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Actual Issues on Labour
Market Economics
Some Considerations
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Important and extreme
Labor Market Theories
 Neoclassical Theory
 Keynesian Theory
Neoclassical Labour Market
Theory : Basics
 Microeconomic Decisions are relevant only
 Households decide on their supply of Hours of Work
 Firms decide on their demand for Working Hours
 The Market Clearing Wage Mechanism decides on
the level of wages
 With a given level of market clearing wages the level
of working number of hours is determined, too.
 That is an EQUILIBRIUM, nobody wants to change
Neoclassical Labour Market
Theory : Basics
 At EQUILIBRIUM households are satisfied since
their supply is employed
 At EQUILIBRIUM firms are satisfied since their
demand for labour is provided
 There is no unwanted unemployment
 There are no undesired vacancies
Neoclassical Labour Market
Theory : Equilibrium
L
L*
w/p*
w/p
Neoclassical Labour Market
Theory : Hierarchy of Markets
Neoclassical Theory : All Markets are EQUAL
Prices and wages clear all markets
You get a simultaneous EQUILIBRIUM
Keynesian Labour Market
Theory : Basics
 Macroeconomic Developments are relevant
 Households have a more or less constant supply of
Hours of Work
 Firms decide on their demand for Working Hours
 Bargaining Power decides on the level of wages
 Output Sales and Wages determine number of workin
hours
 That is an EQUILIBRIUM with potentially
unemployment
Neoclassical Labour Market
Theory : Basics
 At EQUILIBRIUM neither households nor firms are
satisfied since their supply is employed
 There is unwanted unemployment
 There are undesired vacancies
Keynesian Labor Market
Theories: Hierarchy of Markets
 First there are equilibria on the goods and money
markets.
 Then follows the labor market.
 Therefore labor market developments are analyzed
under the assumption of a given goods and money
market equilibrium.
 There are interdependencies
Keynesian Labor Market
Theories: Wages
Aggregate Demand
Curve Small Economy
Real
Wage
W0PS
A
Wage Setting
Curve wws
U0
Unemployment
Keynesian Labor Market
Theories: Employment
L0N(Q0) L1N(Q1)
Σ LiA
wr,0max
Maximum
Real Wage
wr,0
Wage
Setting
Curve
L0
L1
Lmax
L
Keynesian Labor Market
Theories: Equilibrium
LN (X0)
i
LS
IS1
IS
LM
LM1
UN
L
L
LU
Q0
Q
Q(L)
L
Keynesian Results
 Goods and money markets determine the outcome
on the labor market.
 This may be a disequilibrium people may want to
change
 This can only be done by goods or money market
stimulations
 Wage restraint does not help