The Labor Market

Learning Objectives
At the end of the course, the students are
expect to:
understand
the
concept
and
the
importance of labor market
understand the nature of unemployment
be able to determine the wage
determination and price determination
understand natural rate of unemployment

Household Supply and

Employer Demand
Labor market looks at the decisions of
individuals to work and the demand by
employers for workers
The household labor supply decision will
have a positive relationship to the wage
rate; the higher the wage obtained, the
greater our desire to work

Cont..
The demand for labor by businesses,
governments and other employers will have
a negative relationship to the wage rate
As the wage rate increases, the cost of
hiring workers increase as well.
With higher wage rates, employers
increasingly seek for lower-cost alternatives
to labor, such as capital.

Equilibrium in Labor Market

Wage rate, w
Supply of Labor

w*
Demand for
Labor

QL*

Quantity of Labor

The labor market sets the wage rate, w*

Nature of Unemployment
Unemployment is a measure of those
people who are actively seeking work but
cannot find a job which matches their
qualifications.
The goal of macroeconomic policy is to
achieve full employment

Nature of Unemployment
Full employment is described as the
absence of involuntary unemployment.
Involuntary unemployment; characterized
by individuals who would like a job that
matches their skills, but not available.
Some people choose to be unemployed
voluntarily as they switch jobs, move from
one region to another and other reasons.

Nature of Unemployment, cont..

In measuring unemployment, we must
consider those people who are eligible to
work in the labor force.
The definition of labor force is all
employed or unemployed civilians (16 years
old and above).

Nature of Unemployment, cont..

Those who are excluded from labor force are
students, housekeepers for a working spouse, those
who have given up looking for job and others who
are considered as non-labor force participants.
It is important to note that actual number of
unemployed is higher than reported due
to discouraged workers who have given up to
actively seeking work and have dropped out of the
labor force.

Nature of Unemployment, cont..

Individuals may be unable to work for
such reasons as disabilities, personal
hardship, bad luck, a lack of skills, and other
reasons.
During the depression of the 1930s, over
24% of the United States workforce were
lacked of employment.

Nature of Unemployment, cont..

Although the exact number is uncertain,
the estimated impact of discouraged
workers
and
underemployed
(or
involuntary) part-time workers would add
approximately 2% - 3% to the overall
unemployment rate of the United States.
What is discouraged workers?