European Labor Markets

Flashcards on European Labor Markets Economics, Labor Markets and Unemployment Basic concepts

Labor markets

Market where workers offer their labor services while employers demand these services to increase the output of their businesses.

Unemployment

Occurs if the labor market is not in balance so that the supply of labor exceeds labor demand. In consequence, persons who are willing and able to work cannot find a paid job

Aggregate demand

The total amount of goods and services demanded in an economy at a given price level. It's the sum of consumption, investment, government spending, and net exports.

Equilibrium wage

wage rate at which the quantity of labor supplied equals the quantity of labor demanded

Four Freedoms

Free movement of goods, services, capital and persons in a single EU internal Market

Explanations for unemployment

• basic model of competitive labor market

• classic explanations

• keynesian explanation

Basic model of competitive labor market

Labor supply and demand are dependent on workers’ wages (wage rate comparable to product prices)

→ labor demand is going down (value of marginal product of labor; law of diminishing returns)

→ labor supply is going up (substitution and income effect)

Value of the Marginal Product of Labor

Each additional worker contributes less output.

Law of diminishing returns

Adding more of one input (like labor), while keeping others constant (like capital), eventually leads to smaller increases in output.

Substitution effect

Wages rise so leisure prices rise which results in a greater willingness to work.

Income effect

People who earn more can afford more leisure time

with moderate or low income, substitution effect dominates

Classic explanations

• Wage level too high (Minimum wage lies above equilibrium wage -> excess of labor supply)

  → therefore: wages must be reduced to fight unemployment

• disincentives (verringerte Leistungsbereitschaft)

• market imperfections

Keynesian explanation

not enough demand in the economy for goods and services

• Businesses don’t sell enough,

• So they don’t need as many workers,

• Which leads to unemployment

to fight this: government should step in — spend more or cut taxes — to boost demand and create jobs

Potential output

Refers to possible supply when all input factors are supplied (laborers are hired)

Actual output

Supply that gets produced by available input factors

Social policy

To create or equalize life chances for individuals (welfare state aims to protect citizens against old age, sickness and unemployment).

Hibbs partisan influence theory

macroeconomic outcomes (like inflation or unemployment) depend on which party is in power

→ liberal are pro workers (workers and trade unions)

→ democrats pro low inflation (middle and high class/ capital owners)

Globalization

increasing emergence of worldwide markets and international integration of national economies

→ Increased competition between nation states → Governments have to adapt their policies

“Race to the bottom”/ Efficiency thesis

Global competition forces governments to reduce social protections to attract investment and boost economic efficiency -> lowering standards

Compensation thesis

Governments expand welfare policies to compensate for the negative impacts of globalization, like increased job insecurity

How is the labor market regulated?

• rules and regulations: employment protection, wage bargaining systems, minimum wages

• financial programs and measures: passive and active labor market policies

What led to high youth unemployment?

US real estate crisis lead to global bank crisis

declining government revenue (less tax income and higher spending needs)

national debt and weakened public finances

→ resulted in austerity measures and reduced job creation, disproportionately affecting youth employment.

The Youth Guarantee

→ to fight youth unemployment

Instead of simply giving young people financial aid, the policy aims to equip them with skills and opportunities to succeed in the labor market (active labor market policies)

Lessons from the debt crisis?

• high youth unemployment threatens the legitimacy of national governments and the EU itself

• Budget consolidations are necessary but should leave room for social investment (active labor policies)

• More EU-level action: European-level taxes -> more independent funding to launch ambitious social programs

Work values

Demands individuals place on their job — what they appreciate in daily work

Extrinsic work values

External conditions of daily work (job security; good income→ security the job gives them)

Intrinsic work values

Content of daily work (use of skills; personal development→ fulfillment/ autonomy through work)

Influences on work values?

• Individual: past, work environment, age, gender, education level

• macro determinants: globalization, economic state, active and passive labor market policies

Active labor market policies

measures that try to get unemployed people back to work

→ Job trainings and education, job placement services…

Passive labor market policies

measures that support people while they are unemployed

→ income support, unemployment benefits