LABOR MARKET

The labor market holds very important place in the world of economics. An important macroeconomic variable is the total amount of labor that is used in certain period of time. The amount of labor and amount of capital are variables for total production and GDP. Amount of labor is related to unemployment rate.

Classification of unemployment

There are different ways of classifying unemployment.

·     Frictional unemployment- 
Individuals are temporarily unemployed while transiting between jobs or just entering the labor market.This kind is typically short in duration and is always present in the economy.

·     Structural unemployment-
Individuals are unemployed because their skills are no longer in demand where they live. This normally leads to longer spells of unemployment and may require the unemployed to acquire new training to survive.

·      Cyclical unemployment-
Unemployment due to recession

·      Classical unemployment-
Unemployment due to real wages being too high.

The natural rate of unemployment is defined as the sum of the rates of frictional, structural, and classical unemployment excluding the cyclical unemployment. We say, we have full employment when the unemployment rate is equal to the natural rate (and cyclical unemployment is zero)

   Please note, cyclical unemployment is zero in a boom. In a recession, the observed unemployment rate exceeds the natural rate by the cyclical unemployment rate.

Diagram

Wages

Nominal wages-The nominal wage is the wage per unit of time in the currency used in the country- commonly called as call wage. Wage is a flow that we typically measure in units of currency per hour.

Wages and income

Wages and income are two distinct variables.Wage means what we typically receive for working an hour, while income is the total revenue from all sources over a longer period of time. Your income depends on the wage as well as the total number of hours you work.

Real wage

Consider the following scenario. You work full time and during January 2014 you make 2000 euro after tax. A particular basket of goods and services costs 100 euro in January, which means you can buy 20 such baskets.

In February, you receive a 10% wage increase and you make 2200 euro after tax. Does this imply that you can buy 10% more baskets, 22 in February? No, Not necessarily.

The number of baskets you can buy in February depends upon the possible changes in price.If the price of the basket increase by 3% to 103 euro, your 2200wage will buy you 2200/103=21.36 baskets of goods, i.e. 7%more than in January. So even though your wage has increased by 10%, you can only increase consumption of baskets by 7%. We say the real wage has increased by 7%.

We define real wage as the nominal wage divided by a price index (CPI). In the above eg, real wage was 20 in january and 21.36 in February. Nominal wage will tell you your wage in units of currency, while real wage will tell you your wage in basket of goods and services.