Session 8 - Labor Markets (complete) Flashcards
(33 cards)
What are the 5 grand challenges in labor economics?
- The gig economy and remote work
- Women’s labor force participation
- Automation and AI
- Skill gaps and reselling
- Aging workforce and declining births
The gender pay gap - one big challenge of labor economics
- What part of the gender earnings gap closed over the 20th century?
- What is the remaining gap due to? (2 reasons)
- Gender earnings gap from differences in productive characteristics like education and work experience largely closed
- remaining gap largely due to
disproportional penalty on flexible and shorter work hours
-e.g. 40hrs per week often get paid much more than double compared to 20hrs week
child penalty
Child penalty : what possible explanations are there?
- Biology: assumption that biologically preferences change once a women gives birth; evidence based on adoption/ lesbian couples suggest that this plays a very limited roles
- More importantly - Gender norms and culture:
child penalties correlate on survey responses on whether women with children should work - Government policies: taxes, transfers, family policies (parental leave, child care provision)
Automation - one grand challenge in labor economics
What effects (3) did automation have in the past (+ example)?
Automation in the past:
- plenty of historical examples
Displacement effect: automation directly replaces labor
e.g.: automation of spinning and weaving tasks in the early Industrial Revolution
Productivity effect: as automation increases productivity, economy expands and increases the demand for labor in non-automated tasks
e.g. Introduction of ATMs reduced the costs of banking and encouraged banks to open more branches and hire more bank tellers
Reinstatement effect: creation of new tasks in which labor has a comparative advantage
e.g. the mechanization of agriculture in the 20th century US coincided with a lot of new jobs burgeoning industries of farm equipment
What does SBTC stand for and what does it entail?
SBTC = Skill-Biased Technological Change
> The hypothesis that new technologies increase the productivity of skilled workers more than those of less skilled workers
technological changes will lead to higher wage inequality -> SBTC associated with computer technologies is often cited to explain the growing wage inequality since 1980s
What are the reasons for the historical decrease in working hours?
- Production in several industries has become less labor-intensive and more capital-intensive (e.g. automation)
- at the core of how firms optimize their production, given the technologies available and the costs of production inputs - As people escaped poverty and became richer, their demand for leisure time increased
- this concerns the individual choice of (potential) workers
Utility functions - how can we understand how the potential workers decide their work hours?
- Need to understand their preferences
- We can quantify preferences using a utility function, with consumption (C) and leisure (free time) time (L)
U(C,L)
- Utility is a measure of the value that one places on an outcome (think of the payoffs in game theory)
Indifference curve
- What is it?
- What can be said about indifference curves
-shape?
-what does it mean if it is flatter/more curvature?
- can they cross?
- Indifference curves plot out all the consumption combinations that provide a consumer with the
same level of utility or satisfaction.
2.1 The typical (convex) shape of an indifference curve implies that individuals prefer balanced consumption baskets - extreme baskets are less preferred
2.2 The more curvature the more preference for variety; the flatter the less preference for variety
2.3 Indifference curves cannot cross because they are isocurves: each curve represents a distinct and constant level of utility; if they cross, it would mean that the same combination of goods corresponds to two different utility levels, which cannot be true
What is the budget constraint? (Definition + formula)
The budget constraint defines the most expensive combinations of goods that a person can afford
worker’s budget constraint is:
C=wH=w(24-L)
How is the unemployment rate calculated?
The unemployment rate is calculated as the percentage of the total labor force that is unemployed but actively seeking employment. The labor force includes individuals who are either employed or unemployed and actively looking for work.
unemployment rate = unemployed/ labor force x 100
What helps to counter wage stickiness and ameliorate (=abbauen) structural unemployment?
Reducing union power: policies that limit the bargaining power of unions can help in bringing wages closer to market equilibrium
* Inflation: because wage stickiness often applies only to nominal wages, reduction
in real wages due to inflation softens the ”price floor”
* Payroll tax cuts: this lowers the overall cost of hiring, making it more financially
feasible for employers to hire or retain worker
The historical decrease in working hours: reasons?
“We are richer and work less today.” -> US during the 20th century: annual work time decreased by more than one third; hourly earnings increased by more then six-fold.
Some reasons:
1. Production in several industries has become less labor-intensive and more capital-intensive (e.g. automation)
2. As people escaped poverty and became richer, their demand for leisure time increased
Notes on indifference curves
Shape?
Can they cross?
Individuals prefer balanced consumption baskets -> implied by the typical convex shape of an indifference curve
-> the more curvature the more preference for variety. // The flatter the less preference for variety.
Indifference curves cannot cross because they are isovcurves: each curve presents a distinct and constant level of utility.
-> if they cross, it would mean that the same combiantion of goods corresponds to two different utility levels, which cannot be true
What is the budget constraint in an indifference curve?
The budget constraint defines the most expensive combinations of goods that a person can afford
A worker’s budget constraint is:
C = wH = w(24-L)
The feasible set is all combinations of goods that a person can afford -> if you look at the linear graph, this would be represented by the triangle area underneath the budget constraint
Utility maximization: When is utility maximized?
- whenever an indifference curve crosses the budget constraint in two places, there will be a better attainable indifference curve above it
- So only one indifference curve touches the budget constraint exactly once, and this unique curve identifies the point that maximizes utility
Rise in real wage
- What is the difference in nominal & real wage?
- How can this come about (2)?
Nominal wages: wages measured in money
Real wages: wages adjusted for price changes (inflation)
Increase in real wages could be due to either increases in nominal wages or decreases in price
-> real wages matter for workers
-> utility function changes with an increase of real wage increase since budget constraint becomes steeper
Two effects that govern whether people want to work more or less - which are they? Explain
Income Effect: the effect that the additional income would have if there were no change in the prices (in this case wages);
-> induces workers to work less as leisure is a normal good
( Remember Normal good = )
Substitution Effect: the effect that is only due to changes in prices, holding utility level constant
-> induces workers to work more as working becomes more valuable
The overall effect depends on the sum of the income and substitution effects
Historically, income effect dominated -> with higher wages, people worked less
Labor force participation (LFP) - What does it capture?
the share of population that is interested in working; can be affected by various socio-economic and cultural factors
How do you calculate the LFP?
LFP = Labor force participation
LFP rate = Labor force/ working-age population
= employed + unemployed / working-age population
[ Working-age population: those aged 15 or older (who are not in the military or institutionalized)
Employed: working-age people who are working
Unemployed: working-age people without jobs but looking for jobs
Labor force: the employed plus the unemployed ]
Unemployment rate
- How is it calculated?
Unemployment rate = unemployed / labor force x 100
- For what is the unemployment rate a key indicator?
- What does low/high unemployment indicate?
The unemployment rate is a key indicator of population satisfaction with the economy.
Low unemployment rate: People who want to have a job have a job they like
High unemployment:
problematic, can lead to
- reduced consumer spending
- increased government debt
- erosion of skills and work experience
- social unrest
Frictional unemployment
Frictional unemployment occurs due to the time it takes for employers to search for workers and for workers to search for jobs
Some sources of frictional unemployment:
- Job searching: it takes time for workers and employers to find positions that match their skills, preferences, and salary expectations
- skills mismatch: if the workers’ skills do not align well with available job openings, they take additional time to realize this and seek retraining
- unemployment insurance: while it provides a safety net, unemployment insurance can incentivize workers to take longer in their job search
Structural unemployment
Structural employment occurs when wages don’t fall to bring labor demand and supply into equilibrium
Example: wage-price bargained is higher than the equilibrium
-> effectively serves as a price floor -> labor supply is persistently higher than the labor demand
-> this gap (surplus of supply) is structural unemployment
Sources of structural unemployment
Effieciency wages: employers might pay wages higher than the equilibrium level to boost worker productivity, morale or loyalty
wage stickiness: often, wages do not adjust downwards to changes in labor market conditions (e.g. decreases in demand for firm’s products). This can be due to long-term employment contracts or employment contracts or employee resistance to wage cuts
Unions: labor unions often bargain for higher wages for their members
