Download Labor Markets II

Labor Markets II
Labor Markets and the Business
Cycle
What do we mean by “The Business
Cycle”?
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
Real GDP: 1982-2000
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9000
8000
7000
6000
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2000
1000
0
What do we mean by “The Business
Cycle”?
• Since WWII, real GDP in the US has grown an
average of 3% per year.
Real GDP: 1982-2000
9000
8000
7000
GDP
Linear (GDP)
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5000
00
20
98
19
97
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95
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94
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92
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91
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89
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85
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82
4000
What do we mean by “The Business
Cycle”?
• Since WWII, real GDP in the US has grown an
average of 3% per year.
• However, sometimes GDP grows faster than 3%
(expansions) while at other times, it grows slower
than trends (contractions)
GDP: Deviations from trend
6
5
4
3
2
1
0
-1
-2
-3
-4
1982 1983 1985 1987 1989 1990 1992 1994 1996 1997 1999
Characteristics of Business
Cycles
• When we say that all recessions/expansions “look similar”,
we mean that there seem to be consistent statistical
relationships between GDP and the behavior of other
economic variables.
• Correlation (procyclical, countercyclical)
• Timing (leading, coincident, lagging)
• Relative Volatility
-2
-4
-6
1999
1998
1997
1995
1994
1993
1992
1990
1989
1988
1987
1985
1984
1983
1982
GDP
8
6
4
2
GDP
0
-2
-4
-6
1999
1998
1997
1995
1994
1993
1992
1990
1989
1988
1987
1985
1984
1983
1982
GDP and Employment
8
6
4
2
0
GDP
Emp
Labor Markets and the Business
Cycle
• Employment is procyclical and is coincident
with the cycle
-2
-4
-6
1999
1998
1997
1995
1994
1993
1992
1990
1989
1988
1987
1985
1984
1983
1982
GDP
8
6
4
2
GDP
0
82
19
-2
-4
-6
00
20
98
19
97
19
95
19
94
19
92
19
91
19
89
19
88
19
86
19
85
19
83
19
GDP and Real Wages
8
6
4
2
0
GDP
Real Wage
Labor Markets and the Business
Cycle
• Employment is procyclical and is coincident
with the cycle
• Real wages are procyclical
-2
-4
-6
1999
1998
1997
1995
1994
1993
1992
1990
1989
1988
1987
1985
1984
1983
1982
GDP
8
6
4
2
GDP
0
-2
-4
-6
1999
1998
1997
1995
1994
1993
1992
1990
1989
1988
1987
1985
1984
1983
1982
GDP and Labor Productivity
8
6
4
2
0
GDP
Prod.
Labor Markets and the Business
Cycle
• Employment is procyclical and is coincident
with the cycle
• Real wages are procyclical
• Labor Productivity is procyclical and leads
the cycle
Labor Markets and the Business
Cycle
• Employment is procyclical and is coincident
with the cycle
• Real wages are procyclical
• Labor Productivity is procyclical and leads
the cycle
• Unemployment is countercyclical
Can our model explain these labor
market facts?
• Suppose that we assume the
business cycle is caused by
random fluctuations in labor
supply. Can this explain the
correlations in the labor
market?
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12
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4
0
0
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500
Can our model explain these labor
market facts?
• Suppose that we assume the
business cycle is caused by
random fluctuations in labor
supply. Can this explain the
correlations in the labor
market?
• An increase in labor supply
lowers the real wage while
increasing output and
employment
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24
20
16
12
8
4
0
0
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200
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400
500
Can our model explain these labor
market facts?
• Suppose that we assume
the business cycle is
caused by random
fluctuations in labor
supply. Can this explain
the correlations in the
labor market?
• An increase in labor
supply lowers the real
wage while increasing
output and employment
• Countercyclical real
wages are inconsistent
with the facts.
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24
20
16
12
8
4
0
0
100
200
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400
500
Neoclassical (Supply Side) Economics
• Neoclassical economics
assumes that
expansions/recessions are
caused by random
increases/decreases in
productivity
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12
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4
0
0
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500
Neoclassical (Supply Side) Economics
• Neoclassical economics
assumes that
expansions/recessions are
caused by random
increases/decreases in
productivity
• A positive productivity shock
(which increases labor demand)
creates a positive correlation
between output, wages,
employment and productivity.
This is consistent with the data.
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Wealth Effects?
• Recall that if higher
wages are perceived to
be permanent, then
labor supply starts to
decrease.
• This would create
larger wage effects
and smaller
employment effects –
this is not what the
data suggests
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12
8
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Intertemporal Substitution
• Intertemporal
substitution suggests
that individuals exploit
temporary wage
increases by working
more (Make hay while
the sun shines!)
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16
12
8
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0
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500