have caused workers to become less worth employing in the modern world.
