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10. Wages and Employment

10. Wages and Employment. Neoclassical theory: rise in real wage without productivity increase => Employment declines Purchasing power argument => rise in wages generates new commodity demand. Literature: Ulrich van Suntum, Kaufkrafttheorie des Lohnes, in:

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10. Wages and Employment

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  1. 10. Wages and Employment • Neoclassical theory: rise in real wage without productivity increase => Employment declines • Purchasing power argument => rise in wages generates new commodity demand Literature: Ulrich van Suntum, Kaufkrafttheorie des Lohnes, in: Das Wirtschaftsstudium (wisu) 26.Jg (1997), S. 71-77... G. Dieckheuer, Makroökonomik, Kap. 7.6.4. Konjunktur und Beschäftigung U van Suntum, Lecture KuB 1

  2. Neoclassical theory of employment Konjunktur und Beschäftigung KuB 8.1 2 U van Suntum, Lecture KuB 2

  3. Konjunktur und Beschäftigung U van Suntum, Lecture KuB 3

  4. Labor supply curve Demand for leisure as a function of real wage rate => Higher wage mayleadtodeclininglaborsupply Konjunktur und Beschäftigung U van Suntum, Lecture KuB 4

  5. Labor market equilibrium in neoclassical theory Konjunktur und Beschäftigung KuB 8.1 5 U van Suntum, Lecture KuB 5

  6. Reasons for unemployment temporary • Business cycle • Season (e.g. construction industry) • [technological progress]*) • [external shocks (oil crisis, earth quake] *) persisting • frictions • mismatch • Lack of capital • minimum wages natural rate of unemployment *) controversal Konjunktur und Beschäftigung U van Suntum, Lecture KuB 6

  7. Example: lack of capital w/p Labor supply Labor demand Subsistance- level N employed unemployed U van Suntum, Lecture KuB 7

  8. Example: minimum wage w/p Labor demand Labor supply official wage N employed unemployed U van Suntum, Lecture KuB 8

  9. Example: business cycle induced unemployment w/p Labor demand Labor supply Official wage N employed unemployed U van Suntum, Lecture KuB 9

  10. Mismatch and the Beveridge-Kurve Unemployment rate 45o vacancies rate (open jobs/working population) • move on the curve: business cycle • shift of the curve: mismatch U van Suntum, Lecture KuB 10

  11. Indices of wage policy (I) (see SVR, Jahresgutachten 2002/04, Anhang IV) 1. Wage share: LQ = W/Y W = wages wN Y = nominal income (W/Y)const => [(wN)/Y]const => [w/(Y/N)]const E/N 2. Adjusted wage share: LQber = W/Y * E1991/N1991 (E = active population = employed N + self-employed S) 3. Share of income from working: AEQ = W/Y * E/N W * E (W/N) * E w * E = AEQ = = Y Y N * Y U van Suntum, Lecture KuB 11

  12. Indices of wage policy (II) (see U. Van Suntum, Löhne, Wechselkurse und Beschäftigung. Zur Aussagekraft von Lohnstückkosten und realen Wechselkursen als Beurteilungsmaßstab für die nationale Lohnpolitik. Zeitschrift für Wirtschaftspolitik, 46. Jg. (1997), S. 23-50) ) 4. nominal labor unit costs 5. real labor unit costs: • Wage share indices related to distributional issues • Labor unit costs related to competitiveness U van Suntum, Lecture KuB 12

  13. Neoclassical production function A N N* U van Suntum, Lecture KuB 13

  14. Technological progress or rising capital intensity: N N N* => Either rise in wages or in employment U van Suntum, Lecture KuB 14

  15. Wage increase without technological progress N • spurious productivity increase: move at the Nd-curve • genuine productivity increase: shift of Nd –curve SVR : wage rise only with genuine productivity increase and only with full-employment in the initial situation U van Suntum, Vorlesung KuB 15

  16. Why do wages deviate from equilibrium level? Insider-Outsider-approach: • unionsmaximizeutilityofinsiders • transactionscostsleadto wage gap in favorofinsiders • Outsiders lose bothmotivationandabilities Efficiency wages • Reduceshirking (Shapiro/Stiglitz 1984) • Increasecostsofbeingsacked (Salo 1979, Schlicht 1978) • Tightencommitmentto firm (Akerlof 1982) Konjunktur und Beschäftigung U van Suntum, Lecture KuB 16

  17. Why unions enforce wages above equilibrium level See T. Apolte, Th. (2004), Arbeitsmarktökonomik, in: Th. Apolte u.a., Vahlens Kompendium der Wirtschaftstheorie und Wirtschaftspolitik, Bd. 2, 9. A., München 2005 Unions maximize expected value of worker`s income: => Indifference curve: employment vs. wage rate: Konjunktur und Beschäftigung KuB 8.1 17 U van Suntum, Lecture KuB 17

  18. Max E(Y) s.t. labor demand curve: (w/p)max = prohibitive wage; b < 0 • dN*/dTR < 0 • dE*(Y)/dTR > 0 • dN*/dNs = 0 • dE*(Y)/dNs < 0 U van Suntum, Lecture KuB 18

  19. => voluntary acceptance of unemployment AL by unions: full employment U van Suntum, Lecture KuB 19

  20. Rising TR increases E(Y)* but decreases N* Originally highest achievable indifference curve (e.g. E =100^) w/p new highest achievable indifference curve E(Y) > 100 (after rise in TR) New indifference curve E(Y) = 100 (after rise in TR) Labor Demand N Ns Konjunktur und Beschäftigung U van Suntum, Lecture KuB 20

  21. Rising labor demand increases E(Y)*,N* and (w/p) w/p Wage setting curve LS Labor demand N Ns U van Suntum, Lecture KuB 21

  22. => Rising labor supply decreases E(Y) but does not change N* and w/p Originally highest achievable Indifference curve E(Y) = 100 w/p New indifference curve E(Y) = 100 no longer achievable labor demand New highest achievable Indifference curve E(Y) < 100 N Ns Konjunktur und Beschäftigung U van Suntum, Lecture KuB 22

  23. Wage differential in favor of insiders:*) Recruiting costs Dismissal costs *) see also Apolte, Th. (2004), Arbeitsmarktökonomik, in: Th. Apolte u.a., Vahlens Kompendium der Wirtschaftstheorie und Wirtschaftspolitik, Bd. 2, 9. A., München 2005 U van Suntum, Lecture KuB 23

  24. Profit maximization requires: With equal productivity we have: Konjunktur und Beschäftigung U van Suntum, Lecture KuB 24

  25. Persistence of Unemployment • Negative demandshockleadsto • dismissals • Recoveryleadstorisingwages • ofinsiders wI wI N* N* Konjunktur und Beschäftigung U van Suntum, Lecture KuB 25

  26. Minimum wages and unemployment benefits (Source: UvS, Die unsichtbare Hand, 4th. dd. Berlin 2011) productivity fixed wage unemployment benefit Employed in ascending order of productivity Poverty trap outsiders employed Konjunktur und Beschäftigung U van Suntum, Lecture KuB 26

  27. Purchasing power theory of wages(see U. van Suntum, Kaufkrafttheorie des Lohnes.In: Das Wirtschaftsstudium, 26.Jg.(1997)1, S. 71-78) • Rise in wagescomesatexpenseofprofits • However, saving rate ofworkersislower • Doesthis also increaselabordemand? U van Suntum, Lecture KuB 27

  28. Suppose a Kaldorian saving function (N. Kaldor, Review of Economic Research 1956/57): 0 < sw < sQ < 1 U van Suntum, Lecture KuB 28

  29. sQ s sw 0 1 • Average saving rate is sum of class-rates, weighted by their income share • Redistribution in favor of class with lower saving rate increases consumption U van Suntum, Lecture KuB 29

  30. I II III IV Lower saving rate rotates IS-curve counterclockwise i IS-curve I = I(i) I Y S = s1Y S = soY Iplanned = Splanned S U van Suntum, Lecture KuB 30

  31. Scenario I: Keynesian Rationing IS(w1) IS(w0) i LM p Yreal Y´s Yd w1 w0 Ys(w0) w/p Y v w/p* Yreal Nd Ns N Yreal(N) The purchasing power mechanism works, but could be substituted by fiscal policy U van Suntum, Lecture KuB 31

  32. Scenario II: Neoclassical unemployment LM(p1) i LM(p0) IS(w1) IS(w0) p Yreal Yd Ys(w1) Ys(w0) w1 w0 w/p Y v Yreal Nd Ns N Yreal(N) The purchasing power mechanism worsens the problem U van Suntum, Lecture KuB 32

  33. Criticism of the purchasing power theorem • Model: • rationing does not restrict expansion of a single firm • dY/dN > w/p => strong incentives to increase investment and output • lack of demand in open economy? • Policy: • strategy is risky (change to neoclassical unemployment) • stimulus of investment would increase commidity supply as well • empirical evidence does not support the theory U van Suntum, Lecture KuB 33

  34. What are possible reasons for unemployment? What is the Beveridge curve? Explain the difference between genuine and spurious productivity growth What are efficiency wages? Explain the insider-outsider-problem Explain the purchasing power theory of wages Which important indices of wage policy do you know? Lerning goals/questions U van Suntum, Lecture KuB 34

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