WAGES & UNEMPLOYMENTPART I

Chapter 6

Trends in Real Wages and Employment

1. In the last 100 years, all industrial countries have enjoyed substantial growth in real wages.

U.S. Workers: In 2007 the average

worker’s earning could buy twice as many goods as services as in 1960 and nearly five times as many goods and services as in 1929.

2. Since 1970, the rate of increase in the U.S. real wage has slowed.

Real wages have increased since 1970, but at a much slower rate than prior to 1970.

Trends in Real Wages and Employment

real wage = nominal wage/price level

The real wage is the purchasing power of the nominal wage. That is, the real wage tells us the amount of goods and services that can be purchased.

Real Wage

1960 – 1973: 2.5% 1973 – 1996: 1.1%

1996 – 2007: 2.0%

U.S. Real Wage Growth

3. Since 1970, the inequality in U.S. real wages has increased. A. The real wage of the least-skilled, least-educated workers has fallen since 1970. The real wages of the least-skilled workers have fallen by 25% to 30%.

B. The real wages of the most-skilled, most-educated workers have risen continually since 1970.

Trends in Real Wages and Employment

Currently, the real income of U.S. workers with advanced (graduate) degrees is almost three (3) times higher than the real income of a high school graduate.

Trends in Real Wages and Employment

4. Since 1970, the level of employment in the U.S. has increased substantially. That is, the number of

people with jobs has risen substantially.

Trends in Real Wages and Employment

5. Unemployment in the U.S. has been substantially lower than in Europe.

Average unemployment: 1990-2007

5.5% in the U.S.

10.0% in France

Trends in Real Wages and Employment

W = nominal wage

P = price level

w = real wage =W/P

N = quantity of labor

Notation

Labor Supply: The supply of labor curve (LS) relates w to the QS of N.

Supply and Demand in the Labor Market

LS is upward sloping; the higher w, the higher N.

Labor Supply

Labor Supply

Shifts in LS are primarily caused by changes in the size of the labor force.

Shifts in the Supply of Labor.

Size of Labor Force

The demand for labor curve (LD) relates w to the QD to N.

Labor Demand

LD is downward sloping; the higher w, the lower N.

Labor Demand

Labor Demand

1. Changes in the price of the worker’s output.

2. Changes in productivity.

Shifts in the Demand for Labor

Price of the Worker’s Output

Productivity

Labor Market Equilibrium

Explaining the trends in U.S. w and N

1. Last 100 years—substantial growth in w

Primary Cause: productivity ( technology)

Productivity

2.(4.) Since 1970, the rate of increase in w has slowed and N has increased.

Causes:1. Smaller increases in productivity—LD

shifts outward by smaller amounts.

2. Expanding labor force—LS shifts outward.

Explaining the trends in U.S. w and N

Small in Productivity

Labor Force

3) Since 1970, w inequality has increased.

Causes: 1. Globalization - expands the market for

some goods, reduces the market for others.

2. Technological change - has tended to increase the productivity of skilled workers.

Explaining the trends in U.S. w and N

Import Goods – Unskilled Workers

Globalization

Export Goods – Skilled Workers

Globalization

Result: Wage distribution becomes more unequal.

Globalization

Technology

Favored skilled labor

LRAS gives us the relationship between inflation (π) and output (Y).

LRAS—A vertical line showing the economy’s potential output (Y*).

LRAS – Long Run Aggregate Supply

To derive LRAS, we begin in the labor market.

We change P and see what happens to N

and Y.

Deriving LRAS

Deriving LRAS

P

At w1, QD > QS. There is a shortage of N. The nominal wage will be bid up until N0 is reached.

At equilibrium, w0 = W0/P0 = W1/P1.

N remains at N0. There will be no change in output.

Deriving LRAS Continued

Using the same logic, we can draw LRAS in terms of the inflation rate (π).

Deriving LRAS Continued

Permanent changes in the labor market will alter Y* and shift LRAS

Productivity and Labor Force

Productivity and Labor Force

Labor Market

LRAS