CHAPTER 4 THE LABOR MARKET
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A shift in labor supply
*Assuming workers are homogenous, and capital is fixed!!* *An increase in labor supply* reduces the wage and raises employment.
What causes the labor supply curve to shift?
*Changes in preferences, culture,* attitudes towards work: an *increase in the percentage of women in the labor force* The health crisis may reduce the supply of labor as some workers may not be able to go back to work for *medical reasons* or because they need *to stay at home watching their children*. *Changes in alternative opportunities/income*: the supply in the labor market depends on the opportunities available. The generosity of the *welfare system/unemployment benefits* *IMMIGRATION*: movement of workers from country to country is an important source of shift in labor supply.
The diminishing marginal product of labor
*DIMINISHING MARGINAL PRODUCT of LABOR*: the *marginal product of an input declines as the quantity of the input increases* keeping the other factors of production constant. For *labor*, as *the number of workers increases* holding capital and land constant, the *marginal product of labor declines*. As more workers are hired, each additional worker contributes less to production than the prior one.
The markets for factors of production
*Factors of production* are the *inputs* used to produce goods and services (output). *Labor, land, physical capital, and human capital* are the most important factors of production.
The *individual supply of labor curve* will depend on the *income and substitution effects*:
*INCOME EFFECT of a rise in wages*: as wages rise, people feel better off financially and therefore may not feel a need to work as much *(-)* *SUBSTITUTION EFFECT of a rise in wages*: as wages rise, the *opportunity cost of leisure rises*; the substitution effect leads to more hours being worked *(+)* *The result depends on which effect is dominant.* *For SS1 an increase in the real wage induces higher labor supply (SUBSTITUTION EFFECT PREVAILS)* *For SS2, there is a point where a higher wage induces less hours of work to be supplied: (FIRST SUBSTITUTION EFFECT, THEN INCOME EFFECT PREVAIL)*
Supply and demand of labor
*Labor markets* are governed by the forces of *SUPPLY & DEMAND*. *Supply & demand for labor determine WAGE AND QUANTITY of labor.*
What causes the labor demand curve to shift?
*OUTPUT PRICE*: an increase in the price of the good (ceteris paribus) *raises the value* of the marginal product and *shifts the labor demand curve to the right*. *TECHNOLOGICAL CHANGE*: technological advance *raises the marginal product* of labor since it makes workers *more productive* and the *labor demand curve shifts to the right*. *Supply of other FACTORS OF PRODUCTION (LAND & CAPITAL)*: a change in the supply of capital or land will affect the marginal product of labor depending on whether the other factor is a: If it's a *complement shift to the right* (we assume that factors are complements unless specified) If it's a *substitute shift to the left* *Physical capital may be a compliment or a substitute (robot) of labor*
The elasticity of labor supply
*The elasticity of supply* (slope of the curve) of labor depends on: *Geographical mobility of labor*, which depends on: The willingness and ability of people to move; extent of *social, cultural and family ties* The cost and availability of *housing* in different areas and *homeownership rate* *Occupational mobility of labor*: Lack of *information of available* jobs in other occupations The extent of *skills and qualifications* to do the new job (training) Anxiety at switching jobs/occupations (uncertainty avoidance) Labor market *regulations*
Other factors of production: land and capital
*The rental price of land and the rental price of capital* are also determined by supply and demand. The firm will increase the quantity of land/capital hired until the value of *the FACTOR'S MARGINAL PRODUCT EQUALS THE FACTOR'S PRICE*, as with labor.
The labor demand curve
*The value of the marginal product of the labor curve is the labor demand curve* for a competitive firm; it determines *how many workers a firm is willing to hire at each wage level*.
VMPL and the demand for labor
*VMPL diminishes as the number of workers rises* because the market price of the good is constant (in competitive markets) and the marginal product of labor falls. The profit-maximizing firm hires workers up to the point where *the VALUE of the MARGINAL PRODUCT of LABOR (MARGINAL REVENUE) EQUALS the NOMINAL WAGE (MARGINAL COST)*. *Wage* (marginal cost) = *VMPL* (marginal revenue)
A shift in labor demand
Assuming that labor and technology are *complements, an increase in labor demand* increases the wage and increases employment.
How will the pandemic affect automation?
Automation will rise and businesses have become more digitalized.
Automation potential by industry in the U.S.
Educational services don't have a lot of automation potential.
Are fathers/mothers more likely to work than non-fathers/non-mothers?
Fathers are more likely to work than non-fathers. Mothers are less likely to work than non-mothers. This is because mothers are more likely to take care of children instead of work while fathers are more likely to work to support the family than non-fathers.
How has the pandemic affected employment by gender?
Female-dominated industries (accommodation and food services, wholesale and retail trade, manufacturing) were more impacted by the pandemic than male-dominated industries.
Labor force participation gender gap
Labor force participation rates are lower among women, but *the gap varies by income category*. The gap varies the least for low income and the most for lower-middle income.
Equilibrium in the labor market
Labor supply and demand determine *the equilibrium wage and labor*. Shifts in the supply and/or demand curve for labor cause the equilibrium wage and quantity of labor to change. *Shifts in the supply of labor*: if there is an *INCREASE IN THE NUMBER OF IMMIGRANTS*, the supply curve shifts to the *right*. This results in an *increase in the number of workers and lower wages* (ceteris paribus). *Shifts in the demand for labor*: if there is an improvement in *technology*, the demand curve shifts to the right (assuming that *labor technology complements *). This results in *higher wages and an increase in the number of workers*.
Routine vs. non-routine jobs U.S., 1983-2018
Non-routine jobs have increased while routine jobs have plateaued and decreased.
Are technology and labor substitutes or complements?
Technology is more likely to be a substitute for routine occupations and a complement for non-routine occupations. *Non-routine cognitive*: incl. management and professional occupations *Routine cognitive*: including sales and office occupations *Non-routine manual*: occupations related to assisting/caring for others *Routine manual*: construction, transportation, production and farming
The individual's supply of labor
The *individual labor supply* curve reflects how workers decide about the *labor-leisure trade-off*. This response to changes in the *opportunity cost of leisure*. The wage rate must be enough to overcome the *opportunity cost of leisure*.
The VALUE of the marginal product of labor
The *value of the marginal product* is the marginal product of the input multiplied by the market price of the output. *VMPL = MPL x P* The *value of the marginal product* is measured in *dollars, euros, pounds, yens (nominal terms)...*
Employment rate gender gaps EU, 2018
The Scandinavian countries have the lowest gap while Malta, Macedonia, Greece, Italy, and Romania have the highest gap.
The demand for labor: marginal product of labor
The demand for labor is determined by the *EMPLOYER*, and it is based on the *WORKER'S PRODUCTIVITY (marginal product of labor)*. The *MARGINAL PRODUCT OF LABOR*: increase in *the amount of output from an additional unit of labor*. Production per worker decreases as the number of workers increases.
Equilibrium in the markets for land and capital
The marginal product of any factor (land, capital, labor) depends on the quantities of the *other factors available*. *A change in the supply of one factor alters the earnings of all factors* since factors are used together in ways that make the productivity of each factor depend on the other factor's availability. The impact will depend on whether the factors are *substitutes or complements*.
Geographical mobility in the EU
There is no evidence that regional migration is extensive in the *European Union compared to the United States*. Europe has many *languages and cultures*, which hinder migration and labor mobility. Unions, *labor market rigidities* and immigration regulations may also impede labor movements between countries. 73% of EU citizens would not want to work outside their home country. The older the citizen, the less likely they are to want to move.
EU unemployment rates July 2020
There's a 14% difference between the worst country (Spain) and the best country (Czechia).
The aggregate supply of labor
We assume that on *aggregate the SUBSTITUTION EFFECT IS STRONGER than the income effect on an aggregate level*. As a result, there is an *UPWARD-SLOPING AGGREGATE LABOR SUPPLY CURVE*, which means that... *"An increase in the wages induces workers to increase the quantity of labor they supply"*.