MacroEcomonics principles, application, and tools 7th edition by sullivan chapter 07

Together, the demand and supply for labor determine the level of employment and the real wage... Together, the demand and supply curves determine the level of employment in the economy

C H A P T E R 7

The Economy at Full

Employment

The Economy at Full

Employment

While immigration is a big issue in the United States, emigration –

the outflow of people – is a major issue in other countries.

CHAPTER

7

A Nobel Laureate Explains Why Europeans Work Less Than U.S Workers or the Japanese

Can real business cycle models explain the origin and persistence of the Great Depression?

Can Labor Market Policies Account for the Great Depression?

3

A P P L Y I N G T H E C O N C E P T S

C H A P T E R 7

The Economy at Full

C H A P T E R 7

The Economy at Full

 FIGURE 7.1

The Relationship between

Labor and Output with Fixed

Capital

With capital fixed, output

increases with labor input,

but at a decreasing rate.

C H A P T E R 7

The Economy at Full

C H A P T E R 7

The Economy at Full

 FIGURE 7.2

An Increase in the Stock of

Capital

When the capital increases

from K1 to K2, the production

function shifts up

At any level of labor input,

the level of output increases.

The wage rate paid to employees adjusted for changes

in the price level

Together, the demand and supply for labor determine the level of employment and the real wage.

Labor Market Equilibrium

Panel C of Figure 7.3 puts the demand and

supply curves together.

At a wage of $15 per hour, the amount of

labor firms want to hire—7,500 workers—will

be equal to the number of people who want to

work—7,500 workers

This is the labor market equilibrium: The

quantity demanded for labor equals the

quantity supplied

Together, the demand and supply curves

determine the level of employment in the

economy and the level of real wages.

Shifts to demand and

supply will change

both real wages and

employment.

C H A P T E R 7

The Economy at Full

Employment

THE BLACK DEATH AND LIVING STANDARDS IN OLD ENGLAND

APPLYING THE CONCEPTS #1: How can changes in the supply of

labor affect real wages?

According to the research of Gregory Clark of the UC, Davis, the level of real wages for laborers in England was nearly the same in 1200 as it was in 1800 Yet, during the

period from 1350 to 1550, they were higher—nearly 75 percent higher in 1450, for

instance, than in 1200

Why were real wages temporarily so high during this period?

▪ The simple answer was the bubonic plague—also known as the Black Death

▪ Arrived from Asia in 1348 and caused a long decline in total population through the

1450s

▪ With fewer workers, there was less labor supplied to the market The result was

higher real wages

In the era before consistent and rapid technological advance, changes in population was the primary factor controlling living standards As the economist Thomas Malthus (1766–1834) observed, social maladies such as the Black Death would temporarily raise living

A P P L I C A T I O N 1

The level of output that results

when the labor market is in

equilibrium and the economy

is producing at full

employment

Panel B determines the

equilibrium level of

employment at L and the real

wage rate of W

Full-employment output

in Panel A is Y.

C H A P T E R 7

The Economy at Full

 FIGURE 7.6

How Employment Taxes

Affect Labor Demand and

Supply

Taxes and Potential Output

In Panel A, a tax burden on

labor shifts the labor

demand curve to the left

and leads to lower wages

and reduced employment

In Panel B, the supply

curve for labor is vertical,

which means that wages

fall but employment does

not change.

C H A P T E R 7

The Economy at Full

Employment

A NOBEL LAUREATE EXPLAINS WHY EUROPEANS WORK LESS THAN

U.S WORKERS OR THE JAPANESE

APPLYING THE CONCEPTS #2: Do differences in taxes and government benefits explain why Europeans work substantially fewer hours per year

than do U.S workers or the Japanese?

On average today, the French (and other Europeans) work one­third fewer hours than do U.S. workers. In the early 1970s Europeans actually worked slightly more hours than did U.S. workers. 

What will happen if we do not make changes in the underlying programs and allow tax 

A P P L I C A T I O N 2

Technology Shock Affects

Labor Demand and Supply

Real Business Cycle Theory

• real business cycle theory

The economic theory that emphasizes how shocks to technology can cause fluctuations in economic activity

USING THE FULL-EMPLOYMENT MODEL

7.5

An adverse shock to

technology will decrease

the demand for labor.

As a result, both real

wages and employment fall

as the market equilibrium

moves from a to b.

C H A P T E R 7

The Economy at Full

Employment

CAN LABOR MARKET POLICIES ACCOUNT FOR THE GREAT DEPRESSION?

APPLYING THE CONCEPTS #3: Can real business cycle models explain the

origin and persistence of the Great Depression?

Real Business Cycle models do not explain the Great Depression

Economists Cole and Ohanian of UCLA modified the standard model to

include other factors.

▪ President Roosevelt’s New Deal allowed firms to collude if they recognized unions and raised wages.

▪ President Hoover also had polices that raised wages.

Incorporating these factors into the model allow it to explain the origin and

severity of the Great Depression.

A P P L I C A T I O N 3

U.S Consumption and

Government Spending During

The vertical bar highlights

the time period during

which crowding out

occurred.

U.S Investment and

Government Spending During

The vertical bar highlights

the time period during

which crowding out

occurred.

Increased government spending need not crowd out either consumption or

investment It could lead to reduced exports and increased imports

open economy production function real business cycle theory real wage

stock of capital