Chapter 3 Notes - Wages, Employment and ...
Lecture03: Topic 3 - Measuring Macroeconomic Performance: Wages, Employment and the Labour Market Labour and Labour Market Trends - The perfectly competitive model of the labour market assumes that firms and workers are wage takers - Wage takers cannot affect the “price” of labour which is the wage rate - In the market for labour, the “price” is referred to as the wage paid to workers in exchange for their services, expressed as per unit of time - The quantity of labour is the amount of labour which firms use and is generally measured by the number of workers who are employed or the number of hours they work Key Labour Market Trends (5) 1) Since the 1970s, Australia and other industrial countries have enjoyed substantial growth in real earnings 2) Since the 1970s, Australia had a decline rate and slowing down of the real wage growth particularly for men. This has given a reason for increased labour force participation of women. 3) Increase in inequality among top earners and bottom earners, with top earners having a higher increase in real wages than those on lower incomes: this has caused a two-tier labour market with lots of jobs for the educated and few jobs for the unskilled 4) The proportion of the population has increased from 58% to 65% in last 50 years 5) Different countries experience different unemployment rates - Australia’s rate of 6% low
Wages and Demand for Labour The demand for labour is the number of people employers want to hire The demand for labour depends on the price that the market sets on worker’s output and the productivity of labour - as the productivity of the workers increase, there is an increase in the value of goods and services made, hence the greater the number of workers an employer will want to hire at a given wage rate Firms can do cost benefit analysis to determine the number of workers they employ. They consider: - marginal cost - the additional cost of hiring one more worker - value of marginal product - the benefit of hiring one more worker, (the extra production gained by that one extra worker) The tendency for marginal product to decline as more and more workers are added is called diminishing returns to labour - if the amount of capital and other inputs in use is held constant, then the greater the quantity of labour already employed, the less each additional worker adds to production - A worker is hired if marginal product is higher or equal to marginal cost - The higher the price of a good, the lower the quantity demanded. The same can be said for the demand for labour - The higher the wage rate, the lower the demand for labour from employers
- The law of demand says that higher wages lead to lower demand for workers so the demand curve is downward sloping
Factors in the shifts in the Demand of Labour There are two factors which could shift the demand curve: 1) an increase in the relative price of the workers output: - the price of products increases, means the marginal product value would increase meaning more workers could be employed at a given level of output and wages. The demand for labour shifts to the right
2) a change in worker’s productivity: - more productive, the demand of labour would increase and vice versa. - as the productivity of workers decreases due to a technology issue, this means the marginal product value would decrease, meaning less workers could be employed at ta given level of output or wage. The demand for labour shifts to the right
Wages and Supply for Labour The supply of labour are the workers or potential workers - at any given wage rate a person must decide whether they want to participate in paid work. The decision to work is based on an individual’s real wage (the money they get from paid work) and their reservation wage (the value they get from not working e.g.; desire for leisure, family commitments) - People use cost benefit analysis to decide whether to work - If the real wage is higher than the reservation wage, they will work in paid employment Supply for Labour - the higher the price of a good, the greater the supply of the good. Hence the higher the wage rate, the larger the supply of workers - The supply curve is upward sloping, since in general, the higher the real wage rate the more willing people are to work An increase in the supply of labour shifts the curve to the right A decrease in the supply of labour shifts the curve to the left
Factors in the shifts in the Supply of Labour The most important factor is the size of the working-age population (between 15 to 64 years of age) which is influenced by factors such as: - Domestic birth rates - Immigration and Emigration rates - Retirement age - Age starting work An increase in the working-age population raises the quantity of labour supplied at each real wage, shifting the labour supply curve to the right
Equilibrium - Equilibrium occurs where the demand for labour equals the supply of labour (in a perfectly competitive labour market) - this gives us the real wage rate and the level of employment - theoretically the real wage rate adjusts to keep the market in equilibrium
IF there is excess supply than demand = there are more workers than jobs which would put pressure on the real wage rate to fall and the market to be restored to equilibrium
IF there is excess demand than supply = there are less workers than jobs which would put pressure the real wage rate to rise and so the market to be restored to equilibrium ( the other way around from the above pic)
Trends in Real Wages 1) Australia has seen an increase in real wage growth, due to result of sustained improvement productivity of workers leading to an increase in the demand for workers. For example, improved levels of human capital (education) = Improved productivity increases real wages 2) The gap between the wages of skilled and unskilled workers has also risen due to: (i) Globalisation - many markets for goods and services have become international (trading) = this results in increased specialisation within countries to produce certain goods
(ii) Technological change Technology has also widened the gap in the wages of skilled and unskilled workers. Technology affects the marginal productivity of skilled workers more than unskilled workers which has resulted in higher demand for the skilled workers. e.g.;improvement of technology = increase in demand of skilled workers increases the skilled workers wage, however this decreases the demand for unskilled workers hence decrease in unskilled workers wage
Unemployment The unemployment rate is a very good indicator of conditions in the labour market. When the unemployment rate is low, jobs are secure and relatively easier t find. Low unemployment is often associated with improving wages and working conditions as well, as employers compete to attract and retain worker. the unemployment rate is calculated by looking at people aged 15 or above: 1) Employed - people who worked full time or part time in the last week 2) Unemployed - people did not work in the past week by made some effort to find a job 3) Not in the labour force - people who did not work in paid employment or look for a job Important terms:
Labour force - total number of employed and unemployed people in the Australian population Unemployment rate - the proportion of people looking for work and cannot find a job. Calculated by: Labour force participation rate - proportion of Australian working age population in the labour force. Calculated by: labour force divided by the working age(15-64) population. Costs of Unemployment 3 main costs of unemployment: 1) Economic costs - unemployment means the full workforce is not utilised - This means a reduction in the nations output - There is also a drain on the government’s budget via a loss in income tax revenue and, - increased government payments such as unemployment benefits. 2) Psychological costs - unemployment can lead to loss of self-ester, depression and suicidal behavior 3) Social costs - unemployment can lead to people facing financial difficulties and despair - higher rates of crime, domestic violence, alcoholism and abuse Discouraged workers and underemployed: - Discouraged workers who have dropped out of labour force, as they have stopped looking for work as they do not get a job despite their efforts. - Underemployed workers work more hours but can’t or work in jobs which don’t match their qualifications or skills
Types of Unemployment Natural rate of unemployment - The unemployment rate never falls to 0 as there are always people changing jobs There are 3 types of unemployment: Frictional unemployment - these are the people who change jobs - those who quit their jobs and are looking for new jobs - these people are "short-term unemployed” and play a essential role in the dynamic economy - their unemployment is not too costly - frictional unemployment may be economically beneficial - it can be very productive as the worker sets to work at its maximum capacity to sustain the job, hence lead to higher output over the long run Structural unemployment - when worker’s skills or aspiration do not match the jobs available - there is a mismatch of jobs and workers in the economy - these workers needs to be retrained to find suitable jobs - the costs of this employment are much higher than frictional unemployment as these workers are long-term unemployed - factors include lack of skills, language barrier s and discrimination
Cyclical unemployment - occurs due to the nature of the business cycle - occurs when the economy is slowing down, particularly during a recession - less spending means lower demand for about which leads to unemployment - very costly to the economy
Impediments to Full Employment There are 4 main factors which contribute to Australia not achieving a natural rate of unemployment (4-6%): 1) Minimum wage law: - setting minimum wages - minimum wage regulations prescribe the lowest hourly wage that employers may pay to workers - if minimum wages are too high, it will cause unemployment if set above the market clearing rate - minimum wages can create two classes of workers, those who get a job and who don’t - minimum wages hurt the people who are supposed to be employed 2) Labour Unions: - unions can negotiate wages for workers with their employers - this can push wages up causing unemployment - unions can also make job markets and workplaces inefficient 3) Unemployment Benefits - Australia has a generous unemployment benefit scheme - workers who are unemployed receive government payments - This can act as disincentives to find work for some of the unemployed 4) Other Government regulations - such as health and safety regulations impact on the costs of business which effects the demand for labour.
End of Topic 3 - Wages, Employment and the Labour Market
Wages and Demand for Labour The demand for labour is the number of people employers want to hire The demand for labour depends on the price that the market sets on worker’s output and the productivity of labour - as the productivity of the workers increase, there is an increase in the value of goods and services made, hence the greater the number of workers an employer will want to hire at a given wage rate Firms can do cost benefit analysis to determine the number of workers they employ. They consider: - marginal cost - the additional cost of hiring one more worker - value of marginal product - the benefit of hiring one more worker, (the extra production gained by that one extra worker) The tendency for marginal product to decline as more and more workers are added is called diminishing returns to labour - if the amount of capital and other inputs in use is held constant, then the greater the quantity of labour already employed, the less each additional worker adds to production - A worker is hired if marginal product is higher or equal to marginal cost - The higher the price of a good, the lower the quantity demanded. The same can be said for the demand for labour - The higher the wage rate, the lower the demand for labour from employers
- The law of demand says that higher wages lead to lower demand for workers so the demand curve is downward sloping
Factors in the shifts in the Demand of Labour There are two factors which could shift the demand curve: 1) an increase in the relative price of the workers output: - the price of products increases, means the marginal product value would increase meaning more workers could be employed at a given level of output and wages. The demand for labour shifts to the right
2) a change in worker’s productivity: - more productive, the demand of labour would increase and vice versa. - as the productivity of workers decreases due to a technology issue, this means the marginal product value would decrease, meaning less workers could be employed at ta given level of output or wage. The demand for labour shifts to the right
Wages and Supply for Labour The supply of labour are the workers or potential workers - at any given wage rate a person must decide whether they want to participate in paid work. The decision to work is based on an individual’s real wage (the money they get from paid work) and their reservation wage (the value they get from not working e.g.; desire for leisure, family commitments) - People use cost benefit analysis to decide whether to work - If the real wage is higher than the reservation wage, they will work in paid employment Supply for Labour - the higher the price of a good, the greater the supply of the good. Hence the higher the wage rate, the larger the supply of workers - The supply curve is upward sloping, since in general, the higher the real wage rate the more willing people are to work An increase in the supply of labour shifts the curve to the right A decrease in the supply of labour shifts the curve to the left
Factors in the shifts in the Supply of Labour The most important factor is the size of the working-age population (between 15 to 64 years of age) which is influenced by factors such as: - Domestic birth rates - Immigration and Emigration rates - Retirement age - Age starting work An increase in the working-age population raises the quantity of labour supplied at each real wage, shifting the labour supply curve to the right
Equilibrium - Equilibrium occurs where the demand for labour equals the supply of labour (in a perfectly competitive labour market) - this gives us the real wage rate and the level of employment - theoretically the real wage rate adjusts to keep the market in equilibrium
IF there is excess supply than demand = there are more workers than jobs which would put pressure on the real wage rate to fall and the market to be restored to equilibrium
IF there is excess demand than supply = there are less workers than jobs which would put pressure the real wage rate to rise and so the market to be restored to equilibrium ( the other way around from the above pic)
Trends in Real Wages 1) Australia has seen an increase in real wage growth, due to result of sustained improvement productivity of workers leading to an increase in the demand for workers. For example, improved levels of human capital (education) = Improved productivity increases real wages 2) The gap between the wages of skilled and unskilled workers has also risen due to: (i) Globalisation - many markets for goods and services have become international (trading) = this results in increased specialisation within countries to produce certain goods
(ii) Technological change Technology has also widened the gap in the wages of skilled and unskilled workers. Technology affects the marginal productivity of skilled workers more than unskilled workers which has resulted in higher demand for the skilled workers. e.g.;improvement of technology = increase in demand of skilled workers increases the skilled workers wage, however this decreases the demand for unskilled workers hence decrease in unskilled workers wage
Unemployment The unemployment rate is a very good indicator of conditions in the labour market. When the unemployment rate is low, jobs are secure and relatively easier t find. Low unemployment is often associated with improving wages and working conditions as well, as employers compete to attract and retain worker. the unemployment rate is calculated by looking at people aged 15 or above: 1) Employed - people who worked full time or part time in the last week 2) Unemployed - people did not work in the past week by made some effort to find a job 3) Not in the labour force - people who did not work in paid employment or look for a job Important terms:
Labour force - total number of employed and unemployed people in the Australian population Unemployment rate - the proportion of people looking for work and cannot find a job. Calculated by: Labour force participation rate - proportion of Australian working age population in the labour force. Calculated by: labour force divided by the working age(15-64) population. Costs of Unemployment 3 main costs of unemployment: 1) Economic costs - unemployment means the full workforce is not utilised - This means a reduction in the nations output - There is also a drain on the government’s budget via a loss in income tax revenue and, - increased government payments such as unemployment benefits. 2) Psychological costs - unemployment can lead to loss of self-ester, depression and suicidal behavior 3) Social costs - unemployment can lead to people facing financial difficulties and despair - higher rates of crime, domestic violence, alcoholism and abuse Discouraged workers and underemployed: - Discouraged workers who have dropped out of labour force, as they have stopped looking for work as they do not get a job despite their efforts. - Underemployed workers work more hours but can’t or work in jobs which don’t match their qualifications or skills
Types of Unemployment Natural rate of unemployment - The unemployment rate never falls to 0 as there are always people changing jobs There are 3 types of unemployment: Frictional unemployment - these are the people who change jobs - those who quit their jobs and are looking for new jobs - these people are "short-term unemployed” and play a essential role in the dynamic economy - their unemployment is not too costly - frictional unemployment may be economically beneficial - it can be very productive as the worker sets to work at its maximum capacity to sustain the job, hence lead to higher output over the long run Structural unemployment - when worker’s skills or aspiration do not match the jobs available - there is a mismatch of jobs and workers in the economy - these workers needs to be retrained to find suitable jobs - the costs of this employment are much higher than frictional unemployment as these workers are long-term unemployed - factors include lack of skills, language barrier s and discrimination
Cyclical unemployment - occurs due to the nature of the business cycle - occurs when the economy is slowing down, particularly during a recession - less spending means lower demand for about which leads to unemployment - very costly to the economy
Impediments to Full Employment There are 4 main factors which contribute to Australia not achieving a natural rate of unemployment (4-6%): 1) Minimum wage law: - setting minimum wages - minimum wage regulations prescribe the lowest hourly wage that employers may pay to workers - if minimum wages are too high, it will cause unemployment if set above the market clearing rate - minimum wages can create two classes of workers, those who get a job and who don’t - minimum wages hurt the people who are supposed to be employed 2) Labour Unions: - unions can negotiate wages for workers with their employers - this can push wages up causing unemployment - unions can also make job markets and workplaces inefficient 3) Unemployment Benefits - Australia has a generous unemployment benefit scheme - workers who are unemployed receive government payments - This can act as disincentives to find work for some of the unemployed 4) Other Government regulations - such as health and safety regulations impact on the costs of business which effects the demand for labour.
End of Topic 3 - Wages, Employment and the Labour Market
