The Labor Market

The Demand for Labor

· The demand for labor is the relationship between the quantity of labor demanded and the real wage rate.

· The real wage rate equals the money wage rate divided by the price level. The real wage rate is the quantity of goods and services that an hour of labor earns and the money wage rate is the number of dollars that an hour of labor earns.

· Because of diminishing returns, firms hire more labor only if the real wage falls to reflect the fall in the additional output the labor produces. There is a negative relationship between the real wage rate and the quantity of labor demanded so, as illustrated in the figure, the demand for labor curve is downward sloping.

The Supply of Labor

· The supply of labor is the relationship between the quantity of labor supplied and the real wage rate.

· An increase in the real wage rate influences people to work more hours and also increases labor force participation. These factors mean there is a positive relationship between the real wage rate and the quantity of labor supplied so, as illustrated in the figure, the supply of labor curve is upward sloping.

Labor Market Equilibrium and Potential GDP

· In the labor market, the real wage rate adjusts to equate the quantity of labor supplied to the quantity of labor demanded. In equilibrium, the labor market is at full employment. In the figure, the equilibrium quantity of employment is 200 billions of hours per year.

· Potential GDP is the level of production produced by the full employment quantity of labor. In combination with the production function shown in the previous figure, the labor market equilibrium in the figure of 200 billion hours per year means that potential GDP is $12 trillion.

What Makes Potential GDP Grow?

Potential GDP grows when the supply of labor grows and when labor productivity grows.

Growth of the Supply of Labor

· The supply of labor increases if average hours per worker increases, if the employment-to-population ratio increases, or if the working-age population increases. Of these factors, in the United States over the past years the first two have offset each other.

· Only increases in the working-age population can cause persisting economic growth. Persisting increases in the working-age population result from population growth.

An increase in population increases the supply of labor, which shifts the labor supply curve rightward. The real wage rate falls and the quantity of employment increases. The increase in employment leads to a movement along the production function to a higher level of potential GDP.

An Increase in Labor Productivity

· An increase in labor productivity increases the demand for labor and shifts the production function upward.

· As the top figure illustrates, the increase in the demand for labor from LD0 to LD1 raises the real wage rate, from $20 to $30 per hour in the figure, and increases the level of employment, from 200 billion hours per year to 300 billion hours per year.

· The bottom figure shows that the production function has shifted upward, from PF0 to PF1. Combined with the increase in employment to 300 billion hours per year, the increase in labor productivity increases potential GDP from $10 trillion to $15 trillion.

An increase in labor productivity leads to an increase in real GDP per person and increases the standard of living.

Дата добавления: 2015-11-04