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Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Workers, Wages, and Unemployment in the
Modern Economy
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ModernizationOne of the most striking features of the modern world
The close juxtaposition of rapid economic and technological change with traditional values and customsSome countries are comfortable
combining the traditional and the modern
Some countries are not comfortable (Modernization has widen the gap between the “haves” and the “have-nots”)
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Importance of Labor Markets
Most people rely almost entirely on wages and salaries to consume and saveSo, it is in the labor market where most
people see the benefits of growth
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Trends in Real Wages
1. Over the 20th century, all industrial countries have enjoyed substantial growth in real wages1999 U.S. workers earnings commanded 4 times
that of 19292. Since the early 1970s however, the rate of
real wage growth has slowed1960-1973 2.57% increase in income1973-1996 0.93% increase in income1996-1999 3.33% increase in income
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Trends in Employment and Unemployment
3. Recent decades have brought a pronounced increased in wage inequality in the U.S.Growing gap between skilled and unskilled
4. In the U.S., the number of people with jobs has grown substantially in recent decades34% increase in employment 1980-1999
5. Western European countries have been suffering high rates of unemployment for almost 2 decadesDouble-digit unemployment was common
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Supply and Demand in the Labor Market
“Price” The wage paid to workers--measured per hour or
per year“Quantity”
The amount of labor firms use--measured by the number employed
“Demanders”Firms and employers
“Suppliers”laborers
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Wages and the Demand for Labor
Demand for labor depends uponThe productivity of laborThe market price of the output
Employers want to hire more employees whenWorkers are more productiveGoods and services workers produce
become more valuable
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Diminishing Returns to Labor
Marginal ProductThe extra production gained by adding one more
workerDiminishing returns to labor
If the amount of capital and other inputs in use is held constant,
Then the greater the quantity of labor already employed,
And the less each additional worker adds to production
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Value of Marginal Product
Value of marginal productThe amount of extra revenue that each
worker generates for the firmEquals the worker’s marginal product
multiplied by the price of the output
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Fig. 9.1The Demand Curve for Labor
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Shifts in Demand for Labor
Increases in the value of marginal product will increase the demand for labor
Two main factors shift labor demand1. Increase in the price of the output2. Increase in the productivity of workers
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Fig. 9.2A Higher Relative Price of Output Increases the Demand for Labor
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Fig. 9.3Higher Productivity Increases the
Demand for Labor
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Supply of Labor
The total number of people who are willing to work at each real wage is the supply of labor
At any given real wage, potential suppliers of labor must decide if they are willing to workYour reservation price is the minimum
payment you would be willing to accept
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Fig. 9.4The Supply of Labor
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Shifts in the Supply of Labor
For macroeconomistsThe most important factor shifting the
supply of labor is the size of the working-age populationDomestic birthrateImmigration and emigration ratesAge of entering and leaving the labor force
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Trends in Real Wages and Employment
Why have real wages increased by so much in the industrial countries?Increases in productivity increase the
demand for laborIncreases in the demand for labor increase
real wage rates
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Fig. 9.5An Increase in Productivity
Raises the Real Wage
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Trends in Real Wages and Employment
Since the 1970s, real wage growth in the U.S. has slowed, while employment has expanded rapidly. What accounts for these trends?Slowdown in the pace of productivity
gainsSimultaneous increases in the supply of
labor
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Trends in Real Wages and Employment
Why has the gap between the wages of skilled and unskilled workers widened in recent years?GlobalizationTechnological change
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GlobalizationGlobalization
Markets for many goods and services are becoming international, rather than national or local
It’s easier for goods to cross bordersGlobalization brings increased specialization
Makes consumers better offMay make domestic workers and firm owners worse
offGlobalization encourages worker mobility
The movement of workers between jobs, firms, and industries
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Fig. 9.6The Effect of Globalization on the
Demand for Workers in Two Industries
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Technological Change
Skill-biased technological changeTechnological change that affects the
marginal products of higher-skilled workers differently from those of lower-skilled workers
Simplest jobs are taken over by robots and computer-controlled machinery maintained by skilled operators
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Fig. 9.7The Effect of Skill-Biased Technological
Change on Wage Inequality
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Unemployment
Labor force includesEmployedUnemployed
Unemployment rate The percentage of the labor force that is
unemployed
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Frictional Unemployment
Frictional unemploymentThe short-term unemployment associated with
the process of matching workers with jobsThe labor market is dynamic
New jobs are constantly being created and others endedPeople move, gain new skills, leave the labor force to
rear children
The costs are low (maybe negative)Better matches for firms and workers
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Structural Unemployment
Structural unemploymentThe long-term and chronic unemployment that
exists even when the economy is producing at a normal rateLack of skillsLanguage barriersDiscriminationStructural features of the labor market (e.g., unions,
minimum wage laws)The costs are high
Long periods of unemployment are hard to recover from
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Cyclical Unemployment
Cyclical unemploymentThe extra unemployment that occurs
during periods of recessionIncreases in unemployment in recessionsDecreases in unemployment in expansions
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Total Unemployment
Total unemployment is the sum ofFrictional unemploymentStructural unemploymentCyclical unemployment
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Impediments to Full Employment
A surplus of workers Minimum wage lawsLabor unions
Unemployment insuranceIncentive for longer searches
Other government regulationsCosts of complying with regulations can
be high
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Fig. 9.8A Legal Minimum Wage
May Create Unemployment