1. WAGES & UNEMPLOYMENT PART I Chapter 6

2. Trends in Real Wages and Employment 1. In the last 100 years, all industrial countries have enjoyed substantial growth in real wages. U.S. Workers: In 2007 the average worker’s earning could buy twice as many goods as services as in 1960 and nearly five times as many goods and services as in 1929.

3. 2. Since 1970, the rate of increase in the U.S. real wage has slowed. Real wages have increased since 1970, but at a much slower rate than prior to 1970. Trends in Real Wages and Employment

4. real wage = nominal wage/price level The real wage is the purchasing power of the nominal wage. That is, the real wage tells us the amount of goods and services that can be purchased. Real Wage

5. 1960 – 1973: 2.5% 1973 – 1996: 1.1% 1996 – 2007: 2.0% U.S. Real Wage Growth

6. 3. Since 1970, the inequality in U.S. real wages has increased. A. The real wage of the least-skilled, least- educated workers has fallen since 1970. The real wages of the least-skilled workers have fallen by 25% to 30%. B. The real wages of the most-skilled, most- educated workers have risen continually since 1970. Trends in Real Wages and Employment

7. Currently, the real income of U.S. workers with advanced (graduate) degrees is almost three (3) times higher than the real income of a high school graduate. Trends in Real Wages and Employment

8. 4. Since 1970, the level of employment in the U.S. has increased substantially. That is, the number of people with jobs has risen substantially. Trends in Real Wages and Employment

9. 5. Unemployment in the U.S. has been substantially lower than in Europe. Average unemployment: 1990-2007 5.5% in the U.S. 10.0% in France Trends in Real Wages and Employment

10. W = nominal wage P = price level w = real wage =W/P N = quantity of labor Notation

11. Labor Supply: The supply of labor curve (LS) relates w to the Q S of N. Supply and Demand in the Labor Market

12. LS is upward sloping; the higher w, the higher N. Labor Supply

14. Shifts in LS are primarily caused by changes in the size of the labor force. Shifts in the Supply of Labor.

15.  Size of Labor Force

16. The demand for labor curve (LD) relates w to the Q D to N. Labor Demand

17. LD is downward sloping; the higher w, the lower N. Labor Demand

19. 1. Changes in the price of the worker’s output. 2. Changes in productivity. Shifts in the Demand for Labor

20.  Price of the Worker’s Output

21.  Productivity

22. Labor Market Equilibrium

23. Explaining the trends in U.S. w and N 1. Last 100 years—substantial growth in w Primary Cause:  productivity (  technology)

24.  Productivity

25. 2.(4.) Since 1970, the rate of increase in w has slowed and N has increased. Causes: 1. Smaller increases in productivity—LD shifts outward by smaller amounts. 2. Expanding labor force—LS shifts outward. Explaining the trends in U.S. w and N

26. Small  in Productivity

27.  Labor Force

28. 3) Since 1970, w inequality has increased. Causes: 1. Globalization - expands the market for some goods, reduces the market for others. 2. Technological change - has tended to increase the productivity of skilled workers. Explaining the trends in U.S. w and N

29. Import Goods – Unskilled Workers Globalization

30. Export Goods – Skilled Workers Globalization

31. Result: Wage distribution becomes more unequal. Globalization

32. Technology Favored skilled labor

33. LRAS gives us the relationship between inflation ( π ) and output (Y). LRAS—A vertical line showing the economy’s potential output (Y*). LRAS – Long Run Aggregate Supply

34. To derive LRAS, we begin in the labor market. We change P and see what happens to N and Y. Deriving LRAS

35.  P

36. At w 1, Q D > Q S. There is a shortage of N. The nominal wage will be bid up until N 0 is reached. At equilibrium, w 0 = W 0 /P 0 = W 1 /P 1. N remains at N 0. There will be no change in output. Deriving LRAS Continued

37. Using the same logic, we can draw LRAS in terms of the inflation rate ( π ). Deriving LRAS Continued

38. Permanent changes in the labor market will alter Y* and shift LRAS  Productivity and  Labor Force

40. Labor Market

41. LRAS