Labor Economics chap2.docx

Labor Economics chap2.docx

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LaborEconomicschap2

NotesforChapter2

Inlabormarkets,laborissuppliedbyhouseholdsanddemandedbyfirms.Thesearetheoppositeoftherolesthatareplayedbyhouseholdsandfirmsinproductmarkets.Besuretokeepthisdistinctioninmind.

Nationalandlocallabormarkets

Anationallabormarketisoneinwhichmostjobsearchbyemployersandfirmstakesplaceonanationallevel.Mostjobsearchtakesplaceatalocallevelinalocallabormarket.Themarketsforcollegeprofessors,topmanagementpositionsinlargecorporations,andsimilaroccupationsarenationallabormarkets.Secretaries,carpenters,truckdrivers,electricians,andlatheoperatorsareemployedthroughlocallabormarkets.Anationallabormarketsexistsonlywhentherearefewemployersandemployeesinmostgeographicalregions.Locallabormarketsexistwhentherearemanyemployersandemployeesinmostgeographicalregions.

Internallabormarkets

Aninternallabormarketissaidtoexistwithinafirmifthefirmfillshigherlevelpositionsinthefirmprimarilybypromotionfromwithinthefirm.Firmsoftenrelyoninternallabormarketsbecause:

∙thisreduceshiringandtrainingcosts,

∙itimprovesemployeemoraleandmotivation,and

∙itreducestheeffectofuncertainty（sincethefirmhasalreadyobservedworkerproductivity.

Primaryandsecondarylabormarkets

Anotherdistinctionthatisoftenusedtocategorizejobsisthatbetweentheprimaryandsecondarylabormarket.Jobsintheprimarylabormarketarecharacterizedbyhighwagesandstableemploymentrelationships.Workersemployedinthesecondarylabormarketreceivelowwagesandexperienceunstableemploymentrelationships.Examplesofjobsintheprimarylabormarketinclude:

accountant,lawyer,teacher,carpenter,andplumber.Workersinfast-foodrestaurants,gasstationattendants,dishwashers,janitors,etc.areemployedinthesecondarylabormarket.Whileprimarylabormarketjobshaveobviousadvantages,thesecondarylabormarketoffersjobopportunitiesthatwouldnotbeavailableintheprimarylabormarkettohighschoolandcollegestudents,adultsengagedinextensivechild-careactivities,andretiredindividuals.Highschoolandcollegestudentsarenotlikelytofindprimarylabormarketjobsduringsummervacationsorforpart-timeworkduringtheacademicyear.Thoseadultswhoare"stuck"insecondarylabormarketoccupationsbecauseoflimitedjobskillsandeducation,however,arenotaspleasedwithfindingtheironlyemploymentprospectsinthissector.

Laborforceandunemployment

Thelaborforceconsistsofallnoninstitutionalizedindividualsaged16orabovewhoareeitherworkingoractivelyseekingwork.Thosewhochoosetobefull-timestudents,orretire,orwithdrawfromthelaborforceforchild-rearingpurposes,orwhogiveuplookingforworkarenotcountedaspartofthelaborforce

Individualsareunemployedonlyiftheyarenotworkingforpayatanyjobandareactivelyseekingwork.

Theunemploymentrateisdefinedas:

Aswasdiscussedinyourintroductorymacroeconomicsclass,theunemploymentrategenerallyrisesduringrecessionsandfallsduringperiodsofeconomicexpansions.Itisinterestingtonote,though,thatwhenunemployedworkersbecomediscouragedandleavethelaborforce（theseworkersarecalleddiscouragedworkers）,themeasuredunemploymentratedeclines.（Toseethis,observethatwhileboththenumeratorandthedenominatorintheequationabovedecline,thefractiondeclinesbecausethenumeratorfallsbyalargerpercentage.）Thus,theunemploymentratemaydeclinewhenthenumberofdiscouragedworkersrises.Similarly,theobservedunemploymentratemayincreasewhendiscouragedworkersbecomemoreoptimisticaboutthestateoftheeconomyandstartlookingforwork.

Thus,tomeasurethestateofthelabormarket,itisimportanttoexaminemovementsintoandoutofthelaborforceaswellaschangesintheunemploymentrate.Aconvenientmeasureofthisisprovidedbythelaborforceparticipationrate,definedas:

Typically,thelaborforceparticipationrateincreasesduringperiodsofeconomicexpansionanddeclinesduringperiodsofrecession.Notethatthechangesthatoccurinthelaborforceparticipationrateoverthecourseofthebusinesscycletendtodampenthefluctuationsthatoccurintheunemploymentrate.Toseethis,notethatduringarecession,unemploymentrises.Butbecausesomeworkersbecomediscouraged,unemploymentdoesnotrisebyasmuchasitwouldifthelaborforceparticipationratewereconstant.Similarly,duringanexpansion,unemploymentratesdecline,butthedeclineissmallerduetotheincreaseinthelaborforceparticipationratethatgenerallyoccurswhenanexpansionoccurs.

TheBureauofLaborStatistics（BLS）collectsandreportsunemploymentandlaborforceparticipationratedataforawidevarietyofsubgroupsofthepopulation,sortedbyage,gender,maritalstatus,andrace.DataonthesevariablesmaybefoundattheBLSwebsite.

Becarefultonotconfusetheunemploymentratewiththenumberofpeopleeligibletoreceiveunemploymentcompensation.Whileallofthosewhoreceiveunemploymentcompensationarelegallyrequiredtobeunemployed,aworkercouldbeunemployedbutnoteligibletoreceiveunemploymentcompensation（sinceeligibilityisnotavailabletothosewhovoluntarilyquitetheirjoborwhohavenotworkedforalongenoughtimeperiodpriortobeinglaidoff）.

Anexaminationofunemploymentstatisticsduringthepastcenturyindicatesthatunemploymentratesinthelatterhalfofthe20thcenturywere,onaverage,higherthanthoseduringthefirsthalfofthecentury.Thevariationinunemploymentrates,however,hasbeenmuchlowersincetheendoftheGreatDepression.Theincreasedleveloftheunemploymentratemaybetheresultofhigherratesofstructuralunemployment（asdiscussedinyourprinciplesofmacroeconomicscourse）ormaybeduetothereducedcostofbeingunemployed（asaresultoftheintroductionofunemploymentcompensation）.ThereducedvariationinunemploymentratesaregenerallyseentobetheresultofimprovementsinmacroeconomicpolicydecisionsbythegovernmentandFederalReserveBoard.

Duringthepast50years,thelaborforceparticipationrateformaleshasdeclinedslightly.Thisis,however,trueprimarilyforrelativelyyoungandrelativelyoldmales.Thedeclineinmalelaborforceparticipationratesisduetoincreasedyearsofeducationalattainmentandretirementdecisions.

Thelaborforceparticipationrateforfemaleshasincreasedratherdramaticallyduringthesameperiod.Thelargestincreasehasbeenformarriedfemales（partlybecausesingleanddivorcedfemalesalwayshadrelativelyhighlaborforceparticipationrates）.We'llexaminethereasonsforthechangeinfemalelaborforceparticipationratesinalatersectionofthiscourse.

Sectoralpatternofunemployment

Theeconomyisoftenseparatedintothreebasicsectors:

1.theprimarysector（theagriculturalsector）,

2.thesecondarysector（theindustrialsector）,and

3.thetertiarysector（theservicesector）.

Theagriculturalsectoriscalledtheprimarysectorbecauseeconomiesmustproduceenoughfoodforthepopulationtosurvivebeforeanythingelsecanbeproduced.Formostofthehistoryofourspecies,mostworkwasdevotedtoagrarianactivities.Itisonlyinrecentcenturiesthattheindustrialandservicesectorshavebecomeimportant.Asyourtextnotes,employmentintheprimarysectorhasbeensteadilydecliningasashareoftotalemployment.Employmentintheservicesectorhasbeengrowingsteadilyasashareoftotalemployment.TheshareofemploymentintheindustrialsectoroftheU.S.economyhadbeenrelativelystableformostofthepastcentury,buthasbeendecliningslightlyforthepasttwodecades.

Toaccountforthesechanges,therearetwofundamentalconceptsthathavetobeconsidered:

therateoftechnologicalimprovementineachsectorandtheincomeelasticityofdemandfortheoutputofeachsector.（Asyoulearnedinyourmicroeconomicsprinciplesclass,incomeelasticity=%changeinquantitydemanded/%changeinincome.）

Intheagriculturalsector,therehasbeenarapidpaceoftechnologicalimprovementbuttheincomeelasticityofdemandisrelativelylow.Technologicalchangeresultsinincreasedoutputperworkerandhigherincomeintheeconomy.Yet,mostpeopledonoteatsubstantiallymorefoodwhenincomerises.Thus,increasesinproductivityinthissectorresultinaneedforfewerworkersinthissector.Today,fewerthan3%ofthepopulationisemployedintheagriculturalsectoroftheU.S.economy.

Theservicesectorhasalsobeencharacterizedbyafairlyhighrateofproductivitygrowth.Theincomeelasticityofdemandforproductsinthissector,however,issubstantiallyhigherthanfortheagriculturalsector.Increasedoutputperworkerhasbeenaccompaniedbyincreaseddemandfortheoutputofthissectorasincomerises（duetoproductivityincreasesthroughouttheeconomy）.Formostofthiscentury,thedemandforthissector'soutputwasgrowingatapproximatelythesamerateasproductivitywasrising.Itisonlyinrecentyearsthatproductivityhasbeengrowingfasterthanthedemandforoutputinthissector.

Intheservicesector,productivitygrowthisrelativelylowbuttheincomeelasticityofdemandforservicesectoroutputisrelativelyhigh.Productivitygrowthislowintheservicesectorbecauselaborisanessentialingredientinthequalityofthefinalproduct.Patientsvisitingphysiciansordentistsdonotfindtheexperiencetobeofthesamequalityiftheirphysiciansordentistsrushedthroughtheirexaminations.Musicalgroupscanincreasetheirp