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Productivity, Output, and Employment

Productivity, Output, and Employment. Jeffrey H. Nilsen. 5 years after Lehman. http:// video.ft.com/2661154716001/Lehmans-legacy-The-world-economy/Markets. =.

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Productivity, Output, and Employment

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  1. Productivity, Output, andEmployment Jeffrey H. Nilsen

  2. 5 years after Lehman http://video.ft.com/2661154716001/Lehmans-legacy-The-world-economy/Markets

  3. = • Slope: > 0. Additional N increases MP but rise in MP diminishes with larger N: diminishing MPN (N must share same K with greater number of others) • For business cycle (short run), assume K fixed. Output then depends heavily on labor input • Y = A F(K, N) • Y = A K0.3 N0.7 (cobb-douglas) • (When discussing growth, both K & N change over time)

  4. Y = A F(K, N) • “A” (knowledge or total factor productivity (TFP)): better “methods”, if it improves, each unit N can produce greater output • Exogenous (assume certain value for variable [value comes from outside the model]) • If adverse technology shock, production drops at all N levels so production function shifts down • Example shocks: weather, drought, energy prices (imposes higher input costs for most industries)

  5. 3.1The US Production Function

  6. The Labor Market:Labor Demand • N Demand: Firms can easily change N (e.g. lay-offs) not long-lived K (new K has small effect on total K) • Measure N as time worked or number of employees; assume: • Workers identical (same level of skills, ambition, etc) • Firms identical, each one takes wage as given from competitive labor market • Firm will hire the next worker as long as the benefit of hiring her exceeds the costs

  7. Benefit exceeds costs => firm maximizes profits • For firm, cost of hiring the next worker is the real wage, assume nominal W = $80 per day & the output price is $10 per grooming • w is 8 groomings per day, the marginal cost of the next worker • Compare MC to MP (the benefit of hiring the next worker since her production is the benefit for the firm of hiring her)

  8. Graphing MP vs. MC Assume real wage is a given to the firm (w won’t change no matter how many workers it hires (thus horizontal line at 8) MP decreases: with more workers hired, the additional product the next worker provides to the firm falls. For labor < N*, if firm hires next worker its profits will increase. MP curve is thus the ND curve since it shows how many workers the firm will hire

  9. ND Shifts If w rises NO SHIFT; N sinks on fixed ND curve NDshifts if TFP shock or K rise: higher TFP => workers more productive (those laid off find jobs higher pay jobs) Aggregate ND: sum of all firms’ ND => same factors affect as in individual firm ND

  10. NS • Individual (taking W & P as given) asks: Should I work? She compares • Benefit (real wage) e.g. 12$/3$ where denom. = avg PL of goods purchased => she’ll receive 4 goods units if she works next hour • Her marginal cost: leisure she must give up if she works next hour • Rise in w alters agent’s labor/leisure trade-off: • Long-run (or permanent) rise: income effect dominant (feel richer, want to enjoy more leisure) => NSfalls • Empirical: many nations’ rising long-run productivity & w cut hours worked • Short-run (or temporary) rise: substitution effect important (increases opportunity cost of leisure, cut leisure to thus work more) => NS rises   • Model: up-sloping S, taking future w (and wealth) as given • Aggregate NS up-sloping also due to higher w attracting to join LF

  11. Fig 3.10Hours and real per-capita GDP in 36 countries

  12. NS Shifts NS IN if rise in wealth or expected future w (afford more leisure) NS OUT if rise in population or participation Aggregate NS up-sloping also due to higher w attracting to join LF

  13. Labor Market Eqbm Single firm takes w as given, but in market, w* & N* determined together Classic model => w adjusts quickly so NS = ND  If w < w*, ND > NS => firms bid up w to hire N to max profits At w*, NS = ND, N* is full-employment N Full-Employment Y: Y* (or YFE) corresponds to N* => after all W, P have adjusted (Y* is economy’s output capacity)

  14. Temporary Productivity (TFP)Shock A F(K, N*) drops E.g. Adverse shock in A has 2 effects: Direct: Y* falls at initial N* Indirect: MP drop at N* shifts ND, new eqbm N** NS stable: temporary => no change in future w

  15. Unemployment in Models Classics don’t explain U (anyone wanting to work at w* gets job => U = 0) Keynesian U assumes “sticky” w adjustment (excess NS at initial w*) RBC (new classics) explain U by reasoning it takes time to match workers to jobs

  16. EU quarterly Labor Force Survey • E person:worked full or part time in past week • U person: didn’t work in past week, but looked for work in past 4 weeks • Non-LF person: if no work in past week, didn’t look for work in past 4 weeks (e.g. student) • U rate= U/(LF) or U/(E + U) • Employment ratio= E/(adult population)

  17. Table 3.4 US Employment Status of Adult Population, Feb 2003

  18. LF Employed 25.4 million 3.7% Not in LF 9.4 million 15.2% 4% 34% 5.5% Unemployed 2.8 million 21% Fig 3.15Changes in UK employment status in typical month

  19. Unemployment Stylized Fact Most spells are of short duration, but most of those unemployed at specific time are suffering spells of long duration Spell: period when person continuously unemployed Duration: measures length of time unemployed, indicates hardship

  20. Natural Rate of Unemployment • Frictional U • Structural U • Cyclical U: (U – U*) • Positive (U high) when Y < Y* • Okun’s law: for each 1% rise in U above natural rate, GDP drops 2% below YFE

  21. Fig 3.16Okun’s law in US

  22. 5. One reason that firms hire labor at the point where w = MPN is (a) if w < MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring them, so they should hire fewer workers. (b) if w > MPN, the cost (w) of hiring additional workers is less than the benefits (MPN) of hiring them, so they should hire more workers. (c) if w < MPN, the cost (w) of hiring additional workers equals the benefits (MPN) of hiring them, so they have the right number of workers. (d) if w > MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring them, so they should hire fewer workers.

  23. The Upstart Company has a production function: # Workers # Cases Produced 0 0 1 10 2 19 3 26 4 31 5 34 If Upstart hires 4 workers, which could be the real wage? (a) 2 (b) 4 (c) 6 (d) 8

  24. Which of these events would lead to an increase in the MPN for every quantity of labor? (a) An increase in the real wage (b) A decrease in the real wage (c) A favorable supply shock such as a fall in the price of oil (d) An adverse supply shock, such as a reduced supply of raw materials

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