Lectures in Macroeconomics- Charles W. Upton

Short Run Labor DemandShort Run Labor Demand

D

S

H*

w*

S’

H’

w’

Short Run Labor Demand

Labor Supply and Demand

D

S

H*

w*

Short Run Labor Demand

More people reach working age

D

S

H*

w*

S’

H’

w’

Short Run Labor Demand

More people reach working age

D

S

H*

w*

S’

H’

w’

The wage rate falls

Total hours worked rise

Hours per worker fall

Short Run Labor Demand

An Alternative View

D S

H*

w*

Short Run Labor Demand

An Alternative View

D

S

H*

w* Y = AKL1-

Short Run Labor Demand

An Alternative View

D

S

H*

w* Y = AKL1-

11

1

1

1

KAYL

Short Run Labor Demand

An Alternative View

D

S

H*

w* Y = AKL1-

11

1

1

1

KAYL

There is a fixed demand for output.

Knowing A, K and Y, we know L

Short Run Labor Demand

An Alternative View

D S

H*

w*Y=C+I+G

No change in C, I or G = No change in D

Short Run Labor Demand

An Alternative View

D S

H*

w*

Ergo, no change in total hours worked,

just more workers

working fewer hours

Short Run Labor Demand

An Alternative View

D S

H*

w*

Ergo, no change in

hours worked, just more workers

working fewer hours

There is a problem here

Short Run Labor Demand

Labor Supply and Demand

D

S

H*

w* 1LAKY

Short Run Labor Demand

Labor Supply and Demand

1LAKYD

S

H*

w*

wLLAK 1

Short Run Labor Demand

Labor Supply and Demand

D

S

H*

w*

Firms want to hire the

workers. A combination of

lower wages and increased output

does the job.

Short Run Labor Demand

Labor Supply and Demand

D

S

H*

w*

So where is the extra demandFirms want to

hire the workers. A

combination of lower wages and increased output

does the job.

Short Run Labor Demand

Labor Supply and Demand

D

S

H*

w*

So where is the extra demandFirms want to

hire the workers. A

combination of lower wages and increased output

does the job.

As GDP rises, Income rises. That means

more consumption,

more investment, etc

Short Run Labor Demand

Say’s Law

• Jean Baptiste Say– “Supply Creates

its own Demand”

Short Run Labor Demand

Does Say’s Law Work

• In time yes, absolutely.– There is controversy over whether it works

immediately.

Short Run Labor Demand

Does Say’s Law Work

• In time yes, absolutely.– There is controversy over whether it works

immediately.

• We will assume Say’s Law here.– But, we shall return.

Short Run Labor Demand

More people reach working age

D

S

H*

w*

S’

H’

w’

Short Run Labor Demand

More people reach working age

D

S

H*

w*

S’

H’

w’

If you wish, think of this

as a short run labor demand

curve

Short Run Labor Demand

More people reach working age

D

S

H*

w*

S’

H’

w’

If you wish, think of this

as a short run labor demand

curve

Possible, but remember our

query “Does it fit the facts”?

Short Run Labor Demand

More people reach working age

D

S

H*

w*

S’

H’

w’

If you wish, think of this

as a short run labor demand

curve

Possible, but remember our

query “Does it fit the facts”?

More interesting to work with

short run labor supply

Short Run Labor Demand

More people reach working age

D

S

H*

w*

S’

H’

w’

If you wish, think of this

as a short run labor demand

curve

Possible, but remember our

query “Does it fit the facts”?

More interesting to work with

short run labor supply

The Principle of Parsimony

Short Run Labor Demand

End

©2004 Charles W. Upton. All rights reserved