Labor Markets: The Short Run

Keynesian models emphasize short-run adjust­ments. Suppose Aggregate Demand grew slightly during a severe depression like that of the 1930s. Keynes believed that high unem­ployment permits firms to fill all vacant positions at the going wage, so the relevant part of the aggregate labor-supply curve is assumed to be flat, while extensive idle capital limits diminishing returns as a problem. Thus, if the demand for labor grows during a depression, employment and output rise, but wages and prices may not. Consequently, Keynesian analysis assumes a horizontal Aggregate Supply curve. Remember that from Keynes' point of view, Say's Law was backward and should have read "Demand creates its own supply."

Keynes' assumptions about depressed labor markets are drawn from the 1930s experience of a prolonged depression. Labor's supply curve normally has a positive slope because drawing more workers into the labor force requires higher wages; rising wages also enable unem­ployed workers to more rapidly find jobs they perceive as suitable. As firms pay higher wages to attract additional employees, wages rise for all workers.

Workers know that higher prices lower their real wages, but there is a lag between a given inflationary decline in real wages and labor's recognition of this loss. Workers may temporarily be "fooled" by hikes in money wages that are less than inflation, so more labor ser­vices may be offered even if real wages decline.

Firms hire more labor to produce more output if they perceive increased profit oppor­tunities; output prices that rise faster than nom­inal wages. In the short run, workers fail to revise their expectations about changes in the price level and are fooled because they believe the original price level will prevail. Workers may suf­fer from inflation illusion in the very short run, but their misconceptions are unlikely to persist.

• Labor Markets: The Longer Run The long-run orientation of classical reasoningrepresents the polar extreme from Keynesian analysis. New classical economics assumes that workers react to changes in real wages almost instantly, keep­ing the economy close to full employment. At the very least, there can be no involuntary un­employment.

Workers try to base decisions about work on real wages, not on nominal money wages— what their earnings will buy, not the money it­self. In the longer run, workers recognize that price hikes reduce their real wages (w/P) and react by reducing the real supply of labor.

To summarize, suppose Aggregate Demand grows in an economy that is close to full employment. Higher money wages may temporarily lure more workers into the labor force if they expect the price level to remain con­stant. Once workers recognize that prices have risen, they demand commensurate raises.

In reality, workers react slowly to changes in real earnings. A couple of reasons help ex­plain why individual workers may be more eas­ily "fooled" by inflation than are the firms that employ them. First, a major decision by a big firmmay put millions of dollars on the line, while individual workers have only their salary at risk. Thus, firms devote more resources to forecasts of inflation. Second, a firm only needs to esti­mate how much extra revenue will be generated if extra workers are hired to know how much of a monetary wage (w) it can profitably afford to pay. This calculation requires only estimates of the worker's physical productivity and a fore­cast of the price (p_i,) at which the firm will be able to sell its own product.

Thus, the real wage paid a worker from the vantage point of the firm is w/p_i . Workers, on the other hand, must forecast the prices of all goods they expect to buy (e.g., the CPI) before they can estimate the future purchasing power of their monetary wages. The real wage from the point of view of a typical worker equals w/CPI, where CPI is the price level. Thus, firms may need less information about future prices (only p,) to make profitable decisions than workers need (forecasts of most prices in the CPI) as a guide for personally beneficial decisions.

Finally, in reality, when real wages drop, the options open to most workers are limited. Quitting and looking for a new position involves significant transaction costs including the search, interview, lost wages, and possible uprooting of family for a move to another region of the coun­try. Labor immobility and high information and transaction costs may mean that labor isn't "fooled" but can only adjust in the longer term.

As a result, firms have better access to in­formation about inflation, while actually need­ing less information than workers do to react to changes in the price level. Workers also respond relatively slowly because (a) most long-term union contracts set nominal wages for the length of these agreements, (b) both employers and em­ployees often implicitly agree to contracts where wages are adjusted only at scheduled intervals, and (c) changing jobs often entails considerable costs in search time and lost income.

Дата добавления: 2015-11-14