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Labor and Employment
Agec 217, Summer 2007
Labor and Employment
Two sides of Labor and Employment
• Labor is one of the resources used in
production, making the goods and services we
need.
• Employment provides most of us with the
incomes we need to purchase goods and
services
The Production Side of Labor
Percent of Employed by Industry
60
%
E
m
p
l
o
y
e
d
50
40
30
20
10
0
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
Year
Agriculture
Manufacturing
Non-government services
Government services
20th Century Trends
• Large drop in % employment in agricultural
sector over century
• Large drop in % employment in manufacturing
sector over end of century
• Large increase in service sector % employment
Employment
Employment
Drop in Agricultural % Employment
• Farms have become more productive,
requiring less labor
• Increases in population gravitate into the nonfarm sector, decreasing the percentage
remaining on the farm
The Income Side of Labor
The Income Side of Labor
Global Unemployment Rates
Unemployment Rates
• % Unemployed =
Number unemployed
---------------------------------- * 100
Number in the labor force
Unemployment Rates
• % Unemployed (United States, 2001)=
6.7 million
------------------------ * 100 = 4.7%
141.8 million
What is the Labor Force?
In the United States, 2001:
• Adult Population (211.9 million)
– Labor force (141.8 million)
– Not in labor force (70.1 million)
What is the Labor Force?
In the United States, 2001:
• Labor force (141.8 million)
– Employed (135.1 million): those who have spent
the previous week working at a job
– Unemployed (6.7 million): seeking employment or
not employed due to temporary layoff
Not in Labor Force
In the United States, 2001:
• Not in labor force (70.1 million)
– Student only
– Homemaker
– Retiree
– Discouraged workers
– Other marginally attached workers
Labor Force Participation Rate
% Adults in Labor Force
Labor Force Participation Rate
Changes by gender:
• More women have entered the labor force
• Men staying as students longer, becoming
retirees earlier and living longer, and taking
over homemaker responsibilities
Unemployment Misses ...
(1) Discouraged and other marginally attached
workers who want to work and have given up
looking for a job
(2) Individuals who are employed, but for less hours
than desired during a week
• Taking these workers into account, the
unemployment rate in August, 2002 would
increase from 5.7% to 9.5%
Can We Have 0% Unemployment?
• Economists believe that it is not possible
• Natural rate of unemployment: the normal
rate of unemployment due to built in frictions
and structures in the economy
Frictional Unemployment
• Frictional unemployment: Unemployment
caused by the time it takes for workers to
search for the best job
Frictional Unemployment
• Example using the supply curve
– You are a widget manufacturer
– You are perfectly competitive, and therefore, a
price taker
– The market price drops
– The price is now not high enough to cover the
marginal costs of the widgets made by the last
worker
– You fire the last worker to decrease marginal costs
of the last unit made
– This worker is unemployed while job hunting
Structural Unemployment
• Minimum wages
• Unions
• Efficiency wages
Minimum Wage
• We know from microeconomic theory that
this is a price floor
• Quantity labor supplied exceeds the quantity
of labor demanded
Minimum Wage
Price is wage, firms demand labor
Unions
• Perfect Competition: Many sellers, many
buyers. No market power.
• Monopoly: One seller, many buyers. Seller has
market power
• Monopsony: One buyer, many sellers. Buyer
has market power to drive the price down
Unions
• Unions can be seen as negatively colluding to gain
market power in a manner similar to firms trying to
sell their products.
• In the presence of monopsony (one firm buying all
the labor), unions are often needed to group workers
into a single entity (monopoly) and thus shift some
market power back to the workers.
Efficiency Wages
• Efficiency Wages: paying workers higher
wages than the equilibrium amount in order
to retain employees and receive a better
effort. Creates similar inefficiencies to a price
floor.
Summary
• Unemployment rates do not account for all
unemployed adults, or even those working
less hours than desired. They only consider
those without work who are in the labor force.
Most economists agree that there is a natural
rate of unemployment due to frictional and
structural unemployment in the economy.