WORKERS,

WAGES, AND
UNEMPLOYMENT
IN THE MODERN
ECONOMY
FIVE IMPORTANT LABOR
MARKET TRENDS
 TRENDS IN REAL WAGES
1. Over the twentieth century, all industrial countries have
enjoyed substantial growth in real wages.
2. Since the early 1970s, however, the rate of real wage
growth has slowed.
3. Furthermore, recent decades have brought a pronounced
increase in wage inequality in the United States.
 TRENDS IN EMPLOYMENT AND UNEMPLOYMENT
4. In the United States, the number of people with jobs has
grown substantially in recent decades.
5. Western European countries have been suffering high
rates of unemployment for almost two decades.
WAGES AND THE
DEMAND FOR LABOR
 Demand for labor depends upon
• The productivity of labor
• The market price of the output
 Employers want to hire more employees when
• Workers are more productive
• Goods and services workers produce became more
valuable
DIMINISHING
RETURNS TO LABOR
 Marginal product
 the extra production gained by adding one more worker
 Diminishing returns to labor
 If the amount of capital and other inputs in use is held
constant,
 Then the greater the quantity of labor already employed,
 And the less each additional worker adds to production
VALUE OF MARGINAL
PRODUCT
 Value of marginal product
 The amount of extra revenue that each worker generates
for the firm
 Equals the worker’s marginal product multiplied by the
price of the output.
THE DEMAND CURVE FOR LABOR
SHIFTS IN DEMAND
FOR LABOR
 Increases in the value of marginal product will increase
the demand for labor
 Two main factors shift labor demand
1. Increase in the price of the output
2. Increase in the productivity of workers
A HIGHER RELATIVE PRICE OF OUTPUT
INCREASES THE DEMAND FOR LABOR
HIGHER PRODUCTIVITY INCREASES
THE
DEMAND FOR LABOR
SUPPLY OF LABOR
 The total number of people who are willing to work at each
real wage is the supply labor
 At any given real wage, potential suppliers of labor must
decide if they are willing to work
 Your reservation price is the minimum payment you would
be willing to accept
SHIFTS IN THE
SUPPLY OF LABOR
 For macroeconomists
 The most important factor shifting the supply of labor is the
size of the working-age population
 Domestic birthrate
 Immigration and emigration rates
 Age of entering and leaving the labor force