1. Productivity, Output, and Employment Jeffrey H. Nilsen

3.  http://video.ft.com/2930321275001/Carmakings- centre-of-gravity-moves-east/Companies http://video.ft.com/2930321275001/Carmakings- centre-of-gravity-moves-east/Companies Car Production (think of a macro production function?)

4. Long run Production Function In long run: firms & workers can change both K & N used in production Y = A F(K, N) Y = A K 0.5 N 0.5 (cobb-douglas)

5.  In short-run (business cycle): assume K fixed => firms’ & workers’ N choices determine Y  Y = A F(K, N)  Y = A K 0.3 N 0.7 (cobb-douglas) Short run Production Function  Slope > 0. Next unit N raises output but MP diminishes as N rises  Diminishing MP N (new N unit must share same K with greater number of others) Short-run production

6.  Cobb-Douglas example:  Y = A K 1/2 N 1/2  Let A = 1, K = 25, N = 100=> Y = 50  Then if N rises to 121 => Y = 55  So Y rises by 5 from greater labor by 21 => MP N = 5/21 or ca. ¼… In words, at K=25, N=100, next new worker will add ¼ unit of output Production Function Calculating MP without Calculus Extra question: using calculus Find derivative wrt N and its value at K = 25 and N = 100 ?

7.  Improved “A” or TFP (better “methods” or knowledge) => each N or K unit able to produce greater output  Exogenous (assume certain value for variable [its value is given from outside the model])  Adverse TFP shock: production drops at all N levels => production function shifts down  Examples: drought or oil prices (imposes higher input costs for industries in oil importing nations)  Distinct from Y/N (average labor productivity) which measures average output over all workers Total Factor Productivity Y = A F(K, N)

8. 8 3.1 The US Production Function

9.  N D EMAND : Firms can more easily change N (e.g. lay- offs) vs. long-lived K (new K has small effect on total K)  Measure N as time worked or number of employees  Assume:  Workers identical (same level of skills, ambition, etc)  Firms identical & small, each one takes wage as given from competitive labor market  Firm will hire the next worker so long as the benefit of hiring her exceeds the costs The Labor Market: Labor Demand

10. NGroomed Dogs MP 00- 111 2209 3277 Benefit exceeds costs => Firm maximizes profits  For the firm:  MP N = benefit of hiring the next worker  MC, cost of hiring the next worker is real wage w  Assume nominal W = $80 per day  Output price = $10 per grooming  w = 8 groomings per day

11.  MP decreases: hiring more workers reduces the new output the next provides  w is given to firm (w won’t change no matter how many workers it hires (thus horizontal line at 8)  For N < N*, if firm hires next worker its profits will increase  Labor demand: for different w, how many workers will the firm hire?  We see the MP curve gives the amount of workers to hire, so it’s N D curve MP and Labor Demand Graphical Approach

12.  If w rises NO SHIFT; N sinks along fixed N D curve  N D shifts if TFP shock or K rise: higher TFP => workers more productive (those laid off find other jobs)  Aggregate N D : sum of all firms’ N D => same factors affect as in individual firm N D N D Shifts

13.  Individual (taking w as given) asks: Should I work? She compares  Benefit (w) e.g. (Nominal wage (12$))/((3$) avg P of goods purchased) => she’ll receive 4 units of goods by working next hour  Her MC: leisure to give up if she works the next hour Labor vs. Leisure Choice

14.  w rise alters individual’s labor/leisure trade-off:  Long-run (or permanent): income effect dominant (feel richer, want to enjoy more leisure) => N S falls  Empirical: many nations’ rising long-run productivity (& w) cut hours worked  Short-run (or temporary): substitution effect dominant (rising opportunity cost of leisure cuts leisure to work more) => N S rises  For model, assume given expected future w (and wealth)  Aggregate N S up-sloping also due to higher w attracting to join LF N S Upsloping

15. Fig 3.10 Hours and real per-capita GDP in 36 countries

16.  N S shifts IN if rise in wealth or expected future w (afford more leisure)  N S shifts OUT if rise in population or participation N S Shifts

17.  Single firm takes w as given, but in market, w* & N* determined together  Classic model => w adjusts quickly so N S = N D  If w N S => firms bid up w to hire N to max profits  At w*, N S = N D, N* is full-employment N  Y* (or Y FE ) (Full-Employment Y) corresponds to N* => when W, P fully adjusted (Y* is economy’s output capacity) Labor Market Eqbm

18.  E.g. Adverse shock in A has 2 effects:  Direct: Y* falls at initial N*  Indirect: MP N drop at N* shifts N D, new eqbm N**  N S stable: temporary => no change in expected future w Temporary Productivity (TFP) Shock A F(K, N*) drops

19.  Classics don’t explain U (anyone wanting to work at w* gets job => U = 0)   Keynesian U assumes “sticky” wage adjustment (excess N S )   RBC (new classics) explain U by reasoning it takes time to match workers to jobs Unemployment in Classic & Keynesian Models

20. EU quarterly Labor Force Survey  Person who has worked either full or part time in past week is “employed”  If she didn’t work in past week, but had looked for work in past 4 weeks she is “unemployed”  Non-LF person: if didn’t work in past week and didn’t look for work in past 4 weeks (e.g. student)  U rate = U/(LF) or U/(E + U)  Employment ratio = E/(adult population)

23. Table 3.4 US Employment Status of Adult Population, Feb 2003

24. Fig 3.15 Changes in UK employment status in typical month Not in LF 9.4 million Unemployed 2.8 million 5.5% 21% 15.2% 34% 4% 3.7% LF Employed 25.4 million

25. Unemployment Stylized Fact  Most spells are of short duration, but most of those unemployed at a given time are suffering spells of long duration  Spell: period when person continuously unemployed  Duration: the length of time unemployed (indicates degree of hardship)  Simple explanatory example of 100 people in LF:  Each month 2 workers become unemployed and stay unemployed for a month (frictional) 24 spells  Each year 4 workers become unemployed and stay unemployed for year (structural) = 4 spells  On any given day, unemployed consist of 2 short and 4 long.

26. Natural Rate of Unemployment  Frictional U  Structural U  Cyclical U: (U – U*)  Positive (U high) when Y < Y*  Okun’s law: for each 1% rise in U above natural rate, GDP drops 2% below Y FE

27. Fig 3.16 Okun’s law in US

28. 5. One reason that firms hire labor at the point where w = MPN is (a) if w < MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring them, so they should hire fewer workers. (b) if w > MPN, the cost (w) of hiring additional workers is less than the benefits (MPN) of hiring them, so they should hire more workers. (c) if w < MPN, the cost (w) of hiring additional workers equals the benefits (MPN) of hiring them, so they have the right number of workers. (d) if w > MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring them, so they should hire fewer workers.

29.  The Upstart Company has a production function:  # Workers # Cases Produced  0 0  110  2 19  3 26  4 31  5 34  If Upstart hires 4 workers, which could be the real wage?  (a) 2  (b) 4  (c) 6  (d) 8

30.  Which of these events would lead to an increase in the MP N for every quantity of labor?  (a) An increase in the real wage  (b) A decrease in the real wage  (c) A favorable supply shock such as a fall in the price of oil  (d) An adverse supply shock, such as a reduced supply of raw materials