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Labor Market. Deindustrialization?. U.S. Manufacturing Employment Millions of Jobs. Manufacturing Wage Rate, 2005. Wages by Education in the U.S. Marginal Product of Labor. Firms employ workers to produce good and services.

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deindustrialization
Deindustrialization?

U.S. Manufacturing Employment

Millions of Jobs

Manufacturing Wage Rate, 2005

marginal product of labor
Marginal Product of Labor
  • Firms employ workers to produce good and services
  • Marginal Product of Labor is the additional output produced by a worker
diminishing marginal productivity
Diminishing Marginal Productivity
  • Diminishing marginal productivity of labor

MPN

  • MPN depends on A and k/n
  • For given k and A a rise in n leads to a fall in MPN

Fix k

n

the determination of short run labor demand
The Determination of Short-Run Labor Demand

MPN & w

  • w = real wage rate
  • To maximize profits the firm should
    • Increase n if MPN > w*
    • Decrease n if MPN < w*
  • It follows that the demand for labor function equals the MPNfunction

MPN1

W*

MPN2

MPN

n1

n*

n2

n

w = MPN

Condition of profit maximization

factors that shift the aggregate labor demand curve
Factors that Shift the Aggregate Labor Demand Curve
  • An increase in TFP causes the labor demand curve to shift right.
  • An increase in the capital stock causes the labor demand curve to shift right.

Increase in A or k

w

n

the supply of labor

w

n

The Supply of Labor

ns

  • Labor is supplied by households
  • Aggregate labor supply increases with wages
  • Higher wealth lowers labor supply at any wage
short run labor market equilibrium fix k

w

n

Short-Run Labor Market Equilibrium(fix k)
  • Real wage is determined so that labor demand equals labor supply at point X.
  • An increase in TFP shifts the MPN curve to MPN*.
  • The new equilibrium is at point Z with higher real wage and employment.

Z

X

MPN*

MPN

recession

w

n

Recession

Sharp oil price rise

  • Lowers A
  • Lowers demand for labor
  • Lowers real wages and real GDP
  • This is a recession.

ns

MPN

MPN*

oil price
Oil Price

Real

Nominal

does the theory work
Does the theory work?
  • Are real wages proportional to labor productivity over time?
  • Are real wages proportional to labor productivity across countries?
real wages and productivity across countries
Real Wages and Productivity Across Countries

Wages and Productivity

(Output per Worker) Across Countries

size distribution of firms in the us
Size Distribution of Firms in the US

Over half of all employment is in small firms.

Source: Brian Headd, “The Characteristics of Small-Business Employees,” Monthly Labor Review, 2000.

job creation and destruction in the us
Job Creation and Destruction in the US

2006Q2:-7.8 million jobs created - 7.3 million jobs destroyed - .5 million net change in number of jobs

Job creation: net employment change of establishments expanding employmentJob destruction: net employment change of establishments reducing employment

Job creation and destruction is significantly higher than net job creation.

productivity and resource reallocation
Productivity and Resource Reallocation

Churning is the key to economic growth.

Source: John Haltiwanger, “New Ideas for Measuring Labor Productivity,” Census Brief, 1998.

structural transformation and development
Structural Transformation and Development

Source: Bah El-hadj, The University of Auckland, “Structural Transformation in Developed and Developing Countries,” 2008.

labor market and wealth

w

n

Labor Market and Wealth

ns*

Z

  • A permanent rise in A raises MPN and thus shifts out the labor demand curve.
  • A permanent rise in A raises wealth and thus shifts left the labor supply curve.
  • The new equilibrium is at point Z with higher real wage and possibly lower employment.
  • Note, though, that hours worked per person may fall, but a rise in wages may lead to a rise in the labor force participation rate (especially for relatively poor countries).

ns

X

MPN*

MPN

rise in real wage dispersion
Rise in Real Wage Dispersion
  • Two potential explanations
    • Open trade (greater globalization)
    • Technological improvements
skill biased technical change
Skill Biased Technical Change

w

w

NS_unskilled

NS_skilled

ND’_skilled

ND_unskilled

ND’_unskilled

ND_skilled

N_unskilled

N_skilled

  • Skill biased technical change increases demand for skilled workers and hence their wages
  • The opposite is true for unskilled workers.
key message
Key Message
  • Wage premium for skills have gone up and relative supply have been catching up
  • The information technology (IT) revolution is biased toward skilled labor
skill premia across countries
Skill Premia Across Countries
  • Skill premia are highest for poor countries
  • Poor countries have a shortage of skilled workers
  • Why?
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