4. Macroeconomics - Labor Market

Labor market

the market in which households sell their labor as workers to business firms or other employers

Potential worker population includes everyone except

- Children < 16

- People in military

- People in institutions that restrict personal movement e.g. jail

Labor force

Sum of all employed and unemployed workers.

Employed

- Individuals with full-time or part-time job for pay.

Unemployed

- Individuals do not have a job, have actively looked for work in past 4 weeks and are available for job.

Discouraged workers

- Potential workers that would like a job but have given up and not actively looking therefore not in labor force.

Underemployed workers

- Workers willing to work more hours due to difficult circumstances but cannot,

Unemployment rate (+calculation)

- Percentage of the labor force that is unemployed.

o Calculate: (Unemployed/labor force) x 100%

Labor force participation rate (+calculation)

- = Percentage of potential workers who are part of the labor force.

o Calculate: (Labor force / potential workers) x 100%

E.g: in Sweden in 2023, the unemployment rate was 7.7% and the labor force participation rate was 75.2%

Value of marginal product of labor (+calculation)

The additional revenue (value) gained from adding an additional unit of employee.

- Calculate: The amount of output produced by one employee and two etc x the price. Then look at the marginal VMPL by each employee and compare to their wages. Maximize profit: MP > Wage

Labor demand

how many workers the organization will need in the future

Labor demand function

- Firms demand labor (workers) to maximize profits by comparing the VMPL (additional revenue generated by an additional worker) to their wage.

Diminishing marginal product of labor

- The demand for labor decreases (firms demand less) as more workers are hired because the B < C.

Labor demand slope and shift

- Slopes downwards -> firms demand less labor at higher wages and vice versa

- Wage changes and labor changes -> Moves along the curve

- Can shift due to changes in:

o Output market or productivity e.g. technology

o Cost of inputs.

Labor demand movements along the curve

Wage changes and labor changes

Aggregate labor demand:

Sum over all firms' labor demand.

Labor supply

the availability of workers with the required skills to meet the firm's labor demand (The individuals or people willing to work that supply labor to the firms.)

Labor supply slope

- Slopes upwards -> As wages rise, people more willing to work.

Vertical supply

- Because there is full employment, everyone interested already have found a full time job and therefore cannot increase the quantity of labor supplied more.

Labor supply movements along the curve

If wage changes and labor supply changes

Labor supply shifts due to:

o Work less -> shift to left

o Changes in tastes: Changing social perception of married women´s work or work life balance.

o The opportunity cost of time = The time you could have spent on doing something else e.g. worth playing games than working more.

o Changes in population e.g. Immigration (to the right) or demographic change - fewer young people than older -> shift left because fewer supply of labor. - lead to higher wages.

Aggregate labor supply

Sum of all individuals' labor supplies

Competitive Equilibrium in labor market

Where labor demand and labor supply curves intersect. Wage = Labor. Meaning no one would benefit from changing their behavior.

- It is at market clearing wage = Every worker who wants a job can find one.

Types of unemployment

- Frictional Unemployment

- Structural Unemployment

- Cyclical Unemployment

Frictional unemployment

unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills, also because workers have imperfect info about avilable jobs.

Structural unemployment

unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.

Reasons structural unemployment

Wage rigidity: Wages adjust slowly or do not adjust freely to clear the market. o and they hold the market wage above the equilibrium leading to people that want to work at that wage will be left unemployed.

Causes by wage rigidity

· Minimum wage laws

· Labor unions

· Collective bargaining = Contract negotiations between firms and labor unions.

· Efficiency wages (paying above the minimum to increase motivation)

· Downward wage rigidity = Firms reluctant to cut wages. Firms may choose to fire workers rather than lower wages which leads to unemployment.

Cyclical unemployment

- Due to short term fluctuations in the economy (recessions - reduction of economic activity/GDP) that cause labor demand curve to shift.

o Difference between actual employment rate and natural rate.

Natural rate of unemployment

= Rate around where economy fluctuates that includes both structural and frictional unemployment.

The long-run rate of unemployment

Average historical rate of unemployment.

Consequences of unemployment:

Being unemployed for a long time leads to:

- Loss of skills

- Loss of income

- Loss of social interaction

- Loss of perceived self-worth

Graduating during recession -> long term negative effect on wages.

- 1 % point increase in national unemployment -> in short run 7% lower wage and long run 2.5% lower wage

Key insight

- Competitive labor market models (where supply and demand meet) can't fully explain unemployment on their own, job searches explain frictional unemployment and wage rigidities explain structural unemployment

Policymakers aim to reduce unemployment by measuring it and implementing policies to limit its effects