Chapter 3 Macro
Total Factor Productivity
s a measure of the overall effectiveness with which capital and labor are used.
Unemployment rate
s the frac- tion of the labor force that is unemployed
Full employment output
sometimes called potential output, is the level of output that firms in the economy supply when wages and prices have fully adjusted.Y = AF(K, N).
Supply shock
sometimes, productivity shock—to refer to a change in an economy's production functionA positive, or ben- eficial, supply shock raises the amount of output that can be produced for given 6The term shock is a slight misnomer. Not all changes in the production function are sharp or unpre- dictable, although many are. Output, Y (billions of 2005 dollars) FIGURE 3.4 An adverse supply shock that lowers the MPN An adverse supply shock is a downward shift of the production function. For any level of labor, the amount of output that can be produced is now less than before. The ad- verse shock reduces the slope of the production function at every level of employment. quantities of capital and labor. A negative, or adverse, supply shock lowers the amount of output that can be produced for each capital-labor combination.
substitution effect of a higher real wage
tendency of workers to supply more labor in re- sponse to a higher reward for working; substitution effect: If the reward for working rises for a short period, people will take advantage of the opportunity to work more.
Aggregate Labor Supply
the aggregate supply of labor is the total amount of labor supplied by everyone in the economy. Just as the quantity of labor supplied by an individual rises when the person's current real wage rises, the aggregate quantity of labor supplied increases when the economywide real wage rises. An increase in the current economywide real wage raises the aggregate quantity of labor supplied for two reasons. when the real wage rises, people who are already working may supply even more hours—by offering to work overtime, by changing from part-time to full-time work, or by taking a second job. a higher real wage may entice some people who are not currently in the labor force to decide to look for work. Because higher current real wages induce people to want to work more, the aggregate labor supply curve—which shows the relation between the aggregate amount of labor supplied and the current real wage— slopes upward. Factors other than the current real wage that change the amount of labor that people want to supply cause the aggregate labor supply curve to shift. Summary table 4 lists the factors that shift aggregate labor supply. We have discussed the first two factors in the table, wealth and the expected future real wage. Aggregate labor supply will also increase if the country's working-age population increases (for example, because of an increased birth rate or immigration), or if changes in the social or legal environment cause a greater proportion of the working-age Current real wage, w population to enter the labor force (increased labor force participation). For exam- ple, evolving attitudes about the role of women in society contributed to a large increase in the number of women in the U.S. labor market from the late 1960s to the mid-1990s; and the elimination of mandatory retirement in many fields may increase the participation rates of older workers.
employment ratio
the employed fraction of the adult population
Okun's law
the gap between an economy's full-employment output and its actual level of out- put increases by 2 percentage points for each percentage point the unemploy- ment rate increases.18,19 We express Okun's law algebraically as (Y - Y)/(Y)= 2(u - u). Supposing that the natural rate of unemployment is 6% and that the full-employment level of output is $15,000 billion. If the actual unemployment rate is 7%, or 1 percentage point above the natural rate, cyclical unemployment, u - u ̅, equals 1%. If cyclical unemployment is 1%, Okun's law predicts that actual output, Y, will be 2% (2 times 1%) lower than full-employment output, Y. Because Y equals $15,000 billion, Okun's law says that actual output will be $300 billion below the full-employment level (2% times $15,000 billion).
real wage,
the real cost of adding another worker; the wage measured in terms units of outputThis example shows that, when the benefit of an additional worker exceeds the cost of an additional worker, the firm should increase employment so as to maximize profits. Similarly, if at the firm's current employment level the benefit of the last worker employed is less than the cost of the worker, the firm should reduce employment. pg 71-72
Aggregate demand for labor
the sum of the labor demands of all the firms in an economy.
Aggregate supply of labor
the sum of the labor supplied by everyone in the economy.
Chronically unemployed
unemployed a large part of the time
Pure Income Effect
winning the lottery; he reduces work week bc of inc in money;Another example of a pure income effect is an increase in the expected future real wage. higher teach retires now ace gets his pay
The Substitution Effect and the Income Effect Together
A Long-Term Increase in the Real Wage. how long will the money last
Income Leisure Trade-Off
Ace makes 60 hr as a great tennis instructor but since everyday he is working he looses time to do what makes him happy which is skydiving pg 78
Factors that shift the Labor Supply Curve
Any factor that changes the amount of labor supplied at a given level of the current real wage shifts the labor supply curve. inc labor supply (immigrants) wealth (left)
Discouraged Workers
people who have become so discouraged by lack of success at finding a job that they stop searching
marginal product of capital
MPK, is the increase in output produced that results from a one-unit increase in the capital stock. Because ∆K additional units of capital permit the production of ∆Y additional units of output, the amount of additional output produced per ad- ditional unit of capital is ∆Y/∆K. Thus the marginal product of capital is ∆Y/∆K. The marginal product of capital is positive.The marginal product of capital declines as the capital stock is increased.
Factors that shift the Aggregate Demand for Labor Curve 77
Productivity:Right Beneficial supply shock increases MPN and shifts MPN curve up and to the right. Capital stock Right Higher capital stock increases MPN and shifts MPN curve up and to the right.
Full employment level of employment
The equilibrium level of employment, achieved after the com- plete adjustment of wages and prices,
Participation rate
The fraction of the adult population in the labor force
Factors that shift the Labor Demand Curve
The labor demand curve shifts in response to factors that change the amount of labor that firms want to employ at any given level of the real wage. size of capital stock
Structural Unemployment
The long-term and chronic unemployment that exists even when the economy is not in a recession; unskilled or low-skilled workers often are unable to obtain desirable, long-term jobs; the reallocation of labor from industries that are shrinking, or regions that are depressed, to areas that are growing.
natural rate of unemployment
The rate of unemploy- ment that prevails when output and employment are at the full-employment level
diminishing marginal productivity
The tendency for the marginal product of capital to decline as the amount of capital in use increases
Unemployment Spell
period of time that an individual is continuously unemployed
income effect of a higher real wage
The tendency of workers to supply less labor in response to becoming wealthier;income effect: If permanently higher wages make workers much better off, they will choose to work less.
Frictional Unemployment
The unemployment that arises as workers search for suitable jobs and firms search for suitable workers is called frictional unemployment. Because the econ- omy is dynamic, with jobs continually being created and destroyed and workers continually entering and exiting the labor force, there is always some frictional unemployment as workers are matched with appropriate jobs.
Factors that shift the aggregate labor supply curve 83
Wealth Left Increase in wealth increases amount of leisure workers can afford. Expected future real wage Left Increase in expected future real wage increases amount of leisure workers can afford. Working-age population Right ncreased number of potential workers increases amount of labor supplied. Participation rate Right Increased number of people wanting to work increases amount of labor supplied.
Demand for Labor
Workers are all alike.Firms view the wages of the workers they hire as being determined in a competitive labor market and not set by the firms themselves.In making the decision about how many workers to employ, a firm's goal is to earn the highest possible level of profit (the value of its output minus its costs of production, including taxes).
Labor Force
consists of all employed and unemployed workers
cyclical unemployment.
difference between the actual unemployment rate and the natural rate of unemployment; = u - u, where u is the actual unemployment rate and u is the natural rate.
Measuring Unemployment
employed, if the person worked full-time or part-time during the past week (or was on sick leave or vacation from a job); 2. unemployed, if the person didn't work during the past week but looked for work during the past four weeks; or 3. not in the labor force, if the person didn't work during the past week and didn't look for work during the past four weeks (examples are full-time students, homemakers, and retirees).
Leisure
for all off-the-job activities, including eating, sleeping, working around the house, spend- ing time with family and friends, and so on. To make themselves as well off as possible, individuals should choose to supply labor up to the point at which the income obtained from working an extra hour just makes up for the extra hour of leisure they have to forgo.
Production Function
he easiest way to graph it is to hold one of the two factors of production, either capital or labor, constant and then graph the relationship between output and the other factor Y = AK^0.3N^0.7 = (23.17)(K^0.3)(139.1^0.7) = 733.255K^0.3. showsThe production function slopes upward from left to right. The slope of the production function becomes flatter from left to right.
Factors of production
inputs to the production process;A key factor is the quantity of inputs—such as capital goods, labor, raw materials, land, and energy—that producers in the economy use. two most important are capital (factories and machines) and labor (workers)
Production Function
is a mathematical expression relating the amount of output produced to quantities of capital and labor utilized. A convenient way to write the pro- duction function is Y = AF(K, N), (3.1) 62 PART 2 | Long-Run Economic Performance where Y = real output produced in a given period of time; A = a number measuring overall productivity; K = the capital stock, or quantity of capital used in the period; N = the number of workers employed in the period; F = a function relating output Y to capital K and labor N.
real wage
is the amount of real income that a worker receives in exchange for giving up a unit of leisure (an hour, a day, or a week, for example) for work. It is an important determinant of the quantity of labor that is supplied.
DURATION
length of time that an unemployed spell last;1. Most unemployment spells are of short duration, about two months or less. 2. Most people who are unemployed on a given date are experiencing unem- ployment spells with long duration.
Utility
level of happiness;To find the level of labor supply that maximizes his utility, Ace must compare the costs and benefits of working an extra hour. The cost of an extra hour of work is the loss of an hour of leisure; this cost can be measured as the loss in utility that Ace experiences when he must work for an hour instead of skydive. The benefit of working an extra hour is an increase of $60 in income, which allows Ace to en- joy more consumption.
Pure Substitution Effect
one day rise in the real wage; someone offers to pay ace 600 an hr instead of 60
marginal product of labor,
or MPN, is the additional output produced by each additional unit of labor, ∆Y/∆N. As with the marginal product of capital, for small increases in employment, the MPN can be measured by the slope of the linetangent to a production function that relates output and labor.
mar- ginal revenue product of labor
or MRPN, measures the benefit of employing an additional worker in terms of the extra revenue produced. To calculate the MRPN, we need to know the price of the firm's output. If The Clip Joint receives $30 for each dog it grooms, the MRPN of the first worker is $330 per day (11 additional dogs groomed per day at $30 per grooming). More generally, the marginal reve- nue product of an additional worker equals the price of the firm's output, P, times the extra output gained by adding the worker, MPN: MRPN = P * MPN.
