It focuses on economic growth and business cycle issues when the economy trades with the rest of the world and is financially open. Also introduce students to modern macroeconomics which has microeconomic foundations by presenting the intertemporal model and analyzing how the labor market works.
Introduction
Labor market is made up of two components :
– In this chapter, we explore how the labor market
(LM) works and we investigate the cause(s) of
unemployment.
– LM has two components : labor demand (LD
henceforth) and labor supply (LS henceforth).
– LD represents the maximum price on the labor
market that firms are willing to pay for one
additional worked hour. The maximum price is
measured by the MPL which is declining as a result
of diminishing returns to labor. When the real wage
(ω) falls, firms hire more : LD-schedule is thus
downward-sloping in the (N, ω)-space.
– LS represents the minimum amount of goods (i.e.,
minimum real wage) that the worker requires in
, exchange for one additional hour supplied in the
labor market. As the worker supplies more labor,
he/she has to reduce leisure time. The utility loss
caused by a reduction in leisure gets larger as the
agent works more. In compensation for a higher
utility loss, the worker will ask for a higher minimum
wage. The minimum wage is thus increasing in the
number of hours worked. When ω increases, the
price of leisure rises which provides incentives to
work more : LS-schedule is thus upward sloping in
the (N, ω)-space.
Labor Market Equilibrium and Voluntary
Unemployment
– When the downward-sloping LD-curve and the
upward-sloping LS-curve cross, the LM is in
equilibrium, as shown in Figure .
– In this situation, only one type of unemployment
shows up : voluntary unemployment (V ) which is
made up of agents who consider that the equilibrium
ω offered on the LM is not large enough to
, compensate for their utility loss caused by supplying
labor.
– The cause of voluntary unemployment is twofold. To
understand these causes, it is worth mentioning that
voluntary unemployment affects primarily low skilled
workers.
– First, V will be higher in countries where LD for
unskilled labor is low as a result of high payroll taxes
(social contributions paid by the employer to finance
health, pension, and unemployment system).
– Second, V will be higher in countries where
replacement benefits (income support plus housing
benefits) are more generous when the agent is out
of the labor force.
Real wage, ω
6
Labor demand NS Labor supply
Excess of LS
over LD
= Involuntary unemployment (U)
Real minimum
A -B
wage
Equilibrium
real wage E
C
ND
- Labor, N
– N1D N? N1S
, Labor Market and Involuntary Unemployment
– As long as ω is perfectly flexible, LD always meets
LS and only V shows up. In other words, if a
negative shock hits the economy, LD declines so
that an excess supply (ES) for labor arises which
puts downward pressure on ω.
– However, the real wage can be downward rigid and
thus the ES for labor will become persistent. This
ES for labor is called involuntary unemployment (U )
because workers are willing to work for ω offered in
the LM but cannot find a job because LD is too low
relative to LS.
– ω can display some downward rigidity when the
minimum wage legislation leads the minimum wage
to be higher than ω ? . France is one prominent
example of a high minimum wage regulation. Setting
ωmin to a higher level than ω ? lowers labor demand
relative to labor supply which causes unemployment
for low skilled workers ⇒ TC5.
Labor Market Indicators
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