Karlstad Universitet Makroekonomi VT 2011 Frelsning 2 Arbetsmarknaden

Karlstad Universitet Makroekonomi VT 2011 Föreläsning 2: Arbetsmarknaden Per-Åke Andersson 031 -786 1353 per-ake. andersson@economics. gu. se www. gu. se

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 5 Measuring a Nation’s Production and Income 6. 1 EXAMINING UNEMPLOYMENT How Is Unemployment Defined and Measured? ● labor force The total number of workers, both the employed and the unemployed. ● unemployment rate The percentage of the labor force that is unemployed. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 2 of 33

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 5 Measuring a Nation’s Production and Income 6. 1 EXAMINING UNEMPLOYMENT How Is Unemployment Defined and Measured? ● labor force participation rate The percentage of the population over 16 years of age that is in the labor force. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 3 of 33

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 5 Measuring a Nation’s Production and Income 6. 1 EXAMINING UNEMPLOYMENT How Is Unemployment Defined and Measured? FIGURE 6. 1 Unemployment Data, May 2008 Approximately 66 percent of the civilian population is in the labor force. The unemployment rate in May 2008 was 5. 5 percent. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 4 of 33

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6. 1 EXAMINING UNEMPLOYMENT How Is Unemployment Defined and Measured? FIGURE 6. 2 Unemployment Rates in Developed Countries Among the developed countries, unemployment rates vary substantially. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 5 Measuring a Nation’s Production and Income Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 6 of 33

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 5 Measuring a Nation’s Production and Income 6. 1 EXAMINING UNEMPLOYMENT Alternative Measures of Unemployment and Why They Are Important ● discouraged workers Workers who left the labor force because they could not find jobs. FIGURE 6. 3 Alternative Measures of Unemployment, May 2008 Including discouraged workers, marginally attached workers, and individuals working part time for economic reasons substantially increases measured unemployment in 2008 from 8. 49 million to 15. 14 million. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 7 of 33

Changes in employment in Sweden 2006 -2010 www. gu. se

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 5 Measuring a Nation’s Production and Income APPLICATION 2 MORE DISABILITY, LESS UNEMPLOYMENT? APPLYING THE CONCEPTS #2: Does more liberal disability insurance decrease measured unemployment? The federal Disability Insurance program provides income to nonelderly workers who are deemed unable to engage in substantial employment. Economists David Autor and Mark Duggan studied the impact of this program on labor force participation. They found that the changes in the rules administering the program, the increased generosity of the benefits of the program for low-skilled workers, and the increase in the value of health care services all contributed to an increase in participation in this program. Since these workers, a portion of whom would have been unemployed, were no longer in the labor force, the economists estimated that the effect of the Disability Insurance program was to lower the measured unemployment rate by 0. 5 percent, a very large effect. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 12 of 33

6. 1 EXAMINING UNEMPLOYMENT Who Are the Unemployed? FIGURE 6. 4 Selected U. S. Unemployment Statistics, Unemployment Rates for May 2008 The incidence of unemployment differs sharply among demographic groups. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 5 Measuring a Nation’s Production and Income Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 13 of 33

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Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 5 Measuring a Nation’s Production and Income 6. 2 CATEGORIES OF UNEMPLOYMENT Types of Unemployment: Cyclical, Frictional, and Structural ● cyclical unemployment Unemployment that occurs during fluctuations in real GDP. ● frictional unemployment Unemployment that occurs with the normal workings of the economy, such as workers taking time to search for suitable jobs and firms taking time to search for qualified employees. ● structural unemployment Unemployment that occurs when there is a mismatch of skills and jobs. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 15 of 33

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 5 Measuring a Nation’s Production and Income 6. 2 CATEGORIES OF UNEMPLOYMENT The Natural Rate of Unemployment ● natural rate of unemployment The level of unemployment at which there is no cyclical unemployment. It consists of only frictional and structural unemployment. ● full employment The level of unemployment that occurs when the unemployment rate is at the natural rate. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 16 of 33

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 5 Measuring a Nation’s Production and Income APPLICATION 3 FINDING THE OPTIMAL LEVEL OF UNEMPLOYMENT INSURANCE APPLYING THE CONCEPTS #3: What are the costs of either too high or too low levels of unemployment insurance? How do we balance the benefits and costs of unemployment insurance? Suppose the government provided all unemployed workers a payment equal to their previous salary as long as they remained unemployed: • This would prevent unemployed workers from suffering any financial hardship. • Very few workers would return to work if the government were paying them their full salaries. • Result: excessive unemployment. States recognize this and replace only a fraction of a worker’s prior salary—typically about 40 percent. Economist Jonathan Gruber of MIT attempted to calculate the optimal amount of unemployment insurance. • Result: Looking at both the costs and the benefits of unemployment insurance, Gruber found that the optimal level of insurance was probably somewhat lower (closer to 30 percent) than the current 40 percent provided by the states. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 17 of 33

6/e. O’Sullivan, Sheffrin, Perez Macroeconomics: Principles, Applications, and Tools CHAPTER 7 The Economy at Full Employment 7. 2 THE PRODUCTION FUNCTION • production function The relationship between the level of output of a good and the factors of production that are inputs to production. • stock of capital The total of all machines, equipment, and buildings in an entire economy. • labor Human effort, including both physical and mental effort, used to produce goods and services. When there are only two factors of production, capital and labor, the production function is written as follows: Y = F(K, L) Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 18 of 24

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 7 The Economy at Full Employment 7. 2 THE PRODUCTION FUNCTION FIGURE 7. 1 The Relationship between Labor and Output with Fixed Capital With capital fixed, output increases with labor input, but at a decreasing rate. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 19 of 24

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 7 The Economy at Full Employment 7. 2 THE PRODUCTION FUNCTION PRINCIPLE OF DIMINISHING RETURNS Suppose output is produced with two or more inputs, and we increase one input while holding the other input or inputs fixed. Beyond some point—called the point of diminishing returns—output will increase at a decreasing rate. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 20 of 24

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 7 The Economy at Full Employment 7. 2 THE PRODUCTION FUNCTION FIGURE 7. 2 An Increase in the Stock of Capital When the capital increases from K 1 to K 2, the production function shifts up. At any level of labor input, the level of output increases. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 21 of 24

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 7 The Economy at Full Employment 7. 3 WAGES AND THE DEMAND SUPPLY FOR LABOR FIGURE 7. 3 The Demand Supply of Labor Together, the demand supply for labor determine the level of employment and the real wage. • real wage The wage rate paid to employees adjusted for changes in the price level. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 22 of 24

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 7 The Economy at Full Employment 7. 3 WAGES AND THE DEMAND SUPPLY FOR LABOR Labor Market Equilibrium Panel C of Figure 7. 3 puts the demand supply curves together. At a wage of $15 per hour, the amount of labor firms want to hire— 7, 500 workers—will be equal to the number of people who want to work— 7, 500 workers. This is the labor market equilibrium: The quantity demanded for labor equals the quantity supplied. Together, the demand supply curves determine the level of employment in the economy and the level of real wages. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 23 of 24

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 7 The Economy at Full Employment 7. 3 WAGES AND THE DEMAND SUPPLY FOR LABOR Changes in Demand Supply MARGINAL PRINCIPLE Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost. FIGURE 7. 4 Shifts in Labor Demand Supply Shifts to demand supply will change both real wages and employment. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 24 of 24

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 7 The Economy at Full Employment APPLICATION 1 IMMIGRATION AFFECTS BOTH THE DEMAND THE SUPPLY FOR LABOR APPLYING THE CONCEPTS #1: Although we normally think that increased immigration will reduce wages, what factors could cause it to raise wages? A recent study by Gianmarco Ottaviano of the University of Bologna and Giovanni Peri of the University of California, Davis, estimated that during the 1990 s immigration, on average, increased the average wage of U. S. -born workers by 2. 7 percent. They took into account that increased immigration led to increases in the supply of labor and additional investment, and as a result, both the demand the supply for labor shifted, with the shift in demand slightly outpacing the shift in supply. When they looked more closely at wages, they found the wages of highschool dropouts fell, while wages of workers with at least a high-school education increased. The reason for this difference was that high-school dropouts compete most directly with the new immigrants, whereas those workers with more education do not. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 25 of 24

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 7 The Economy at Full Employment 7. 4 LABOR MARKET EQUILIBRIUM AND FULL EMPLOYMENT FIGURE 7. 5 Determining Full-Employment Output Panel B determines the equilibrium level of employment at L and the real wage rate of W. Full-employment output in Panel A is Y. • full-employment output The level of output that results when the labor market is in equilibrium and the economy is producing at full employment. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 26 of 24

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 7 The Economy at Full Employment 7. 5 USING THE FULL-EMPLOYMENT MODEL Taxes and Potential Output FIGURE 7. 6 How Employment Taxes Affect Labor Demand Supply In Panel A, a tax burden on labor shifts the labor demand curve to the left and leads to lower wages and reduced employment. In Panel B, the supply curve for labor is vertical, which means that wages fall but employment does not change. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 27 of 24

Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. CHAPTER 7 The Economy at Full Employment APPLICATION 3 A NOBEL LAUREATE EXPLAINS WHY EUROPEANS WORK LESS THAN AMERICANS OR THE JAPANESE APPLYING THE CONCEPTS #3: Do differences in taxes and government benefits explain why Europeans work substantially fewer hours per year than do U. S. workers or the Japanese? On average today, the French (and other Europeans) work one-third fewer hours than do U. S. workers. In the early 1970 s Europeans actually worked slightly more hours than did U. S. workers. What explains this dramatic turnaround in the space of just 20 years? Nobel-laureate Edward Prescott of the Federal Reserve Bank of Minneapolis and Arizona State University attributes the decreases in hours of work in Europe to: • Increases in the tax burden that ultimately falls on workers. • Government spending and transfers play a larger role in European economies than in the United States. Prescott notes that as the burdens of Social Security and Medicare increase, the United States may be tempted to increase its tax rates to European levels. What will happen if we do not make changes in the underlying programs and allow tax rates to increase? Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 28 of 24

Economics: Principles and Tools O’Sullivan, Perez 6/e. Sheffrin, Perez Macroeconomics: Principles, Applications, and Sheffrin, Tools O’Sullivan, 6/e. CHAPTER 7 The Economy at Full Employment 7. 5 USING THE FULL-EMPLOYMENT MODEL Real Business Cycle Theory • real business cycle theory The economic theory that emphasizes how shocks to technology can cause fluctuations in economic activity. FIGURE 7. 7 How an Adverse Technology Shock Affects Labor Demand Supply An adverse shock to technology will decrease the demand for labor. As a result, both real wages and employment fall as the market equilibrium moves from a to b. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 29 of 24

Economics: Principles and Tools O’Sullivan, Perez 6/e. Sheffrin, Perez Macroeconomics: Principles, Applications, and Sheffrin, Tools O’Sullivan, 6/e. CHAPTER 7 The Economy at Full Employment 7. 6 DIVIDING OUTPUT AMONG COMPETING DEMANDS FOR GDP AT FULL EMPLOYMENT Crowding Out in a Closed Economy • crowding out The reduction in investment (or other component of GDP) caused by an increase in government spending. P R I N C I P L E O F O P P O RT U N I T Y C O S T The opportunity cost of something is what you sacrifice to get it. • closed economy An economy without international trade. output = consumption + investment + government purchases Y=C+I+G Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 30 of 24

Economics: Principles and Tools O’Sullivan, Perez 6/e. Sheffrin, Perez Macroeconomics: Principles, Applications, and Sheffrin, Tools O’Sullivan, 6/e. CHAPTER 7 The Economy at Full Employment 7. 6 DIVIDING OUTPUT AMONG COMPETING DEMANDS FOR GDP AT FULL EMPLOYMENT Crowding Out in a Closed Economy FIGURE 7. 8 U. S. Consumption and Government Spending During World War II Increased government spending crowds out consumption by consumers. The vertical bar highlights the time period during which crowding out occurred. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 31 of 24

Economics: Principles and Tools O’Sullivan, Perez 6/e. Sheffrin, Perez Macroeconomics: Principles, Applications, and Sheffrin, Tools O’Sullivan, 6/e. CHAPTER 7 The Economy at Full Employment 7. 6 DIVIDING OUTPUT AMONG COMPETING DEMANDS FOR GDP AT FULL EMPLOYMENT Crowding Out in a Closed Economy FIGURE 7. 9 U. S. Investment and Government Spending During World War II Increased government spending also crowds out private investment spending. The vertical bar highlights the time period during which crowding out occurred. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 32 of 24

Economics: Principles and Tools O’Sullivan, Perez 6/e. Sheffrin, Perez Macroeconomics: Principles, Applications, and Sheffrin, Tools O’Sullivan, 6/e. CHAPTER 7 The Economy at Full Employment 7. 6 DIVIDING OUTPUT AMONG COMPETING DEMANDS FOR GDP AT FULL EMPLOYMENT Crowding Out in an Open Economy • open economy An economy with international trade. Y = C + I + G + NX Increased government spending need not crowd out either consumption or investment. It could lead to reduced exports and increased imports. Crowding in • crowding in The increase of investment (or other component of GDP) caused by a decrease in government spending. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 33 of 24