layout: true background-image: url(figs/tcb-logo.png) background-position: bottom right background-attachment: fixed; background-origin: content-box; background-size: 10% --- class: title-slide .row[ .col-7[ .title[ # Principles of Macroeconomics ] .subtitle[Labor Markets and Unemployment] .author[ ### Dennis A.V. Dittrich ] .affiliation[ ] ] .col-5[ ] ] --- # 1. .row[ .col-5[ Construction jobs in New Chongqing pay $20 per hour. The job isn’t that safe: a lot of sharp objects, a lot of ways to fall off a building. The city council of New Chongqing decides to set some job safety regulations for the construction industry. Let’s assume that the government enforces these new regulations effectively and fairly, so that half as many workers get hurt on the job. Let’s also assume that the city council makes the taxpayers pay the cost of making these jobs safer, so there’s no noticeable shift in the labor demand curve. ] .col-7[ a. After these new job safety regulations come into effect, will workers be more willing to take these jobs than before or less willing than before? b. Is that like a rise in the supply of labor or like a fall in the supply of labor? c. Let’s put it all together: What will these job safety regulations do to the wage for construction jobs in New Chongqing? d. What principle does this illustrate? e. In the United States, OSHA doesn’t make the taxpayers pay the cost of making the jobs safer. Instead, OSHA requires employers to spend the money themselves to make their firm’s jobs safer. Thus, OSHA requirements work like a tax on labor demand. What would this probably do to the demand curve for construction labor: Would it increase or decrease construction labor demand? ]] ??? a. Assuming workers are aware of the safer working environment, they will be more willing to take the now-safer jobs. b. This is a rise in the supply of labor. c. This will push down the wage for these construction jobs. d. This is an example of compensating differentials. e. This implicit tax would tend to decrease construction labor demand. --- # Compensating Wage Differentials .col-10[ ![](img06/f1807.jpg) ] --- # 2. .col-7[ What happens when job safety regulations are taken away? a. If a radical free market, anti-regulation government comes to power in the land of Pelerania, and it begins dismantling job safety regulations, what will this tend to do to the supply of labor for dangerous jobs in Pelerania: Will it increase or decrease? b. Will that push wages in dangerous jobs up or down? c. What will this do to the supply of labor in safer jobs? And to the number of people working in safer jobs? d. Overall, will employers have to pay for their decision to offer dangerous jobs, or will they have a free lunch handed to them by the new government? ] ??? a. This will decrease the supply of labor in dangerous jobs. b. This will push up wages in dangerous jobs. c. Some of the leftover workers will shift to the safer jobs, increasing the supply of labor for safer jobs. All else equal, this increase in the supply of labor to safer jobs will increase the number of people working in safer jobs. d. Employers have to pay for their decision to offer dangerous jobs in the form of higher wages. Remember, however, that this analysis applies only if the workers are aware of how risky a job is. If workers are unaware, then firms can offer unsafe working conditions and low wages. --- .col-9[ ![](img06/f1806.jpg) ] --- ## 3. .row[.col-6[ a. In 2084, the programmers at Robotron have a secret-ballot vote and form a union. Their new union bargains for a wage of $80 per hour, and the newly unionized programmers are very excited. How many workers will Robotron hire at the new, higher wage? b. How many Robotron workers get laid off? c. A natural choice for the other programmers is to look for work at Korrexia: The remaining workers have perfectly inelastic labor supply, so all 100 workers are going to work at one of the two firms. What’s the wage for the non-union Korrexia workers? How many programmers work for Korrexia? ] .col-6[ The current wage is 55$. There are 100 workers in total, 65 work at Robotron and 35 at Korrexia. ``` Number of Programmers per Firm Robotron’s Korrexia’s MPL($) MPL($) 10 200 110 20 150 80 30 120 60 40 110 50 50 80 40 60 60 20 70 50 10 80 40 0 90 20 0 100 10 0 ``` ]] .row[.col-7[ d. You might think that one solution is to unionize both firms and lift wages for all the programmers. If the unions negotiate a high-wage contract and unionized wages rise to $110 at both firms, how many of the 100 workers will have jobs? ]] ??? a. In 2084, Robotron will hire 50 workers at $80 per hour. b. About 65 workers were there before, so 15 workers just got laid off at Robotron. c. At a wage of $40 per hour, 50 workers are going to work at Korrexia. d. Now 50 workers will have jobs: The other 50 will be unemployed or will work in some other sector. At this high wage, these extra 50 workers just aren’t profitable at these two firms. (By the way, UCLA economists Harold Cole and Lee Ohanian argue that much of the high unemployment during the Great Depression was caused by these kinds of high-wage, strong-union policies. Their academic work can be found at Harold L. Cole and Lee E. Ohanian. 2004. New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis. Journal of Political Economy 112 (4): 779–816. An accessible popular article by Cole and Ohanian is How Government Prolonged the Depression. Wall Street Journal, Feb. 2, 2009. --- # Wage equals Marginal Product of Labor .col-9[ ![](img06/f1801.jpg) ] --- ## Most lucrative degrees, 10 years on (UK data): .row[.col-8[ | Degree | Women’s salaries | Men’s salaries | |--------------------------------------|------------------:|----------------:| | Medicine | £45,400 | £55,300 | | **Economics** | **£38,200** | **£42,000** | | Engineering and technology | £23,200 | £31,200 | | Law | £26,200 | £30,100 | | Physical Sciences | £24,800 | £29,800 | | Education | £24,400 | £29,600 | | Architecture | £22,500 | £28,600 | | Maths and Computer science | £22,000 | £26,800 | | __Business__ | __£22,000__ | __£26,500__ | | History and philosophy | £23,200 | £26,500 | | Social sciences | £20,500 | £26,200 | | Biological sciences | £23,800 | £25,200 | | European languages and literature | £26,400 | £25,000 | | Linguistics and classics | £23,200 | £24,100 | | Veterinary and agriculture | £18,900 | £21,400 | | Creative arts | £14,500 | £17,900 | ] .col-4[ Base: Median annual salary Source: IFS and BBC, 2018 It is interesting to note that it is estimated that around 12% of male economics graduates earned above £100,000 some ten years after graduation; by contrast, 6% of those studying medicine or law earned more than £100,000. In terms of females, it is estimated that around 9% of economics graduates earned above £100,000 some ten years after graduation; by contrast, just 1% of those studying medicine and 3% of those studying law did so (Institute for Fiscal Studies). ]] --- ## Lifetime Earnings Economics vs other degrees <img src="img06/lifetime-earnings.png" width="100%" /> Source: Bleemer, Zachary and Mehta, Aashish; 2020. Will Studying Economics Make You Rich? A Regression Discontinuity Analysis of the Returns to College Major. --- ## Return on human capital investment .row[.col-8[ <img src="img06/return-women.png" width="100%" /> ] .col-4[ Figure reports derived estimates of the impact of studying different subjects on annual earnings at age 29 based on the 2002-2007 GCSE cohort conditional on being in sustained employment, controlling for age, background and prior attainment. Source: Belfield, Chris et al.; 2018. The impact of undergraduate degrees on early-career earnings. Institute for Fiscal Studies. ]] --- class: practice-slide # 4. .col-8[ In the United States, it’s legal to work for free: We call this an "unpaid internship." a. Why will college students take these zero-wage jobs when they could get a minimum wage job instead? b. Which idea in this chapter does this sound like? c. Just for thought: Why do you think federal law allows people to work for free, but not for $1 per hour? Is it just an oversight on the part of government, or do you think there’s some grand design at work? ] ??? a. They’ll take the zero-wage job because it gives them experience that will help them earn more in the future. b. This sounds like human capital investment: An internship is a lot like school in that respect. You can also think of the lower wages at an internship as a compensating differential for valuable training or just for the excitement of working a more professional job. c. A lot of politicians care about making sure that workers earn the minimum wage, so it’s probably not just an oversight. Perhaps the government thinks that the kind of people who apply for internships usually have a promising future ahead of them, so they’ll be able to earn much more than the minimum wage over the course of their lives. Interns thus don’t “need” the protection of a minimum wage law. It’s also possible that politicians believe that internships really are a form of education, where you almost surely earn real job skills that would make you more productive in the future. Of course, this is also true of many low-wage jobs, but perhaps politicians believe that if a job has the word “internship” in the title, the employer will make an extra effort to build human capital. Other stories are certainly possible: This question is understudied. Note that the first explanation is about the nature of the interns themselves (they don’t “need” the minimum wage law), while the second is about the nature of employers who hire interns (they’ll “play nice”). --- class: practice-slide # 5. .row[.col-6[ In Principles of Microeconomics, we analyzed a minimum wage in the usual way, as a price floor, and we showed that a minimum wage creates unemployment. Now suppose that firms must pay the minimum wage but they can adjust the working conditions, such as by increasing the pace of work, reducing lunch breaks, cutting back on employee discounts, and so forth. Will the minimum wage create (as much) unemployment if firms adjust in this way? ] .col-6[ ![](img06/f0810.jpg) ]] ??? Imagine that firms can pay workers $7 an hour and work them at a hard pace or they can pay $5 an hour and make the work easier. It’s possible that both workers and firms could be indifferent between these two jobs. In this case, a minimum wage that raises wages from $5 to $7 will make the work harder but will have no effect on either employment or profits. It’s like the balance in Figure 17.7; if the wage goes up, the fun goes down and these two effects could balance. More generally, we would not expect an exact balance but if firms can adjust to a minimum wage by increasing the pace of work or reducing other benefits then we would not expect a large increase in unemployment. Of course, in this situation even the workers who get higher wage jobs would, on net, be no better off (since they are indifferent between the low-paced $5 an hour and the high-paced $7 an hour). --- # 6. .row[ .col-6[ The director of human resources at ToyCo is hiring new engineers. She’s got a stack of 250 applications, and she’s going to do a little research. She sits down and does a little cyber-snooping on all 250, and she finds the following: i. Of the 150 who have Facebook pages, 50 are holding a bottle of beer in their profile photo, and 100 aren’t. ii. Of the 100 who have their own Web sites, 20 have more than two typos. iii. Of the 150 who have Facebook pages, 25 have at least two friends who have apparently spent time in prison, according to a quick check of public records. ] .col-6[ a. Each of these are cases of sending bad signals. In each case, describe what you think these might be signals of. b. In each case, is the bad signal 100% correct? For example, is every applicant with three or four typos on their personal Web site worse than every applicant with an error-free page? c. In each case, is the bad signal probably better or probably worse than having no signal at all? In other words, should the bad signal get at least a little bit of weight in the balance if the HR director’s only goal is to hire the best workers? ]] ??? a. i : General unruly behavior, lack of concern for one’s public image. ii: Lack of attention to detail. iii: If it is true that “birds of a feather flock [often] together” then this may be a signal that these applicants are not trustworthy. b. The signal is never 100 percent correct. Sometimes the beer is just an innocent drink, a few typos don’t mean much if there’s a lot of content (like a textbook!), and some people with friends in prison are more honest than average. c. A reasonable HR director would put at least a little weight on the bad signals, especially if the other candidate characteristics are even. Statistical discrimination usually pays. --- .row[.col8[ ![](img06/economist_wages_uk2017.png) ].col-4[ ### Signaling? In the UK, higher ability (performance in the university entry qualification tests) allows to study at high(er) prestige / selective institutions. Having a degree from a prestigious institution leads to higher wage earnings for many different degree progams. Source: The Economist, 12 August 2017. Which British universities do most to boost graduate salaries? ]] --- # 7. .col-8[ Signaling theorists say that you suffer through college not because you get valuable job skills, but only because it’s a good way to prove that you were already smart and capable before you started college. a. Suppose you want to prove this theory wrong: You want to show that college courses really do make you a better worker, just like the human capital theorists say. How would you go about proving that? Remember, just showing that college graduates earn more isn’t evidence! b. If that’s too difficult, at least explain why the following plausible-sounding tests of human capital vs. signaling aren’t very good tests at all: i. Looking at wages of people with degrees compared with those of people without degree ii. Comparing wages for people whose parents can afford college with wages for people whose parents can’t afford college ] ??? a. This is very hard: Almost any evidence for human capital can be reinterpreted as a signaling story. Knowing that someone is “educated” almost always solves a statistical discrimination problem. There are obvious counterexamples, however, like medical school or engineering school or learning arithmetic, where people really learn some valuable skills that you can’t just pick up by watching TV. b. i: It could just be that people with degrees were smarter already: All those art history classes didn’t make them better bank managers. Or, it could be that the art history classes did help. Regardless, this test does not separate the human capital explanation from the signaling explanation. ii: The kind of parents who can afford college might have given their kids the skills to succeed in life well before college began: Good nutrition, a stimulating environment, and good genes all might play a role much larger than four years of partying and intermittent studying. --- # 8. .col-7[ Michael Lynn, a social psychologist in Cornell’s School of Hotel Administration, has spent years studying tipping. He finds that men tip more when they have a female server, while women tend to tip more when they have a male server. This sounds a lot like discrimination by customers. a. If this is a fact, who will tend to apply for jobs waiting tables at truck stops: Mostly men or mostly women? b. If this is a fact, who will tend to apply for jobs waiting tables at steakhouses: Mostly men or mostly women? c. If this is a fact, who will tend to apply for jobs waiting tables at vegetarian restaurants: Most men or mostly women? d. In these three cases, does your experience match up with what this simple theory predicts? If there’s a contradiction, what do you think the simple model is missing? ] ??? a. Mostly women (most truck drivers are men). b. Mostly women (steakhouses have more male than female customers). c. Mostly men (most vegetarians are women). d. Students will have varying answers for b and c, but all will agree that almost all servers at truck stops are women. Anecdotally, there seem to be about equal numbers of male and female servers at steakhouses: Perhaps male customers associate high-status restaurants with male servers. --- class: practice-slide # 9. .col-8[ In the decades after the Civil War, most streetcar companies in the South discriminated against a class of citizens: smokers. Customers who wanted to smoke had to ride in the back of the car. Around 1900, many governments in the South passed laws mandating segregation by race instead. Many streetcar operators protested against this new form of segregation. Assuming that these entrepreneurs were driven by self-interest alone rather than a desire for equality, why would they do that? ] ??? One way to get an answer to this question is to look at Roback’s article, which contains interesting quotations from the era. But just using the tools of the chapter, a student should be able to guess that the streetcar company found it more profitable to segregate by smoking than by race. Even a racist white customer might prefer sitting next to a black passenger rather than next to a smoker. Presumably, that’s what these entrepreneurs thought; that’s why they wanted to keep segregating on the basis of smoking. A self-interested, profit-seeking business owner would want to keep the nonsmokers happy, and as long as the streetcar is moving forward, the smokers’ fumes shouldn’t bother the nonsmokers. Based on Roback’s work, it seems that white customers’ desire to pay for their racism, while high, was still smaller than nonsmokers’ desire to pay for a smoke-free ride. --- # Unemployment ... .row[ .col-6[ ...as a Social Problem * The Industrial Revolution changed the nature of work and introduced unemployment as a problem for society * There was a shift to wage labor and to a division of responsibilities * The Industrial Revolution created the possibility of cyclical unemployment and changed how families dealt with unemployment * Early capitalism had an unemployment solution: the fear of hunger ] .col-6[ ...as Government's Problem * As capitalism evolved, the fear of hunger was no longer an acceptable answer to unemployment * In the Employment Act of 1946, the U.S. government took responsibility for unemployment; Germany introduced the unemployment insurance already in 1927 ]] --- ## Whose Responsibility is Unemployment? .col-7[ **Classical** economists believe that individuals are responsible for their own jobs * If people really want a job, they will find one **Keynesian** economists tend to say that society owes people jobs commensurate with their training or past job experience * Jobs should be close enough to home so that people don't have to move ] --- # Target Rate of Unemployment .col-7[ The **target rate of unemployment** is the lowest sustainable rate of unemployment that policy makers believe is achievable under existing conditions * The appropriate target rate of unemployment is debatable, but most economists place it around 5% * The target rate of unemployment changes due to: * Inflation rates * Demographics * Social and institutional structures * Changing government institutions ] ![](img06/2403.jpg) --- class: practice-slide # 10. .col-8[ Why might a person who does not have a job not be unemployed? ] --- # Calculating the Unemployment Rate .row[ .col-7[ The **labor force** is those people in an economy who are willing and able to work The labor force excludes those incapable of working and those not looking for work ![](img06/2404.jpg) `$$\text{Unemployment Rate} = \frac{\text{Number Unemployed} \times 100}{\text{Labor Force}}$$` ] .col-5[.col-11[ ![](img06/f3001.jpg) ] ]] --- # 11. .col-7[ When the following events happen, does the unemployment rate rise, fall, or stay the same? a. Workers are laid off and start looking for work. b. People without jobs who are looking for work find work. c. People without jobs and looking for work give up and stop looking. d. People without jobs and not looking for work become encouraged and decide to start looking for work. e. People without jobs and not looking for work take a job immediately. ] ??? a. rise b. fall c. fall d. rise e. Falls, slightly. Since this increases the “labor force,” it reduces the unemployment rate slightly. --- # Accuracy of the Unemployment Rate .row[.col-7[ * Does not include **discouraged workers**, people who do not look for a job because they feel they don't have a chance of finding one * Does not take into account the **underemployed**, which are part-time workers who would prefer full-time work * Does not measure the quality of jobs or how well people are matched to their jobs. * Includes people who say they're unemployed, but voluntarily don't work * The **labor force participation rate** and the **employment--population ratio** provide additional information ]] --- # Unemployment .row[.col-7[ **Labor force participation rate** is the percentage of adults in the labor force The **unemployment rate** is the percentage of people who are willing and able to work but who are not working **Cyclical unemployment** is that which results from fluctuations in economic activity **Structural unemployment** is that caused by the institutional structure of an economy or by economic restructuring making some skills obsolete **Frictional unemployment** is unemployment caused by people entering the job market and people quitting a job just long enough to look for and find another job ] .col-5[ **Full employment** is an economic climate where nearly everyone who wants a job has one **Potential output** is output that would be achieved at the target rates of unemployment and capacity utilization ]] --- class: practice-slide # 12. .col-8[ Decide whether each of the following are frictional, structural, or cyclical unemployment: a. The economy gets worse, so General Motors shuts down a factory for four months, laying off workers. b. General Motors lays off 5,000 workers and replaces them with robots. The workers start looking for jobs outside the auto industry. c. About 10 workers per month at a General Motors plant quit their jobs because they want to live in another town. They start searching for work in the new town. ] ??? a. cyclical b. structural c. frictional --- # Frictional Unemployment .row[.col-7[ Short-term unemployment caused by difficulties of matching employee to employer * Scarcity of information creates frictional unemployment. * Matching people to jobs takes time * Usually doesn't last very long. * Is usually a significant fraction of total unemployment because * the economy is dynamic. ] .col-5[ _Creative Destruction_ ---Joseph Schumpeter. progress is about creating new jobs and destroying old jobs. It takes time to adjust to innovation and the job creation/destruction that ensues ]] --- # Structural Unemployment .row[ .col-7[ Persistent, long-term unemployment caused by long-lasting shocks or permanent changes in the economy. Causes: Large shocks that take a long time for the economy to restructure. * Oil shocks * New (information) technologies * Globalization * Restructuring jobs away from manufacturing and towards services Long structural unemployment brings significant human costs. * At some point unemployment can become chronic. * The longer a worker is out of work, his or her skills atrophy. * Managers are wary of hiring workers who have been unemployed for a long time. ] .col-5[ Who would you rather hire: a worker looking to switch jobs or a worker who has been unemployed for five years? `\(\rightarrow\)` Unemployment can become a trap. ]] --- ## Labor Regulations and Structural Unemployment .row[ .col-7[ * In the U.S. unemployment historically increases with a shock, then declines. (1980-1984 was a shock period) * In Europe unemployment has increased with shocks but has not declined. ![](img06/c28-01.png) ] .col-5[ Unemployment rates differ because of different labor regulations. * Unemployment benefits: more generous in Europe. * Unemployment benefits last longer in Europe. * Minimum wages: higher in Europe * Unions? Stronger in Europe. * The higher the minimum wage is above the market wage, the greater unemployment will be. Unions have the same effect. ]] --- class: practice-slide # 13. .col-8[ When a government raises the minimum wage by $2.00 per hour, where would we expect more jobs to be lost: in the fast-food industry or in city government? Why? ] ??? Probably more in the fast-food industry, since the fast-food industry hires more low-skilled workers than city governments and city governments can more easily raise taxes or borrow money to pay the higher wages. --- class: practice-slide # 14. .col-8[ A computer software company advertises for employees, saying “We offer the best-paid jobs in the industry!” But why would any company want to pay more than it absolutely has to pay in order to attract workers? Can this phenomenon help to explain the existence of unemployment? Explain. ] ??? Efficiency wages. --- ## Effect of Minimum Wage and Unions on Unemployment ![](img06/f3004.jpg) --- # 15. .row[.col-8[ It’s been said that “once you reach the top of the ladder of opportunity, the first thing to do is pull up the ladder behind you.” Let’s consider the implications of this adage for labor market outcomes. ]] .row[.col-6[ a. When doctors, schoolteachers, and beauticians encourage the government to make it more difficult for people to enter their industries, does this tend to lower or raise the supply of these professionals? b. If government requires higher educational and training standards for doctors, schoolteachers, and beauticians, does this tend to raise or lower the demand for the services of these professionals? ] .col-6[ c. In equilibrium, taking into account your answers to parts a and b, what is the total effect of this lobbying on the wages of these professionals: Do wages rise, fall, or is the total effect ambiguous? Does the total number of people employed in these professions rise, fall, or is the total effect ambiguous? ]] ??? a. This lowers supply. b. This raises demand. c. The effect on wages is definitely positive; the effect on employment is ambiguous, since demand and supply push in different directions. --- ## Employment Protection Laws .row[ .col-9[ ![](img06/f3005.jpg) ] .col-3[ World Bank _rigidity of employment index_: The higher the index, the greater the hiring and firing costs ]] --- # Labor Regulations .col-7[ In summary, European labor regulations: * create valuable insurance for workers with a full-time job. * make labor markets less flexible and dynamic. * increase the duration of unemployment. * increase unemployment rates among young, minority, or otherwise _riskier_ workers. Europe has begun to change its labor laws to reduce Structural Unemployment * Reducing unemployment benefits * Adopting Active labor market policies: work tests, job search assistance and job retraining programs focus on getting unemployed workers back to work. * Allowing exceptions to collective bargaining agreements. ] --- # Cyclical Unemployment .row[ .col-4[ Unemployment is correlated with the business cycle Lower growth is usually correlated with higher unemployment for two reasons 1. When GDP falls, firms lay off workers. 2. Idle labor and capital `\(\rightarrow\)` economic growth is not being maximized `\(\rightarrow\)` decreases ability of the economy to create more jobs. ] .col-8[ ![](img06/f3006.jpg) ]] --- ## Faster growth in Real GDP decreases unemployment .row[.col-8[ ![](img06/f3007.jpg) ] .col-4[ **Okun's rule of thumb** states that a 1% change in the unemployment rate will be associated with a 2% change in output in the opposite direction `$$+ 1\% \Delta \text{unemployment}\\ \rightarrow - 2\% \Delta \text{in output}$$` ]] --- # What causes cyclical unemployment? .col-7[ Non _Keynesians_: Caused by real shocks that require a reallocation of resources. Cyclical unemployment is just another example of frictional and structural unemployment. _Keynesians_: Caused by deficiencies in aggregate demand. For now: consider it a mismatch between the aggregate level of wages and the level of prices. ] --- ## The Natural Unemployment Rate: Structural plus frictional unemployment .col-10[ ![](img06/f3009.jpg) ] --- class: practice-slide # 16. .col-8[ Outline different costs of unemployment to (a) an individual and (b) to society. ] --- ## What determines the labor force participation rate? .row[ .col-7[ ![](img06/f3011.jpg) ] .col-5[ * Lifecycle Effects and Demographics * Differences in Incentives * Taxes and Benefits * Taxes discourage work and benefits encourage non-work. * Many countries penalize workers who work past the normal early retirement age. ] ] --- ## The rise in female labor force participation .row[ .col-7[ ![](img06/f3012.jpg) 1948 -- 2008: number of women aged 25-54 in the paid labor force increased from 35% to 75% in the US. ] .col-5[ What caused this? ] ] --- ## The rise in female labor force participation .row[ .col-7[ ![](img06/f3012.jpg) 1948 -- 2008: number of women aged 25-54 in the paid labor force increased from 35% to 75% in the US. ] .col-5[ What caused this? * Cultural factors * Rise of feminism * Growing acceptance of equality * Move from a manufacturing to a service economy. * The _Pill_ lowered the * cost of earning a professional degree. * uncertainty about the consequences of sex. and increased the **incentive** of women to invest in a long-term education. ] ]