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Topic 4: Labour Markets and Equilibrium Unemployment

Topic 4: Labour Markets and Equilibrium Unemployment. Burda + Wyplosz, Chapter 6 + Section 17.4. Labour Markets and Equilibrium Unemployment. Data and Definitions Static Analysis: Supply and Demand in the Labour Market Dynamic Analysis: Stocks and Flows Equilibrium Unemployment.

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Topic 4: Labour Markets and Equilibrium Unemployment

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  1. Topic 4: Labour Markets and Equilibrium Unemployment Burda + Wyplosz, Chapter 6 + Section 17.4

  2. Labour Markets and Equilibrium Unemployment • Data and Definitions • Static Analysis: Supply and Demand in the Labour Market • Dynamic Analysis: Stocks and Flows • Equilibrium Unemployment

  3. Definitions and Data • Labour Force = Employed + Unemployed • N = L + U • N´ Not in labour force: • unavailable for (paid) work • above, or below working age etc. • Population = N + N´ • Unemployment Rate = U/N (%)

  4. Population and Labour Force Retired Employed Labour Force Active population i.e. of working age Available for work, but Unemployed Unavailable for (paid) work Below working age

  5. Population and Labour Force Census of Population Ireland 1996 000s Aged 65+ 414 Employed 1,297 Unemployed 191 Aged 15-64, not available for work 865 Aged 0-14 859 Total Population 3,626 Active (i.e. working age) population 2,353 Labour Force 1,488 Unemployment Rate U/N (%) 12.8%

  6. Unemployment rates End 1997/early 1998 UK 5.0% US 4.7% Belgium 13% Germany 12% France 12% Italy 12% Spain 21% Ireland 10%

  7. Static Analysis: Supply and Demand in the Labour Market Microeconomic analysis The supply of labour: • optimal choice of work/leisure by utility maximising households The demand for labour: • optimal choice of labour by profit maximising firms

  8. The supply of labour C w 0 l´ 0 work

  9. The supply of labour C w 0 l´ 0 work

  10. The supply of labour C w slope = - w1 0 l´ 0 work

  11. The supply of labour C w w1 slope = - w1 0 l´ 0 work

  12. The supply of labour C w w1 slope = - w1 0 l´ 0 work

  13. The supply of labour C w w1 R slope = - w1 0 l´ 0 work

  14. The supply of labour C w w1 R slope = - w1 0 l´ 0 work

  15. The supply of labour C w w1 R slope = - w1 0 l´ 0 work leisure1

  16. The supply of labour C w w1 R slope = - w1 0 l´ 0 work leisure1 work1

  17. The supply of labour C w w1 R slope = - w1 0 work1 l´ 0 work leisure1 work1

  18. The supply of labour C w w1 R slope = - w1 0 work1 l´ 0 work leisure1 work1

  19. The supply of labour C w w2 w1 R slope = - w1 0 work1 l´ 0 work leisure1 work1

  20. The supply of labour C w slope = - w2 w2 w1 R slope = - w1 0 work1 l´ 0 work leisure1 work1

  21. The supply of labour C w slope = - w2 w2 w1 R slope = - w1 0 work1 l´ 0 work leisure1 work1

  22. The supply of labour C w slope = - w2 w2 R´ w1 R slope = - w1 0 work1 l´ 0 work leisure1 work1

  23. The supply of labour C w slope = - w2 w2 R´ w1 R slope = - w1 0 work1 l´ 0 work leisure1 work1

  24. The supply of labour C w slope = - w2 w2 R´ w1 R slope = - w1 leisure2 0 work1 l´ 0 work leisure1 work1

  25. The supply of labour C w slope = - w2 w2 R´ w1 R slope = - w1 leisure2 work2 0 work1 l´ 0 work leisure1 work1

  26. The supply of labour C w slope = - w2 w2 R´ w1 R slope = - w1 leisure2 work2 0 work1 l´ work2 0 work leisure1 work1

  27. The supply of labour C w slope = - w2 w2 R´ w1 R slope = - w1 leisure2 work2 0 work1 l´ work2 0 work leisure1 work1

  28. The supply of labour C w slope = - w2 labour supply w2 R´ w1 R slope = - w1 leisure2 work2 0 work1 l´ work2 0 work leisure1 work1

  29. The Demand for Labour • Profit-maximising, competitive firms • Consider an increase in labour input by 1 unit • marginal cost = W • marginal revenue = P. MPL • Optimal profit: MC=MR • W=P.MPL • Equilibrium labour demand where MPL = W/P • or MPL = w (real wage) • Assume diminishing MPL

  30. Labour Market Equilibrium:voluntary and involuntary unemployment w = W/P L

  31. Labour Market Equilibrium:voluntary and involuntary unemployment w = W/P labour demand w = MPL L

  32. Labour Market Equilibrium:voluntary and involuntary unemployment w = W/P labour supply labour demand w = MPL L

  33. Labour Market Equilibrium:voluntary and involuntary unemployment w = W/P labour supply labour demand w = MPL Lactive L

  34. Labour Market Equilibrium:voluntary and involuntary unemployment w = W/P labour supply labour demand w = MPL Lactive L

  35. Labour Market Equilibrium:voluntary and involuntary unemployment w = W/P labour supply w* labour demand w = MPL Lactive L

  36. Labour Market Equilibrium:voluntary and involuntary unemployment w = W/P labour supply w* labour demand w = MPL L* Lactive L

  37. Labour Market Equilibrium:voluntary and involuntary unemployment w = W/P labour supply w* labour demand w = MPL UE1VOL L* Lactive L

  38. Labour Market Equilibrium:voluntary and involuntary unemployment w = W/P labour supply w´ w* labour demand w = MPL UE1VOL L* Lactive L

  39. Labour Market Equilibrium:voluntary and involuntary unemployment w = W/P labour supply w´ w* labour demand w = MPL UE1VOL L* Lactive L

  40. Labour Market Equilibrium:voluntary and involuntary unemployment w = W/P labour supply w´ w* labour demand w = MPL UE1VOL Ld L* Lactive L

  41. Labour Market Equilibrium:voluntary and involuntary unemployment w = W/P labour supply w´ w* labour demand w = MPL UE1VOL Ld L* Ls Lactive L

  42. Labour Market Equilibrium:voluntary and involuntary unemployment w = W/P labour supply UEINVOL w´ w* labour demand w = MPL UE1VOL Ld L* Ls Lactive L

  43. Labour Market Equilibrium:voluntary and involuntary unemployment w = W/P labour supply UEINVOL w´ w* labour demand w = MPL UE1VOL Ld L* Ls Lactive L

  44. Labour Market Equilibrium:voluntary and involuntary unemployment w = W/P labour supply UE2VOL UEINVOL w´ w* labour demand w = MPL UE1VOL Ld L* Ls Lactive L

  45. ‘Voluntary’ unemployment and labour force participation rates From Burda + Wyplosz Table 6.2 p. 146 Female labour force participation rates 1993 (% of females of working age in labour force) Sweden USA UK Germany Spain Ireland

  46. ‘Voluntary’ unemployment and labour force participation rates From Burda + Wyplosz Table 6.2 p. 146 Female labour force participation rates 1993 (% of females of working age in labour force) Sweden 76% USA 69% UK Germany Spain Ireland

  47. ‘Voluntary’ unemployment and labour force participation rates From Burda + Wyplosz Table 6.2 p. 146 Female labour force participation rates 1993 (% of females of working age in labour force) Sweden 76% USA 69% UK 65% Germany 58% Spain Ireland

  48. ‘Voluntary’ unemployment and labour force participation rates From Burda + Wyplosz Table 6.2 p. 146 Female labour force participation rates 1993 (% of females of working age in labour force) Sweden 76% USA 69% UK 65% Germany 58% Spain 43% Ireland

  49. ‘Voluntary’ unemployment and labour force participation rates From Burda + Wyplosz Table 6.2 p. 146 Female labour force participation rates 1993 (% of females of working age in labour force) Sweden 76% USA 69% UK 65% Germany 58% Spain 43% Ireland 40%

  50. Sources of real wage rigidity and involuntary unemployment • Collective bargaining institutions • Social protection • Efficiency wages

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