1

Labor Market

2

Deindustrialization?

Manufacturing Wage Rate, 2005

United States

3

Wages by Education in the U.S.

15 percent of U.S. population do not have a high school degree

73 percent of U.S. population do not have a college degree

4

Merchandise exports as % of GDP

In 2007 World Exports was 31% of World GDP

5

Exports from Around the World

Exports from Developing Countries is now about half of world exports.

Exports from China have seen explosive growth (larger than

Japan).

6

What DeterminesWages and Employment?

7

Diminishing Marginal Productivity of Labor

3.0

7.0

n

kAMPN

n

Fix A, kMPN

• MPN depends on A and k/n

• For given k and A, a rise in n leads to a fall in MPN

8

Short-Run Labor Demand

• w = real wage rate

• To maximize profits the firm should– Increase n if MPN > w*– Decrease n if MPN < w*

• It follows that the demand for labor function equals the MPN function

MPN=Nd

MPN & w

n

W*

MPN1

MPN2

n1 n2n*

w = MPNCondition of profit maximization

9

Factors that Shift the Aggregate Labor Demand Curve

• An increase in TFP causes the labor demand curve to shift right.

• An increase in the capital stock causes the labor demand curve to shift right.

w

n

Increase in A or k

10

Does the theory work?

• Are real wages proportional to labor productivity over time?

• Are real wages proportional to labor productivity across countries?

w = MPN

11

Real Wages and Productivity over time for the U.S.

12

Real Wages and Productivity Across Countries

Wages and Productivity(Output per Worker) Across Countries

13

International Wage Differences

14

Productivity and Wages

15

Do real wages converge?

16

The Supply of Labor

• Labor is supplied by households

• Aggregate labor supply increases with wages

• Higher wealth lowers labor supply at any wage

w

n

nsSupply curve is drawn for a fixed level of wealth

17

Short-Run Labor Market Equilibrium(fix k)

• Real wage is determined so that labor demand equals labor supply at point X.

• An increase in TFP shifts the MPN curve to MPN*.

• The new equilibrium is at point Z with higher real wage and employment.

MPN*

MPN

w

n

X

Z

18

Recession

Sharp oil price rise• Lowers A• Lowers demand for

labor• Lowers real wages and

real GDP

• This is a recession.

w

n

MPN*

MPN

ns

This theory implies that supply shocks drive the business cycle.

19

Price of Oil and RecessionsPrice of West Texas Intermediate Crude

Shaded Regions are Periods of Recession

20

Price of Oil and the 2008/09 Recession

Source: James Hamilton, 2009, “Causes and Consequences of the Oil Shock of 2007-08,” NBER Working Paper.

21

Jobless RecoveriesFor the 1990/91 and 2001 recessions, unemployment remained high for 18 months after GDP recovered. How about 2008/09?

Shaded Regions are Periods of Recession

22

The Great Moderation?Recessions seem to be milder as of the early 1980s.

Shaded Regions are Periods of Recession

23

European Unemployment

24

Labor Market Dynamicsand Structural Transformation

25

Size Distribution of Firms in the US

Over half of all employment is in small firms.Source: Brian Headd, “The Characteristics of Small-Business Employees,” Monthly Labor Review, 2000.

26

Job Creation and Destruction in the US

Job creation and destruction is significantly higher than net job creation.

Job creation: net employment change of establishments expanding employment

Job destruction: net employment change of establishments reducing employment

2006Q2• 7.8 million jobs created

• 7.3 million jobs destroyed

• 0.5 million net change in number of jobs

27

Productivity and Resource Reallocation

Churning is the key to economic growth.

Source: John Haltiwanger, “New Ideas for Measuring Labor Productivity,” Census Brief, 1998.

28

Structural Transformation and Development

Source: Bah El-hadj, The University of Auckland, “Structural Transformation in Developed and Developing Countries,” 2008.

29

Farm and Non-farm Productivity in the U.S.

30

Urbanization and Development

Source: World Development Report 2009.

31

Urbanization and Development

2009

46

82

32

Real Wages and Hours Worked

33

Labor Market and Wealth

• A permanent rise in A raises MPN and thus shifts out the labor demand curve.

• A permanent rise in A raises wealth and thus shifts left the labor supply curve.

• The new equilibrium is at point Z with higher real wage and possibly lower employment.

• Note, though, that hours worked per person may fall, but a rise in wages may lead to a rise in the labor force participation rate (especially for relatively poor countries).

MPN*

MPN

w

n

X

Z

ns

*ns

34

Aggregate Labor Supply and Wealth

Aggregate Labor Supply

Permanent w

Period of rising labor force participation rate and hours worked

Reduction in hours worked

35

Income Inequality

36

Rise in Real Wage Dispersion

• Two potential explanations– Open trade (greater globalization)– Technological improvements

37

Skill Biased Technical Change

w

N_unskilled

ND_unskilled

ND’_unskilled

NS_unskilled

N_skilled

w

ND_skilled

ND’_skilled

NS_skilled

•Skill biased technical change increases demand for skilled workers and hence their wages

•The opposite is true for unskilled workers.

38

39

Key Message

• Wage premium for skills have gone up and relative supply have been catching up

• The information technology (IT) revolution is biased toward skilled labor

40

Source: Bils and Klenow, “Does School Cause Growth“, American Economic Review, 2000

Skill Premia Across Countries

Skill premia are highest for poor countries.

41

Income Inequality in the U.S.

Source: Emmanuel Saez, “Striking it Richer: The Evolution of Top Incomes in the United States", 2009

Technology and education as drivers of income inequality

42

Income Inequality by Country

Source: CIA Factbook Gini Coef. = A/(A+B)

Range from 0 to 1 (100)

0 = complete equality

43

Income Inequality by Region Over Time

Is world growth driven by technology or education?