Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Chapter 4 Labour Markets and Unemployment

Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA

©EGEA 2006

Chapter 4

Labour Markets and Unemployment


©EGEA 2006

Household preferences


©EGEA 2006

A household indifference curve:utility held constant

Con

sum

ptio

n

0

More leisure = less work

pain

gain

Figure 4.01

Leisure


©EGEA 2006

♦ Slope. (<0) Substitution of leisure for consumption ♦ Curve. Marginal rate of substitution is not constant. The

less leisure you have, the less leisure you are willing to sacrifice for one more unit of consumption (holding utility constant).

♦ Shift. Level of economic welfare (utility).

Household preference.Economic interpretation of the geometry

Figure 4.01


©EGEA 2006

Household preferencesC

onsu

mpt

ion

0

Higher utility

Lowerutility

Figure 4.01

Leisure


©EGEA 2006

Household budget line and optimal choice


©EGEA 2006

The household budget (zero non-labour income)C

onsu

mpt

ion

0

B

A =-wslope

We "buy earnings spending back" our

if we work leisure time rest on

all day goods

w w C

actual earnings

( ) w C

Figure 4.02

Leisure


©EGEA 2006

Highest attainable indifference curve is tangent to this budget constraint for those who work

Con

sum

ptio

n

0

B

A

Nice but we can’t afford it!We can do

better than this!

Figure 4.02

Leisure


©EGEA 2006

Optimal choiceC

onsu

mpt

ion

0

R

B

A

Work

Consumption =-wslope

Leisure

Figure 4.02

Leisure


©EGEA 2006

Reaction of the household to a wage increase:Labour supply


©EGEA 2006

Wage increase chances budget setC

onsu

mpt

ion

0

R

B

A

R´

Figure 4.03

Leisure


©EGEA 2006

Assuming both consumption and leisureare normal goods and that the substitutioneffect for labour supply is greater than theincome effect.

,w C

Figure 4.03


©EGEA 2006

Rea

l wag

e

0

(Upward sloping)household labour supply curve

w

Figure 4.03

Labour supply


©EGEA 2006

The production function andthe labour demand curve


©EGEA 2006

Rea

l wag

e

Labour

Out

put

(Y)

Labour

Firm has a production function and it paysthe real wage w1

1w

Figure 4.05


©EGEA 2006

1w

Rea

l wag

e

Labour

Out

put

(Y)

Labour

Wage costs increase with employment

R1)(slope

1 = w

Figure 4.05


©EGEA 2006

1w

Rea

l wag

e

Labour

Out

put

(Y)

Labour

Determine L1 so that MPL1=w1

R1A1 )(slope

1 = w

1L

Figure 4.05


©EGEA 2006

1w

Rea

l wag

e

Labour

Out

put

(Y)

Labour

Now determine L for a lower wage, w2

R1A1 )(slope

1 = w

1L

R2

2w

)(slope2

= w

Figure 4.05


©EGEA 2006

1w

Rea

l wag

e

Labour

Out

put

(Y)

Labour

Find L2 so that MPL2=w2

R1A1 )(slope

1 = w

1L 2

L

A2

R2

2w

)(slope2

= w

Figure 4.05


©EGEA 2006

1w

Rea

l wag

e

Labour

Out

put

(Y)

Labour

Connect the dots to derive the demand for labour

R1A1 )(slope

1 = w

MPL

1L 2

L

A2

R2

2w

)(slope2

= w

Figure 4.05


©EGEA 2006

♦ Slope. Negative because MPL falls as we move to the right along the production function.

♦ Curve. Here there is no reason to expect curvature one way or the other. Note that an absolutely linear demand for labour implies a quadratic form of the production function.

♦ Shift. Capital accumulation or productivity change. (Figure 4.6)

Economic interpretation of geometry of the demand for labour

Figure 4.05


©EGEA 2006

An increase in labour productivity


©EGEA 2006

Rea

l wag

e

Labour

Out

put

(Y)

Labour

An increase in labour productivity (A increases)

MPLMPL´

,Y F A L K

FMPL A

AL

Hold L constant

Figure 4.06


©EGEA 2006

Equilibrium in the labour market

Figure 4.07


©EGEA 2006

Labour market: first blade of scissorsR

eal w

age

0

Supply

leisure

cons

umpt

ion

Figure 4.07

Labour hours


©EGEA 2006

Labour market: second blade of scissorsR

eal w

age

0

Demand

Labour hours

outp

ut

Figure 4.07

Labour hours


©EGEA 2006

Equilibrium in the labour marketR

eal w

age

0

Supply

Demand

Aw

L

Figure 4.07

Labour hours


©EGEA 2006

Rea

l wag

e

0

Supply

Demand

Aw

L

Voluntary unemployment

L

Figure 4.07

Labour hours


©EGEA 2006

Shifting labour demand and supply


©EGEA 2006

Increase in labour demand(MPL increases because of increase in A or K)

Rea

l wag

e

0

Supply

Demand

AA´ w,L

both increase

Figure 4.08

Labour hours


©EGEA 2006

Increase in labour supply(e.g. new entries through immigration)

Rea

l wag

e

0

Supply

Demand

A

A´

w falls,L rises

Figure 4.08

Labour hours


©EGEA 2006

Involuntary unemployment


©EGEA 2006

wB

L sL

Wage fixed above market-clearing level

Real wage

0

Household labour supply

Labour demand

wA

It’s a free market, so the short-side determines actual employment.

Figure 4.09

Labour


©EGEA 2006

Trade unions’ indifference curves


©EGEA 2006

Trade unions’ indifference curves

Employment

Re

al w

ag

e

Employment

Re

al w

ag

e

Employment

Re

al w

ag

e

(a) Average (b) Hard-line (c) Jobs-first

Figure 4.10


©EGEA 2006

The collective labour supply curve


©EGEA 2006

Collective labour supply curve

Figure 4.11

Rea

l wag

e

0

CollectiveLabour Supply

LabourDemand

Employment


©EGEA 2006

Labour market equilibrium with a trade union


©EGEA 2006

Labour market with a trade union

Labour

Realwage

0


Labour demand

Aw

L

Collective labour supply

Bw

L sLUnion-voluntary, individual-involuntary unemployment

Figure 4.12


©EGEA 2006

Minimum wages


©EGEA 2006

No unions, no minimum wage

Realwage

0


Labour demand

Aw

L

Figure 4.13

Labour


©EGEA 2006

Add unions, no minimum wage yet

Realwage

0


Labour demand

Aw

L


Bw

L sLUnion-voluntary, individual-involuntary unemployment

Figure 4.13

Labour


©EGEA 2006

Adding a minimum wage above union wage

Realwage

0


Labour demand

Aw

L


Bw

L

minw

min

sLminL

C

sLUnemployment under a minimum wage

Figure 4.13

Labour


©EGEA 2006

A map of labour markets


©EGEA 2006

All working age people are in one of three states

Employed Unemployed

Not inlabour force

Figure 4.14


©EGEA 2006

Gross flows starting from state of employment

Employed Unemployed

Not inlabour force

Quits tounemployment

Layoffs

Retirements

Quitsto

otherjobs

Figure 4.14


©EGEA 2006

Gross flows from state of unemployment

Employed Unemployed

Not inlabour force

Job finds

Layoffs


DiscouragedRetirements

Quitsto

otherjobs

Figure 4.14


©EGEA 2006

Gross flows from out of the labour force

Employed Unemployed

Not inlabour force

Job finds

Layoffs


DiscouragedRetirements

Quitsto

otherjobs

New entries

Unsuccessfulnew entries

Figure 4.14


©EGEA 2006

Actual and equilibrium employment


©EGEA 2006

Realwage

0

Individuallabour supply

Labour demand

Wage offer curve

Aw

sLL

Equilibrium employment

sL L

and unemployment

Figure 4.17

Labour


©EGEA 2006

Actual employment when real wage is not equal to the equilibrium real wage

Realwage

0


Labour demand

Wage offer curve

Aw

sLL

1w

1L

A1

A22w

2L

Figure 4.17

Labour


©EGEA 2006

Actual unemployment when real wage is not equal to the equilibrium real wage

Realwage

0


Labour demand

Wage offer curve

Aw

sLL

1w

1L

A1

A22w

2L

Figure 4.17

Labour

Documents

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Chapter 4 Labour Markets and Unemployment