Video Transcript: Lesson 19

Hey everybody! Welcome back. Unit seven will begin lesson one: the labor  market. We want to discuss the labor market and unemployment suggests at  times, you know, a mismatch between supply and demand, as far as how much  labor is demanded and the supply that is available to meet that demand.  Sometimes the market is oversupplied, where there may be recession or you  know there's no need to hire. Banks are not lending, so growth isn't happening.  Interest rates may be high, so that may slow the need to grow operations, and  then demand will for labor will be diminished. So at times there can be an  oversupply, and then when the economy may be too hot, may be growing really  fast and rapidly. There may be an under supply of labor and a shortage. So, but  let's look at people that are unemployed. Right, people who are unemployed,  they want to have a job, but are unable to find one. Typically, in economic  language, they are willing to supply labor, but cannot find a firm that demands  their labor. The most natural starting point for an economic analysis of  unemployment is the natural labor market. The labor market is depicted in this  figure on the screen. Price is on the vertical axis that is dominated as the real  wage, which is the nominal wage divided by the price. It tells us how much you  can obtain, how much you can obtain in real terms of goods and services if you  sell an hour of your time. So, I want to be able to purchase things in the physical market for consumption off the value of my labor. So, therefore, I'm trading my  time for consumption goods in the market. Let's recall that the price level can be  thought of as the price of a unit of the real gross domestic product, the GDP, you can equivalently think of the real wage as the value of your time measured in  units of the real GDP. So you can take a percentage of what you consume and  what you produce, and you can measure that against the real GDP and figure  out where you sit on that scale. So, at a higher real wage, households supply  more labor. So, as the wages increase, people are more willing to supply their  labor at higher wages. There are two reasons for this. Typically, first, a higher  real wage means that the need to sacrifice more of an hour of your time, you  can obtain more goods and services than you were able to before when you're  operating on a higher real wage, and most people are willing to provide their  services for a higher real wage, households can obtain more goods and  services than before once they obtain that higher wage. So households are  looking to substitute away from leisure to work and ultimately consume more  because they'll be bringing in more revenues into their household, because the  wages will be increased. So people are looking for higher wages so they can  have more consumption capacity, essentially, so they can enjoy more leisure  time later and maybe more, you know, better leisure time later than they were if  they were able to obtain a higher wage. Second, as the wage increases, more  individuals join the labor force and find a job. So you can see that the curve on  the supply curve for labor will increase as wages increase because more people enter the market as wages go up, so there is an increase in hours worked for 

each employed worker, and an increase in the number of employed workers  overall as the wages increase across the economy. At a higher real wage, firms  demand fewer labor hours, though, because they have to budget, you know  what they have to spend on their labor, so that way people can, companies can  ensure that they are hitting their profit targets. So therefore, shareholders can,  you know, rest assured that the company is continuing to grow. At a steady rate,  a higher real wage means that labor time is more expensive than before. So  each individual firm demands less labor and produces less output because the  prices are going up. They don't want to spend as much, so they'll produce less  output. The point where the labor supply and demand curves meet is the  equilibrium in the labor market. This is where the demand for labor and the  supply of labor meet in their imbalance. At the equilibrium real wage, the number of hours that workers choose to work exactly matches the number of hours that  firms choose to hire. This puts the market in equilibrium. Supply and demand in  the labor market determine the real wage and the level of employment. So  variations in either labor supply or labor demand show up as shifts in the curves. They can move up or down. If we want to talk about unemployment, the labor  market diagram presents us with a problem. The idea of a market is the price  adjusts to reach equilibrium, so the price will move based on the demand of  labor. So where supply equals demand is where you'll find your equilibrium price for labor for that job in the market. Now, in the labor market, this means the real  wage should adjust to its equilibrium value, so that there is no mismatch of  supply and demand. So, prices, which is the cost of wages, will adjust to the  demand, and at times demand will adjust towards wages. So, if wages are too  high, you can see that employers will shift the demand down. So, therefore, the  supply curve will have no choice but to shift down with the demand. Everyone  who wants to supply labor at the equilibrium at the equilibrium wage finds that  their labor is demanded. In other words, everyone who is looking for a job is  able to find one. All right, let's remember the definition of unemployment. It is  people who are not working but are looking for employment. So the supply and  demand framework has the implication that there should be no unemployment at all. Everyone who wants to work is employed. The only people without jobs are  those who do not want to work. So this is the definition of unemployment in  terms of a government aspect, right? They people they don't factor into  unemployment people that aren't looking for a job or they're disabled, they just  factor in people that are looking for a job but can't find one.