Ch The Labor Market Definitions Facts and Trends

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					          Chapter 2.
       The Labor Market:
Definitions, Facts, and Trends.
        Labor Force Measures
• (Adult) Civilian noninstitutional population.
  – persons 16 years of age and older
  – residing in the 50 States & DC
  – not inmates of institutions (e.g., penal and
    mental facilities, homes for the aged),
  – not on active duty in the Armed Forces.
       Labor Force Measures
• Employed persons.
  – during the reference week,
     • did any work at all (at least 1 hour) as paid
     • worked in their own business, profession, or on
       their own farm,
     • or worked 15 hours or more as unpaid workers in
       an enterprise operated by a member of the family,
     • all those who were not working but who had jobs
       or businesses from which they were temporarily
       Labor Force Measures
• Unemployed persons.
  – no employment during the reference week,
  – available for work, except for temporary
    illness, and made specific efforts to find
    employment some time during the 4-week-
    period ending with the reference week.
  – Persons who were waiting to be recalled to a
    job from which they had been laid off need not
    have been looking for work to be classified as
        Labor Force Measures
• Labor force.
  employed + unemployed
• Unemployment rate.
  Unemployed / Labor Force
• Labor Force Participation rate.
  Labor Force / Civ. NonInst. Pop
• Employment-population ratio.
  Employed/ Civ. Noninst. Pop.
• Historical Data (Table B35 from Econ.
                1994/2005 Data
                                Adult Civilian Noninst.
                                (230.133 / 224.640 m.)

                     Labor Force                       Not in labor force
              (136.297 / 148.203 m.)                   (66.836 / 76.437)

      Employed                       Unemployed
(129.558 / 140.156 m.)             (6.739 / 8.047 m)
      Labor force measures
                                 1994   2005
Unemployment rate

Labor force participation rate

Employment rate
• Start with
   U=10 million, E=90 million, CNIP=200 million
• What would happen to unempl rate, lfpr, and
  empl rate if
   – 10 million people out of labor force begin
     looking for work and 6 million find jobs.
   – 1 million unemployed people become
     “discourage” and quit looking for work?
   – 1 million unemployed people find new jobs?
   – 1 million employed people lose jobs and .5
     million choose to retire while the other .5
     million begin search for new jobs.
Variation in unemployment rates
• Employment Situation from
  – Sex
  – Age
  – Education
• Why is there a correlation between these
  characteristics and unemployment rates?
           Labor Earnings
• Wage rate X hours worked =Earnings

• Earnings + Benefits = Total Compensation

• Total compensation + unearned (non-
  labor) income = Total Income
Earnings Measures
   Real versus Nominal Wages.
                    Cost of bundle in t
• CPIt = 100 *
                 Cost of bundle in baseyear
               Nom. Wage t
• Real Waget = (CPI / 100 )

• Nominal Wage represents earnings in current dollars.

• Real Wage represents earnings in constant (base year)
  Real versus Nominal Wages.
• Issues with Indexing
  – The bundle
     • Varies across people/time.
     • Evidence that CPI over-states growth in cost of living by 1 to
       1.5 percent per year.
         – Quality of goods
         – Substitution effects

• Point in time adjustments versus across time
  – Comparable salary in city j = salary in city k * city j cpi
                                                    city k cpi
  Real versus Nominal Wages.
• CPI data (available from BLS)
• If a person earned $8 per hour in 1980, what
  would yield the equivalent purchasing power in
• If a person’s nominal wage rose from $10 per
  hour in 2000 to $11 per hour by 2006, what
  happened to their real wage (in 1982-84
        Earnings Measures
• Cost of Living by City (ACCRA)
• If a person moved from Cincinnati to
  Washington DC and their earnings rose
  from $50,000 to $60,000, did their real
  earnings rise or fall?
• What are some of the problems with the
  Cinci/DC comparison?
               Labor Demand
• Changes in wages (move along D-curve)
  – scale effect
  – substitution effect
• Changes in other factors (shift D-curve)
  – demand for product
     • scale effect, no substitution effect
  – supply of other inputs (e.g. capital)
     • scale effect and substitution effect
             Labor Demand
• Market, Industry, and Firm Demand.
  – different ways of measuring labor demand.
• Long run versus short run demand.
  – substitution effects tend to be larger in the
    long run, making labor demand more elastic
    in the long run.
                 Labor Supply
• Labor supply curve.
   – Market supply curve: upward sloping.
   – Firm supply curve: horizontal in competitive market.
• Factors shifting labor supply:
   – population.
   – alternative opportunities (other employment,
   – taxes
   – non-pecuniary aspects of job (fringes, risk, night
     shifts, etc.)
    Labor Market Equilibrium
• If wage is below equilibrium: shortage.
• If wage is above equilibrium: surplus
• Shortages put upward pressure on wages. Surpluses
put downward pressure on wages.
     Labor Market Equilibrium
• Effect of
  – Increased population
  – Increased tax on employers
  – Increased tax on employees
  – Cheaper capital
  – Cheaper imports
  – Increased demand for product

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