17 Employment:

the Market for

DAMIEN KING
University of the West Indies, Jamaica
 What determines the level of
?unemployment?
How is the wage level in a country
?determined?
How can there be people unemployed
?when there is “full employment”?
Why is the unemployment rate in Jamaica
?so high?

2
Outline 1The Labour Market

2The Natural Rate of Unemployment

3The Market for Capital

3
The Labour
Market

4
The demand for labour
is derived from the
desire to produce
goods and services.

5
 Diminishing …times

900
$
VMP marginal
product
price
Value of
Marginal
Labour Product Marginal
800 Product
700
10 9 $900
600
500 20 7 $700
400
30 5 $500
300
200 40 3 $300
100
N 50 1 $100
0 5 10 15 20 25 30 35 40 45 50 also
called
MRP 6
Revenue
from 10th
900
$
Labour Demand
Value of
Marginal
Labour Product Marginal
800 Product
Wage
700
Cost 10 9 $900
of 10th 600
500 20 7 $700
400
30 5 $500
300
200 40 3 $300
100
N 50 1 $100
0 5 10 15 20 25 30 35 40 45 50

7
 Revenu
e from
15th 900
$
Labour Demand
Value of
Marginal
Labour Product Marginal
800 Product
700
Cost 10 9 $900
of 15th
600
500 20 7 $700
400
30 5 $500
300
200 40 3 $300
100
N 50 1 $100
0 5 10 15 20 25 30 35 40 45 50

8
900
$
Labour Demand Labour is paid
800 the value of it’s
700 marginal
600 product.
500
400
300
200
100
N
0 5 10 15 20 25 30 35 40 45 50

9
900
$
Labour Demand
Value of
Marginal
Labour Product Marginal
800 Product
700
10 9 $900
600
500 20 7 $700
400
30 5 $500
300
200 40 3 $300
100
N 50 1 $100
0 5 10 15 20 25 30 35 40 45 50

10
 Suppose the price of

900
$
Labour Demand the product falls
Value of
Marginal
Labour Product Marginal
800 Product
700
10 9 $900
600 $630
500 20 7 $700
400 $490
30 5 $500
300 $350
200 40 3 $300
$210
100
N 50 1
$70
$100
0 5 10 15 20 25 30 35 40 45 50

11
 Suppose the produc-

900
$
Labour Demand tivity of labour rises
Value of
Marginal
Labour Product Marginal
800 Product
700
10 9 $900
600 11 $1100
500 20 7 $700
9 $900
400
30 5 $500
300 7 $700
200 40 3 $300
5 $500
100
N 50
3
1 $100
$300
0 5 10 15 20 25 30 35 40 45 50

12
The supply of labour is
the result of the choice
between consumption
(which labour affords)
and leisure.

13
 The Objective
 Utility (satisfaction)
Worker
Choices
 Consumption, leisure
Feasible Set
 Time
 Cons.
9000
8000 The
Labour-
7000 Money
6000
5000
4000
Leisure
3000 Choice
2000
1000
0
Hours
Leisur
0 2 4 6 8 10 12 14 16 e
16 14 12 10 8 6 4 2 0 Work
 Cons.
9000
8000
7000
6000
5000
4000 Wage Rate = $250/hr
3000
2000
1000
0
Leisur
0 2 4 6 8 10 12 14 16 e
16 14 12 10 8 6 4 2 0 Work
 Cons.
9000
8000
7000
6000
5000 Wage Rate = $375/hr
4000 Wage Rate = $250/hr
3000
2000
1000
0
Leisur
0 2 4 6 8 10 12 14 16 e
16 14 12 10 8 6 4 2 0 Work
Consumption
The
Labour-
Income

B
Leisure
Choice
Subst

Subst Income Leisure

The
Labour
Market
Labour
Labour Demand
Supply
N
21
Israel,
1989:
wages
rose by
50%.

22
$ Labour
Supply

In 1989
in Israel,
wages
Labour
rose by
Demand
N 50%.
23
24
$ Labour
Supply

Labour
Demand
N
25
For some purposes, we
treat different segments
of the labour market as
different markets.

26
27
The Natural Rate
of
Unemployment
How come there is
always
unemployment?

28
 Unemployment
Rate
The percentage of the labour
force (those who want work)
that is unemployed (are not
working)

29
 Unemployment
labour force – employedRate
labour force %

30
$ Labour
Supply

Labour
Demand
N
31
32
 Employed

Labour Demand
Unemployed

Labour Supply
Frictional
Cyclical
Structural Outside of
Effective
Labour Force

33
 Labour Demand

Statistician’s
Economists’
“Unemployed”
Labour Supply
 Frictional
 Cyclical
Outside of
Structural Effective
Labour Force

34
 Labour Demand

Statistician’s
Economists’
“Unemployed”
Labour Supply
 Frictional
Cyclical
Outside of
Structural Effective
Labour Force

35
 Full Employment
The condition in which there
is no cyclical unemployment

36
 Natural Rate of
Unemployment
The rate of unemployment
associated with only
frictional and structural
unemployment

37
Why is there
unemployment?
 Some don’t have employable skills
 Takes time for employers and the
unemployed to find each other
 Insufficient demand at the current
wage level

38
$ Labour
Supply

Wage
What
keeps
wages
Labour
up?
Demand
N
39
$ Labour
Supply

Wage
Why
nominal
wages are
sticky
Menu Costs
Labour Coordination
Demand
N Money Illusion

40
Why are
Unemploymen
t Rates higher
in Poorer
Countries?

41
 Honduras
South Africa
Lesotho Why are
Nigeria
Georgia Unemployment
Zambia
 Jamaica Rates higher in
India
USA Poorer
UK
Canada Countries?
Peru
 Germany
Brazil
Australia
Japan
Norway

0 5 10 15 20 25 30

42
 Honduras
South Africa
Lesotho Why are
Nigeria
Georgia Unemployment
Zambia
 Jamaica Rates higher in
India
USA Poorer
UK
Canada Countries?
Peru
 Germany
Brazil
Australia
Japan
Norway

0 5 10 15 20 25 30

43
 Labour
Market Why are
Attribute Unemployme
s nt Rates
Efficient Frictional higher in
Developing
Flexible  Cyclical Countries?

Skilled  Structura
l
44
 Labour
Market What can be
Attribute done about
unemployment?
s
Efficient Frictional
Flexible  Cyclical
Skilled  Structura
l
45
The Market for
Capital

46
 Best to think of as a rental market.
Some
Consideration
1Capital can be re-sold after use.

Demand based on marginal product.

the Market for Supply easier to increase.

Capital

47
$ Supply of
LabourSupply of
Demand
The
Capital
for Capital

Market
for
Capital
N
48
 Labour Capital
Over time, wages rise faster than the cost of capital.

Labour
Supply
Wage

Rent
Capital
Supply
Labour Capital
Demand Demand
Quantity of Labour Quantity of Capital

49
Factors are paid the value of their
1
marginal product
Wage levels are determined by the
2
interaction of labour demand and supply
Unemployment is high because the
3
market is inefficient & the labour force is
unskilled

50