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15. Principles of Economics (Brief Edition)_2e (13)

Chapter 13: Wages and. Unemployment.1. Discuss the four important trends that have. characterized labor markets in the U.S. since 1960.2. Apply a supply-and-demand model to understand. the labor market.3. Explain how changes in the supply of and demand. for labor explain trends in real wages and. employment since 1960.4. Define and calculate the unemployment rate and. the participation rate.5. Differentiate among the three types of. unemployment and the costs associated with each. McGraw­Hill/Irwin Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved. Five Important Labor Market. Trends.1. Increasing Real Wages.2. Slower Growth Rate Since 1973.3. Increased Wage Inequality in US.4. Increasing Unemployment in the US.5. Unemployment in Western Europe. 13­2 The Labor Market.• Supply and demand analysis can be used to find. the price of labor (real wages) and the quantity. (employment). – Analysis will consider the number of workers. employed, not work-hours per year.• Labor market is an input market. – Firms buy labor to produce goods and services.• Macroeconomics look at aggregate levels of. employment and real wages. – Microeconomics looks at wage determination for a. category of workers. 13­3 Wages and Demand for Labor.• The demand for labor depends upon:. – The productivity of workers. • Greater productivity increases employment. – The price of the worker’s output. • A higher real price increases employment.• Diminishing returns to labor. – Assumes non-labor inputs are held constant. – Adding one worker increases output but by less. than the previous worker added.• Value of Marginal Product (VMP) is extra. revenue that an added worker generates. 13­4 Shifting Demand for Labor.• Demand shifts when the value of the marginal. product of a worker changes.• Two factors determine the demand (VMP) for. labor. – The price of the company’s output. • An increase in market demand. – The productivity of the workers. • Greater quantity of non-labor inputs. • Organizational change. • Training and education 13­5 Higher Productivity. Increases in productivity. increase VMP. Demand curve shifts right. Employers hire more. workers at any given wage.Real Wage. Labor Demand. (after productivity. increase). Labor Demand. (before productivity increase). Employment. 13­6Individual Labor Supply.• Reservation wage is the lowest wage a worker would. accept for a given job. – Opportunity cost of working is your leisure activity. – Work compensates you for lost leisure. • If working conditions are unpleasant or dangerous, a premium. for that would be included in the wage. – Cost – Benefit Principle at work.Aggregate Labor Supply.• Macroeconomic determinants of labor supply. – Size of the working age population. • Domestic birthrate. • Immigration and emigration. • Ages when people enter and retire from the workforce. – Share of working-age population willing to work. 13­7 The Supply of Labor Labor. Supply.Real Wage. The labor supply curve. slopes up because at a.