Labour Market

Trend 1 - Increasing Real Wages

Industrialized countries have had sustained growth in productivity in the 20th century – Increased demand for labour 

• Both real wages and employment increased

Productivity increases were due to 

• Technological progress 

• Increases in capital 

Trend 2 - Stagnated Wage Growth Since 1970

Could be either 

• Slower growth in demand for labour OR 

• Faster growth in the supply of labour 

Productivity growth and real wages move together

Slower demand growth explains slower wage growth  

• Does not explain rapid growth in employment 

Supply of labour must have increased as well 

Trend 2 - Why would Labour Supply Increase after 1970?

increased participation by women

baby boom

high rates of immigration

Trend 3 - Increased Wage Inequality in U.S.

Globalisation results in an expansion of many markets to worldwide supply

• Increasing ease of goods and services crossing national borders 

Benefit of globalisation is increased specialisation and efficiency 

• Principle of Comparative Advantage

Globalisation also means that some goods produced domestically are no longer competitive 

Trend 3 - Principle of Comparative Advantage

countries should specialize in producing goods and services that they can produce at a lower cost than other countries

Trend 3 - Why Principle of Comparative Advantage?

countries can become more efficient and productive, leading to increased economic growth and welfare

then they seek to trade with each other based on their relative strengths and weaknesses

Trend 3 - What does it mean when some Goods produced Domestically are no longer Competitive (due to Globalisation)?

• Some domestic sectors shrink

•  Job losses in certain sectors due to increased competition from foreign producers – Environmental concerns related to the production and transportation of goods across borders 

• Countries need to consider the potential benefits and risks of globalisation and trade, and to design policies that support sustainable and inclusive growth

Trend 4 - Number of People with Jobs has Grown in the past 50 years

• Rate of job growth has slowed recently 

• In 1970, about 57% of people over 16 had jobs, by 2000 this was 64%, 61% in 2019 

• Number of jobs grew 1980-2000 by 38%, number of people grew by only 27%

Trend 5 - Western Europe has suffered Higher Unemployment than the U.S.

• Unemployment in France, Italy, and Spain from 1990-2018 was 9.9, 9.6, and 16.6% vs. 5.9% in the U.S. 

• Similar problems in many other Western European countries

The Labour Market

An input market 

Firms buy labour to produce goods and services 

What can be used to find the Price of Labour (Real Wages) and the Quantity (Employment)?

supply and demand analysis

considers the number of workers employed, bot work hours per year

Diminishing Returns to Labour

• Assumes non-labour inputs are held constant 

• Adding one worker increases output but by less than the previous worker added 

• Adding more labour to a fixed amount of capital may lead to overcrowding or reduced efficiency in the production process

Value of Marginal Product (VMP)

extra revenue that an added worker generates

What does Demand for Labour Depend on?

The productivity of workers 

The price of the worker’s output 

What impact does Greater Productivity in Workers have?

increases employment demand through cost reduction, increased firm profits, business expansion, new investments

can also produce more with the same amount of time, results in higher revenues used to increase wages for workers

What impact does Higher Wages have?

increases employment through profit motives

can lead to increased consumer spending, which can increase demand for goods and services and create more jobs

Demand Curve for Labour

• To maximize profits, firms hire an extra worker if and only if the VMP exceeds the wage paid

• The VMP decreases as more workers are hired

• The lower the wage, the more workers employed

• Wage increases raise employers cost, reducing demand for additional workers

• Wage increase up to the point where its no longer profitable for firms to hire more workers

Labour demand is thus downward sloping: inverse relationship between labour demand and wages

When does Demand for Labour Shift?

when the VMP of a worker changes 

What 2 Factors determine the Demand )VMP) for Labour?

• The price of the company’s output 

  • An increase in market demand 

• The productivity of the workers 

  • Greater quantity of non-labour inputs 

  • Organizational change 

  • Training and education

Price of Output Increases

Demand for labour shifts to the right 

• There is a separate demand for labour curve for each possible output price 

An increase in the price of workers' output increases the demand for labour

Higher Productivity

Reservation Wage

the lowest wage a worker would accept for a given job

What is the Opportunity Cost of Working?

your leisure activity

work compensates you for this - if conditions are unpleasant or dangerous, a premium for that would be included in the wage - cost-benefit principle

Determinants of Labour Supply

Size of the working age population

• Domestic birth-rate 

• Immigration and emigration 

• Ages when people enter and retire from the workforce 

Share of working-age population willing to work 

Wage rate: As it increases, workers may be more willing to supply labour and work longer hours to earn more money

Education and training can affect labour supply by increasing workers' skills and knowledge, making them more productive and able to command higher wages

Why do the Ages when People Enter and Retire from the Workforce matter?

younger workers may be more willing to supply labour and work longer hours, while older workers may be more likely to retire or reduce their work hour 

Supply of Labour

Shifts in Labour Supply

• Caused by any change in the number of workers willing to work at each wage 

• Increase / decrease in the working-age population

• Increase / decrease in the share of working-age population willing to work

• Job availability: when job opportunities are plentiful, workers may be more willing to supply labour and work longer hours

• Education and training

Globalisation

Flow of goods, services, capital, and labour across international borders 

How does Globalisation Affect Inequality?

• Through a differential impact on low-skilled workers and hence their wages 

• For the US, it is thought to lower the wages of low skilled and hence low-wage workers relative to those of high-skilled workers

Mechanisms for the Effects of Globalisation

Merchandise trade 

Outsourcing 

• Similar channel as with merchandise trade

Trade in services 

• US imports of middle-skill services: business and some professional services 

Intuitively: The same as if we were to move the actual workers

What is Merchandise Trade?

importing goods that are made with low-skilled workers and exporting goods that are mode with high-skilled workers

lowers the wages of unskilled relative to skilled making the distribution of income less equal

Skill-Based Technological Change

Why does Technological Change increase Inequality?

Much of the technology adopted in the last 30 years has eliminated low-skill or low-wage jobs

There is a “winner take all” aspect of the technology-driven economy

• This likely favors a small group of individuals

Both aspects increase inequality by increasing the rewards to:

• Those with significant labor market skills: bargaining power resulting in higher wages

• Owners over workers: lobbying power on governments and policies that favour the wealthy and restrict labour bargaining

What is Driving Increasing Inequality?

• Technology: winners and losers in labor markets (finance and technology vs. manufacturing and retail)

• Globalization: job losses in certain industries due to worldwide competition

• Labor market policies: erosion in workers bargaining power

• Tax policies: cuts to social safety nets and reduction in taxes for higher income earners

• Differences in education and skill levels

• Discrimination

These can also influence personal choices in ways that affect measured income inequality

Too Little Inequality can…

• Reduce individual motivation

• Slow economic growth

• Reduce incentives to take risks and create new products and technologies

• Limit philanthropy and charitable giving

Too Much Inequality can….

• Reduce individual motivation

• Limited economic mobility: barriers to education, training, and job opportunities

• Limited access to healthcare

• Slow economic growth

• Divide society 

• Distort political environment 

• Reduce political participation 

• Reduce investments in public goods 

  • Education 

  • Environmental protections

Is Inequality a Problem Economically?

• There is evidence that at some level, increased inequality slows economic growth

• Or, inequality concentrates resources among investors

• At the same time, attempts to reduce inequality through taxation can have negative economic effects and fewer job opportunities

Is Inequality a Problem Non-Economically?

Values, ethics and morals will drive individual evaluations of the level of inequality

• E.g., inequality is primarily a function of market outcomes, so should be left alone

• Attempts to redistribute wealth or limit economic inequality through taxation or other means is seen as an infringement on personal freedom and property rights (the libertarian view)

Immediately Available Policy Solutions (Addressing Inequality)

• Progressive taxation and transfer programs funding infrastructure and education

• Strengthen labour laws

• Targeted social programs: food assistance, housing subsidies, and healthcare to lower income households

• Pro-competition policies aimed at removing regulatory barriers for small businesses and entrepreneurs

• Employment services: job training, interviewing skills, etc

How can Strengthening Labour Laws help reduce Inequality?

through collective bargaining, skill development, minimum wages, and favouring labour over business owners

Addressing Inequality in the Long Term

• Education

• Opportunities for wealth-building

• Housing

What are Key Strategies to improving Educational Equity?

• Improve public education and promote economic mobility

• Reduce disparities in quality of public education 

• Improve counselling in low-income schools 

  • With respect to college – paths to success and funding 

• Investments are needed in early education, not later 

• Targeted investment in disadvantaged communities (levelling up)

• Address discrimination and bias

What challenges do Policies aimed at Reducing Inequality often face?

opposition from business owners who fear reduced competitiveness or profitability

Minimum Wage Laws

• Setting a minimum wage (Wmin) above equilibrium (W) creates (NB – NA ) unemployment 

• Workers who find a minimum-wage job get a higher wage 

  • Others are unemployed

• Unemployment insurance

• To work efficiently, unemployment benefits should be 

  • For a limited time 

  • Less than the income received when working 

What is Unemployment Insurance?

government transfer to unemployed workers

helps reduce the costs of unemployment

may give them an incentive to search longer and less intensively

How can Health and Safety Regulations Reduce the Demand for Labour?

• Increasing employer costs 

• Reducing productivity 

The reduction in demand will increase unemployment and lower wages

What factors help explain Lower Employment Rates in Western Europe compared to the US?

• Highly regulated labor markets

• High minimum wages

• Inflexible benefits

• Strong unions

• Globalization and skill-biased technological change

These factors can make some workers less employable under current regulations