OVERVIEW OF THE LABOR MARKET

Centralized vs. Decentralized market place.

Agents use information on prices, wages, tech. to decide
where, what, how much, and how to produce. And
also whom to hire.
Production, employment, and consumption decisions are
all made and coordinated by price signals arising
through the marketplace.
The labor market allocates workers to jobs and
coordinates employment decisions. 136 M employees
and over 6 M employers.

DEFINITIONS, FACTS AND TRENDS

National, Local and Internal Labor Markets (and
interrelations)
Labor Force Status: Participants vs. Non-Participants
Unemployment Rate: ratio of Unemployed to those in
the Labor Force.
Industries and Occupations adapting to change:
1. Gross vs. Net employment movements
2. Shift from primary to tertiary sector
3. Skilled bias technological change
4. Changing demographics and ethnicity
The earnings of labor
1. Wage rate is the price of labor per working hour,
nominal vs. real
2. If CPI outpaces the increase in nominal wages then
we observe a loss of purchasing power.
Normalized to 100 in 1982-84, it was 63.2 in
1977, and 160.5 in 1997.
3. Possible problems with CPI: changes in the bundle
and quality of goods
4. Wage, Earnings and Income

HOW THE LABOR MARKET WORKS

Demand (firms operate in different markets) and supply
(workers and potential workers). We are after the
determination of the terms of employment and the
levels of employment.
Demand
For firms the output and the K,L mix depends on:
1. Product Demand
2. Amount of L and K at given prices that they can
acquire
3. Technology available
Other things equal, higher wages lead to lower demand
for labor.
1.
Higher wages increase costs for the firm, what
leads to lower output to face lower product demand at
higher prices. Scale Effect.
2.
Substitution to Capital Intensive technology. K
is substitute for L in the production process.
Substitution Effect.

If Product Demand increases, for every wage the number of

employees demanded increases.
If the price of K drops. The Scale Effect shifts the
demand right, because overall costs go down. The
substitution Effect shifts the demand left because K is
less costly comparatively.
Movements along the curve vs. shifts
Firm vs. industry vs. market demand schedule
Short vs. Long run. Long run allows for adjustments in
the input mix and the demand for given products
Supply
If wages increase more people want to supply labor in a
given profession
What if wages rise in other professions
Market vs. firm supply curve. Flat supply for a given
firm. Employers are perfect substitutes for the
employees

Wage Determination
Market-clearing or market equilibrium wage
If the demand for a given profession increases wages go
up and employment goes up
If supply goes up wages go down and employment goes
up. If supply goes down then wages go up but
employment goes down as well.
If Demand and Supply shift left wages can go up or
down but Employment goes down unambiguously
Non-market forces (laws, customs, institutions) can keep
wages above market level. Leading to unemployment.
Effect of Unions:
unambiguous lower level of
employment, maintaining higher wage level or lower
supply level.
APPLICATIONS
Overpaid (low quit rates) vs. Underpaid (if increased the
output will rise and more workers will be hired)
Reservation wages and rents
International Differences in Unemployment