Labor Market

Firm optimal hiring: marginal product of labor = real wage $(MPN=w)$

MPN downward sloping due to diminishing MPN

MPN curve is same as Labor demand curve how to draw labor demand curve:

1. draw MPN curve
2. for given $w$, find quantity of N demanded
3. change $w$ level and repeat 2

Shifts of Labor Demand Curve

Labor Supply

Ind: relationship between CURRENT $w$ and quantity of labor supplied $(N)$

AGGREGATE: no. of workers $\times$ individuals working hrs

$N=T-\ell$

$c=w(T-\ell )+V$

Budget Constraint:

$$c+w\ell =wT+V$$

price of $\ell$ is real wage $w$

Income Effect

$V\uparrow ,w\uparrow :\ell \uparrow ,N\downarrow$ $V\downarrow ,w\downarrow :\ell \downarrow ,N\uparrow$

Substitution Effect

$w\uparrow :\ell \downarrow ,N\uparrow$ $w\downarrow :\ell \uparrow ,N\downarrow$

if $w$ change is temporary SE dominates, if permanent IE dominates

Shifts of $N^S$

Factors

• wealth
• expected future real wage $(w)$
• individuals preference and taste
• working-age population
• Labor Force participation rate

real wage shifts rapidly to equate $N^S$ and $N^D$ (eq)

solving strat: $N⟹N^d$

Unemployment

Frictional Unemployment: voluntarily leave to look for better jobs

Structural Unemployment: workers losing their jobs due to shifts in the economy

Natural Rate of unemployment: unemployment rate at full-employment

• not contradictory because of frictional and structural U

Cyclical Unemployment: actual U - natural rate of U