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

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.1 Household preferences

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.1 A household indifference curve: utility held constant Consumption 0 More leisure = less work pain gain Figure 4.01 Leisure

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.1 ♦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

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.1 Household preferences Consumption 0 Higher utility Lower utility Figure 4.01 Leisure

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.2 Household budget line and optimal choice

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.2 The household budget (zero non-labour income) Consumption 0 B A Figure 4.02 Leisure

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.2 Highest attainable indifference curve is tangent to this budget constraint for those who work Consumption 0 B A Nice but we can’t afford it! We can do better than this! Figure 4.02 Leisure

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.2 Optimal choice Consumption 0 R B A Work Consumption Leisure Figure 4.02 Leisure

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.3 Reaction of the household to a wage increase: Labour supply

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.3 (a) Wage increase chances budget set Consumption 0 R B A R´ Figure 4.03 Leisure

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.3 Figure 4.03

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.3 (b) Real wage 0 (Upward sloping) household labour supply curve Figure 4.03 Labour supply

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.5 The production function and the labour demand curve

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.5 Real wage Labour Output (Y) Labour Firm has a production function and it pays the real wage w 1 Figure 4.05

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.5 Real wage Labour Output (Y) Labour Wage costs increase with employment R1R1 Figure 4.05

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.5 Real wage Labour Output (Y) Labour Determine L 1 so that MPL 1 =w 1 R1R1 A1A1 Figure 4.05

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.5 Real wage Labour Output (Y) Labour Now determine L for a lower wage, w 2 R1R1 A1A1 R2R2 Figure 4.05

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.5 Real wage Labour Output (Y) Labour Find L 2 so that MPL 2 =w 2 R1R1 A1A1 A2A2 R2R2 Figure 4.05

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.5 Real wage Labour Output (Y) Labour Connect the dots to derive the demand for labour R1R1 A1A1 MPL A2A2 R2R2 Figure 4.05

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.5 ♦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

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.6 An increase in labour productivity

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.6 Real wage Labour Output (Y) Labour An increase in labour productivity (A increases) MPL MPL´ Hold L constant Figure 4.06

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.7 Equilibrium in the labour market Figure 4.07

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.7 Labour market: first blade of scissors Real wage 0 leisureconsumption Figure 4.07 Labour hours

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.7 Labour market: second blade of scissors Real wage 0 Labour hours output Figure 4.07 Labour hours

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.7 Equilibrium in the labour market Real wage 0 A w L Figure 4.07 Labour hours

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.7 Real wage 0 A w L Voluntary unemployment Figure 4.07 Labour hours

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.8 Shifting labour demand and supply

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.8 (a) Increase in labour demand (MPL increases because of increase in A or K) Real wage 0 A A´ w,L both increase Figure 4.08 Labour hours

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.8 (b) Increase in labour supply (e.g. new entries through immigration) Real wage 0 A A´ w falls, L rises Figure 4.08 Labour hours

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.9 Involuntary unemployment

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 B Figure 4.9 Wage fixed above market-clearing level Real wage 0 A It’s a free market, so the short-side determines actual employment. Figure 4.09 Labour

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.10 Trade unions’ indifference curves

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.10 Trade unions’ indifference curves Employment Real wage Employment Real wage Employment Real wage (a) Average (b) Hard-line (c) Jobs-first Figure 4.10

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.11 The collective labour supply curve

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 F.4.11 Collective labour supply curve Collective labour supply curve Figure 4.11 Real wage 0 Employment

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.12 Labour market equilibrium with a trade union

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.12 Labour market with a trade union Labour Real wage 0 A w L B Union-voluntary, individual-involuntary unemployment Figure 4.12

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.13 Minimum wages

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.13 No unions, no minimum wage Real wage 0 A w L Figure 4.13 Labour

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.13 Add unions, no minimum wage yet Real wage 0 A w L B Union-voluntary, individual-involuntary unemployment Figure 4.13 Labour

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.13 Adding a minimum wage above union wage Real wage 0 A w L B C Unemployment under a minimum wage Figure 4.13 Labour

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.14 A map of labour markets

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.14 All working age people are in one of three states EmployedUnemployed Not in labour force Figure 4.14

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.14 Gross flows starting from state of employment EmployedUnemployed Not in labour force Quits to unemployment Layoffs Retirements Quits to other jobs Figure 4.14

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.14 Gross flows from state of unemployment EmployedUnemployed Not in labour force Job finds Layoffs Quits to unemployment Discouraged Retirements Quits to other jobs Figure 4.14

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.14 Gross flows from out of the labour force EmployedUnemployed Not in labour force Job finds Layoffs Quits to unemployment DiscouragedRetirements Quits to other jobs New entries Unsuccessful new entries Figure 4.14

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.17 Actual and equilibrium employment

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.17 Real wage 0 A Equilibrium employment and unemployment Figure 4.17 Labour

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.17 Actual employment when real wage is not equal to the equilibrium real wage Real wage 0 A A1A1 A2A2 Figure 4.17 Labour

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 4.17 Actual unemployment when real wage is not equal to the equilibrium real wage Real wage 0 A A1A1 A2A2 Figure 4.17 Labour