chapter 4 powerpoint: overview of the labour market Flashcards by Badr Lotfi

the labor market

market that allocates workers to jobs and coordinates employment decision

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what is the scope of the labor market?

national labor market

regional

local

external

internal labor market

primary

secondary

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Adult Working Population (AWP)

those who are over 16 years of age and are in the labor force (LF) and not in labor force (NLF)

AWP = LF + NLF

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labor force (LF)

those (>16 years of age) who are employed (E) and those who are unemployed (U) but are actively seeking work or waiting to be recalled from layoff

LF = E + U

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not in labor force (NLF)

People who are not employed and are neither looking for work or waiting to be recalled from layoff

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Unemployment rate

the ratio of those unemployed (U) to those in the labor force (LF)

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when is the unemployment rate high?

high when the labor market is loose, which happened in 2009

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when is the unemployment rate low?

when the labor market is tight

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why are have there been sectoral changes in jobs?

some jobs have expanded over the years while some have contracted

due to changes occurring in a dynamic economy

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has employment in goods-producing industries risen or fallen?

fallen

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has employment in the private sector risen or fallen?

risen

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how did workers and employers adapt to the drastic changes?

through the acquisitions of new skills and technology

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the wage rate

The price of labor that equilibrate the labor market

is the price of labor per working hour

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how can the rage rate be measured?

in nominal and/or real terms

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nominal wage

what workers get paid per hour in current dollars

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real wages

nominal wages divided by some measure of prices (usually the consumer price index – CPI)

the real purchasing power of a worker’s earnings

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what are some of the problems with the use CPI as measure of changes in the purchasing power of workers?

Consumers change the bundle of goods and services they buy over time in response to changes in prices

The quality of goods and services change over time

CPI doesnt account for any of this

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what the difference between wages and earnings?

Wages refer to the payment for a unit of time/hour worked

Earnings refer to wages multiplied by the number of time units/hours worked

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total compensation

earnings plus employee benefits

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Employee Benefits

payments in kind or deferred

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income

total compensation + unearned income

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unearned income

interest, dividends, government transfer payments

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what do firms have to do to survive?

successfully operate in the labor market, the capital market, and the product market

where do firm purchase inputs from?

from the labor market and the capital market

labor (L) and capital (K) used in the production of goods and services

where does the study of the labor market begin and end?

with an analysis of the demand for and the supply of labor Employers/Firms demand for labor from different labor markets Employees/Workers supply their labor services

what are major labor market outcomes related to?

terms of employment (wages, compensation levels, working conditions) levels of employment

Firms’ total output (Q) and their mix of inputs (L and K) depend on which three forces?

Output or product demand (QD) The amount of labor (L) and capital (K) acquired at given prices Choice of technology (T ) available to firms

The amount of labor (L) and capital (K) acquired at given prices

wages (W) for L rental cost (rK) or price (pK) for K

whats the formula for demand of labor?

LD = f (W, QD, pK, T ) LD = labor demand W = wage rate QD = output or product demand T = technology pK is price

what will an increase in wage lead to?

A scale or output effect A substitution effect

A scale or output effect due to wage increase

the reduction in the scale of production or output due to the reduction in employment

A substitution effect due to wage increase

capital is substituted for labor in the production process

what happens if the demand for the product (QD) increases? why? other factors remained constant

this will lead to scale or output effect firms try to maximize profits; thus leading to an increase in labor demand The labor demand curve shifts to the right at every possible wage level indicated

what would happen if the supply of capital changed and rK or pK fell by 50%? what does this then do? basically a fall in capital prices other factors remained constant

more capital (K) would be used in production process generates two opposite effects for LD

what are the two opposite effects for LD when there is a fall in capital prices? what do the effects do?

If the scale effect dominates, --> more workers will be required as well, thus LD will shift to the right If the substitution effect dominates as firm adopt more capital-intensive technologies in response to cheaper capital, --> LD will shift to the left

on which levels can the demand for market labor be analyzed?

firm level industry level market

how do you analyze the market labor at firm level? machinists in the aircraft industry

we see how an increase in the wage rate of machinists affects their level of employment by a particular aircraft manufacturer

how do you analyze the market labor at industry level? machinists in the aircraft industry

to analyze the effect of this wage increase on the employment of machinists in the entire aircraft industry, we utilize an industry demand curve

how do you analyze the market labor at market? machinists in the aircraft industry

to see how the wage increase affects the entire labor market for machinists in all industries in which they are used, we use a market demand curve

employers find it difficult to substitute capital for labor (and vice versa in the short run or long run?

short run also true for product demand

employers adjust consumption and production behavior in the short run or long run?

in the long run

what happens to the market supply of a certain profession when the salaries of another profession increase?

she entire supply curve of the first profession shifts to the left

how is the curve of the market supply of a certain profession?

upward sloping

what happens to the firm supply of a certain profession when its salaries increase or decrease? why?

the firm can still hire as many as they please the supply of a profession at firm level is horizontal if salaries fall, they'll hire as many as they need at a lower price firms are wage takers, they don't influence the market wages

how is the supply curve of a profession at firm level in a perfectly competitive market?

horizontal

what does the wage rate in the labor market depend on?

depends on LD and LS (We) at which LD equals LS is the market-clearing wage

what will disturb the equilibrium wage?

Changes in labor demand or changes in labor supply the simultaneous changes in labor demand and supply

what are the forces that impede the adjustment of both wages and employment to changes in supply or demand?

Changing jobs often requires an employee to invest in new skills or bear the costs of moving Hiring workers can involve an initial investment in search and training firing workers or cutting their wages can be perceived as unfair, which may affect moral and productivity

which non market forces are barriers to market adjustment?

Government programs or laws such as minimum wage laws may serve to keep wages (especially for unskilled labor) above market levels, which could result in unemployment Customs or institutions (labor unions) also constrain the choices of individuals and firms

when are workers considered overpaid?

Workers whose wages are higher than the market-clearing wage Employers are paying more than necessary to produce their output: (WH > We) More workers want jobs than they can find

when are workers considered underpaid?

Employees whose wages are below market-clearing levels

why do employers face labor shortages due to WL < We (wage levels below market wage equilibrium)?

difficult for employers to find and keep workers those who remain will be dissatisfied and resentful production of goods and services will be affected

economic rents

the difference between the wage workers are actually paid on a job and the workers’ reservation wages sum the area between the market-clearing wage and the labor supply curve

The reservation wage of a worker

wage below which the worker would refuse (or quit) the job in question It is the opportunity cost to the individual worker for giving up hours of leisure for market work

why do rents differ for each worker?

each worker potentially has a different reservation wage

what happens if if wages are held above the market-clearing levels?

theoretically, there will be excess supply of labor (ESL or unemployment)

how could ESL or unemployment worsen?

if the labor demand curve shifts to the left