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Wages and Unemployment
Friday, February 12, 2016

10:33 AM

Three Important Labor Market Trends

• Over the twentieth century, all industrial countries have enjoyed substantial
growth in real wages
• Since the early 1970s, however, the rate of real wage growth has stagnated,
while both the number of people with jobs and the percentage of the
population employed have grown substantially
○ Real hourly wages were exactly the same in 2012 as they were in 1970
• Recent decades have brought a pronounced increase in wage inequality in the
United States
○ Gap between skilled and unskilled workers

Supply and Demand in the Labor Market

• In the labor market, the "price" is the real wage paid to workers in exchange for
their services
• The "quantity" is the amount of labor firms use
• Diminishing 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, the less
each additional worker adds to production
○ The marginal product of each worker is the extra production that is
gained by adding one more worker
• The value of a worker's marginal product is the amount of extra revenue that
the worker generates for the firm
○ The value of the marginal product of each worker is that worker's
marginal product, stated in terms of the number of additional computers
produced, multiplied by the price of output
• The lower the wage a firm must pay, the more workers it will hire
• Any factor that raises the value of the marginal product of a worker will shift the
labor demand curve to the right
○ An increase in the price of the company's output
○ An increase in the productivity of workers
• The suppliers of labor are workers and potential workers
• The most important factor affecting the labor supply is the size of the workingage population
○ Birthrate
○ Immigration and Emigration rates

• The suppliers of labor are workers and potential workers
• The most important factor affecting the labor supply is the size of the workingage population
○ Birthrate
○ Immigration and Emigration rates
○ Age at which people enter the workforce and retire

Explaining the Trends in Real Wages and Employment

• The large increase in real wages results from the sustained growth in
productivity experienced by the industrial countries during the twentieth
century
○ Increased productivity raises the demand for labor, increasing
employment and the real wage
○ Productivity grew due to technological progress and large increases in
capital
• Large increases in employment in the face of slow growth of labor demand (due
to productivity slowdown) can be explained only by simultaneous increases in
the supply of labor
○ Increased participation by women in the workforce
• Globalization increases specialization and efficiency
○ Consumers stop buying certain goods from domestic producers and
switch to foreign ones, causing domestic business to lose revenue
○ Those workers that benefit from specialization become economically
separated from those that are harmed
• Worker Mobility: the movement of workers between jobs, firms, and industries
○ Labor moves out of low-profit industries and into high-profit ones
• Skill-Biased Technological Change: technological change that affects the
marginal products of higher-skilled workers differently from those of lowerskilled workers

Unemployment and the Unemployment Rate

• Employed: worked full-time or part-time during the past week or is on vacation
or sick leave from a regular job
• Unemployed: did not get work during the preceding week but made some effort
to find work in the past four weeks
• Out of the Labor Force: did not work in the past week and did not look for work
in the past four weeks
• Labor Force: the total number of employed and unemployed people in the
economy
• Unemployment Rate: the number of unemployed people divided by the labor
force
• Participation Rate: the percentage of the working-age population in the labor
force
○ Divide the labor force by the working-age population
• From an economic perspective, the main cost of unemployment is the output

• Unemployment Rate: the number of unemployed people divided by the labor
force
• Participation Rate: the percentage of the working-age population in the labor
force
○ Divide the labor force by the working-age population
• From an economic perspective, the main cost of unemployment is the output
that is lost because the workforce is not fully utilized
• Societal costs include unemployed workers who are liable to stop paying taxes
and start receiving government support payments
• Periods of unemployment can lead to loss in self-esteem, depression, and even
suicidal behavior
• Unemployment Peril: a period during which an individual is continuously
unemployed
• Duration: the length of an unemployment spell
• Workers whose unemployment spells are broken up by brief periods of
employment or withdrawals from the labor force are chronically unemployed
• Discouraged Workers: people who say they would like to have a job but have
not made an effort to find one in the past four weeks because they believe
there are no jobs available for them
○ Counted as out of the labor force but not unemployed
• Involuntary part-time workers are people who say they would like to work fulltime but are able to find only part-time work
○ Employed rather than unemployed

Types of Unemployment and their Costs

• Jobs and workers are heterogeneous
○ Differ in location, skills required, working conditions, etc

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