Ch 18: Wages and UnemploymentI. Five Important Labor Market TrendsII. Supply and Demand in the Labor MarketExampleTo maximize profits, the firm should hire workers up to the point where: In fact, the demand curve is defined implicitly by: B. Shifts in the Demand for Labor B. Shifts in the Demand for Labor (cont.) III. Explaining Trends in Real Wages and EmploymentIV. Unemployment and the Unemployment RateU.S. November 2010 Total population 308.7 million Civilian noninstitutional pop ages 16+ 238.7 million Civilian employment Measurement issues 1. True unemployment might be higher than measured because: Measurement issues (continued) 2. True unemployment may be less than measured because:IV. Types of UnemploymentV. Impediments to Full EmploymentV. Impediments to Full Employment (cont.)VI. Why are Unemployment Rates so High In Western Europe?VI. Why are Unemployment Rates so High In Western Europe?1Ch 18: Wages and UnemploymentUnderstanding the labor market is key to understanding the macroeconomy.In this section, we will discuss:-Some important trends in labor markets-Use supply and demand to understand the labor market-Talk about measures of the state of the labor market.2I. Five Important Labor Market TrendsTrends in Real Wages34Average constant-dollar wages of full-time males,age 22 - 65 by educational group, 2002 dollars20,00040,00060,00080,000100,0001963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002PC CGSC HSGHSD5Trends in Employment and Unemployment64 6 8 10 121980 1990 2000 2010Yearfrance usUnemployment Rate Trends in France vs. US7II. Supply and Demand in the Labor MarketA. Labor Demand CurveWhy does a company hire workers even thought it must pay them? Because it expects to receive more in extra revenue than it must pay.8Example# of workers # of goods producedMarginal ProductValue of MP (P = $5)001 30301502 55251253 75201004 9015755 100 10 509To maximize profits, the firm should hire workers up to the point where:10In fact, the demand curve is defined implicitly by:11B. Shifts in the Demand for Labor12B. Shifts in the Demand for Labor (cont.)13C. Labor Supply CurveBasic premise: People enjoy leisure and consumption. So utility depends on both:U(Consumption, Leisure)But the only way to buy goods is to earn income, so you must give up leisure.Time endowment = T = Hours of work + hours of leisureBudget constraint:14Suppose your wage increases. How should you respond?1516D. Shifts in Labor Supply17III. Explaining Trends in Real Wages and EmploymentWe can now combine supply and demand to try to explain trends in real wages and employment.A. Why Real Wages have increased over time.W/PN18B. Why wage growth slowed down.W/PN19C. Why wage inequality increasedW/PLess skilled workers (textile)W/PMore skilled workers (software)20C. Why wage inequality increased (cont.)W/PN5 10 15percent1890 1910 1930 1950 1970 1990 2010yearForeign-Born % of U.S. Population21C. Why wage inequality increased (continued)W/PLess skilled workersW/PMore skilled workers220 50 100 150 200 250Pounds1750 1800 1850yearFarm laborers Other laborersArtisans White-collar employeesWages in England, at Constant PricesEstimates from Lindert-Williamson (1983)Industrial revolution.3 .35 .4 .45 .51920 1940 1960 1980 2000 excluding capital gains including capital gainsElectrification and the IT RevolutionIncome Share of the Top 10% of the Income Distribution,1917 - 200623A. Measuring UnemploymentBLS surveys about 60,000 households. Each person 16+ is categorized as:Employed: worked full-time or part-time during the past week, or is on vacation or sick leave from regular job.Unemployed: did not work during the preceding week, but made some effort to find work, such as going to a job interview during the past 4 weeks.Out of the labor force: did not work in the past week and did not look for work in the past 4 weeks.IV. Unemployment and the Unemployment Rate24More Definitions:Labor Force: the number of people employed or unemployed.Employment rate: number employed divided by noninstitutional population ages 16+Labor force participation rate: number in labor force divided by noninstitutional population ages 16+Unemployment rate: number unemployed divided by labor force25U.S. November 2010Total population 308.7 millionCivilian noninstitutional pop ages 16+ 238.7 millionCivilian employment 138.9 millionCivilian unemployment 15.1 million26Measurement issues1. True unemployment might be higher than measured because:27Measurement issues (continued)2. True unemployment may be less than measured because:28IV. Types of UnemploymentFrictional – short-term unemployment associated with the process of matching workers with jobs.Structural – long-term or chronic unemployment due to lack of skills, language barriers, discrimination, skill mismatch. Etc.Cyclical unemployment – Type of unemployment that occurs during recessions29V. Impediments to Full Employment30V. Impediments to Full Employment (cont.)31VI. Why are Unemployment Rates so High In Western Europe?32VI. Why are Unemployment Rates so High In Western