Question

Can you think of some real world complications or limitations of taxation effect on labor supply(where individuals can adjust their hours freely and incrementally) Describe them

Answer 1

Measuring the Labor Force
On the first Friday of every month, the Bureau of Labor Statistics (BLS) releases its esti-
mate of the unemployment rate for the previous month. The unemployment rate statistic
is widely regarded as a measure of the overall health of the U.S. economy. In fact, the
media often interpret the minor month-to-month blips in the unemployment rate as a sign
of either a precipitous decline in economic activity or a surging recovery.
The unemployment rate is tabulated from the responses to a monthly BLS survey called
the Current Population Survey (CPS). In this survey, nearly 50,000 households are ques-
tioned about their work activities during a particular week of the month (that week is called
the reference week). Almost everything we know about the trends in the U.S. labor force
comes from tabulations of CPS data. The survey instrument used by the CPS also has
influenced the development of surveys in many other countries. In view of the importance
of this survey in the calculation of labor force statistics both in the United States and
abroad, it is useful to review the various definitions of labor force activities that are rou-
tinely used by the BLS to generate its statistics.
The CPS classifies all persons aged 16 or older into one of three categories: the
employed, the unemployed, and the residual group that is said to be out of the labor force.
To be employed, a worker must have been at a job with pay for at least 1 hour or worked
at least 15 hours on a nonpaid job (such as the family farm). To be unemployed, a worker
must either be on a temporary layoff from a job or have no job but be actively looking for
work in the four-week period prior to the reference week.
Let E be the number of persons employed and U the number of persons unemployed.
A person participates in the labor force if he or she is either employed or unemployed.
The size of the labor force ( LF) is given by
LF = E + U (2-1)
Note that the vast majority of employed persons (those who work at a job with pay) are
counted as being in the labor force regardless of how many hours they work. The size of
the labor force, therefore, does not say anything about the “intensity” of work.
The labor force participation rate gives the fraction of the population ( P) that is in
the labor force and is defined by
Labor force participation rate = LF/
P

The employment rate gives the fraction of the population that is employed, or
Employment rate = E/
P (2-3)
Finally, the unemployment rate gives the fraction of labor force participants who
are unemployed:
Unemployment rate = U/
LF (2-4)
The Hidden Unemployed
The BLS calculates an unemployment rate based on a subjective measure of what it means
to be unemployed. To be considered unemployed, a person must either be on temporary
layoff or claim that he or she has “actively looked for work” in the past four weeks. Persons
who have given up and stopped looking for work are not counted as unemployed, but are
considered to be “out of the labor force.” At the same time, some persons who have little
intention of working at the present time may claim to be “actively looking” for a job in
order to qualify for unemployment benefits.
The unemployment statistics, therefore, can be interpreted in different ways. Dur-
ing the severe recession that began in 2009, for instance, it is often argued that the
official unemployment rate (that is, the BLS statistic) understates the depths of the
recession and economic hardships. Because it is so hard to find work, many laid-off
workers have become discouraged with their futile job search activity, dropped out of
the labor market, and stopped being counted as unemployed. It is then argued that this
army of hidden unemployed should be added to the pool of unemployed workers
so that the unemployment problem is significantly worse than it appeared from the
BLS data.

Some analysts have argued that a more objective measure of aggregate economic activ-
ity may be given by the employment rate. The employment rate simply indicates the frac-
tion of the population at a job. This statistic has the obvious drawback that it lumps together
persons who say they are unemployed with persons who are classified as being out of the
labor force. Although the latter group includes some of the hidden unemployed, it also
includes many individuals who have little intention of working at the present time (for
example, retirees, women with small children, and students enrolled in school).
A decrease in the employment rate could then be attributed to either increases in unem-
ployment or unrelated increases in fertility or school enrollment rates. It is far from clear,
therefore, that the employment rate provides a better measure of fluctuations in economic
activity than the unemployment rate.

At the macroeconomic level, supply and demand are influenced by domestic and international market dynamics, as well as factors such as immigration, the age of the population and education levels. Relevant measures include unemployment, productivity, participation rates, total incomeand gross domestic product (GDP).

At the microeconomic level, individual firms interact with employees, hiring them, firing them and raising or cutting wages and hours. The relationship between supply and demand influences the hours the employee works and compensation she receives in wages, salary and benefits.

The U.S. Labor Market

The macroeconomic view of the labor market can be difficult to capture, but a few data points can give investors, economists and policymakers an idea of its health. The first is unemployment. During times of economic stress, the demand for labor lags behind supply, driving unemployment up. High rates of unemployment exacerbate economic stagnation, contribute to social upheaval and deprive large numbers of people the opportunity to lead fulfilling lives.

In the U.S., unemployment was around 4 to 5 percent before the financial crisis, when large numbers of businesses failed, many people lost their homes, and demand for goods and services — and the labor to produce them — plummeted. Unemployment reached 10 percent in 2009 but declined more or less steadily to 4.9 percent in January 2016.

INSIGHTS  MARKETS & ECONOMY

Labor Market

REVIEWED BY DAVID FLOYD

Updated Apr 18, 2018

What is the Labor Market

The labor market, also known as the job market, refers to the supply and demand for labor in which employees provide the supply and employers the demand. It is a major component of any economy and is intricately tied in with markets for capital, goods and services.

BREAKING DOWN Labor Market

At the macroeconomic level, supply and demand are influenced by domestic and international market dynamics, as well as factors such as immigration, the age of the population and education levels. Relevant measures include unemployment, productivity, participation rates, total incomeand gross domestic product (GDP).

At the microeconomic level, individual firms interact with employees, hiring them, firing them and raising or cutting wages and hours. The relationship between supply and demand influences the hours the employee works and compensation she receives in wages, salary and benefits.

The U.S. Labor Market

The macroeconomic view of the labor market can be difficult to capture, but a few data points can give investors, economists and policymakers an idea of its health. The first is unemployment. During times of economic stress, the demand for labor lags behind supply, driving unemployment up. High rates of unemployment exacerbate economic stagnation, contribute to social upheaval and deprive large numbers of people the opportunity to lead fulfilling lives.

In the U.S., unemployment was around 4 to 5 percent before the financial crisis, when large numbers of businesses failed, many people lost their homes, and demand for goods and services — and the labor to produce them — plummeted. Unemployment reached 10 percent in 2009 but declined more or less steadily to 4.9 percent in January 2016.

Labor productivity is another important gauge of the labor market and broader economic health, measuring the output produced per hour of labor. Productivity has risen in many economies, the U.S. included, in recent years due to advancements in technology and other improvements in efficiency.

In the U.S., however, growth in output per hour has not translated into similar growth in income per hour. Workers are creating more goods and services per unit of time, but not earning more compensation. Growth in the employment cost index averaged under 0.7 percent per year from 2001-2015, while growth in productivity exceeded 2 percent.

The Labor Market in Macroeconomic Theory

According to macroeconomic theory, the fact that wage growth lags productivity growth indicates that supply of labor has outpaced demand. When that happens, there is downward pressure on wages, as workers compete for a scarce number of jobs and employers have their pick of the litter. Conversely, if demand outpaces supply, there is upward pressure on wages, as workers have more bargaining power and are more likely to be able to switch to a higher paying job, while employers must compete for scarce labor.

Some factors can influence labor supply and demand. For example, an increase in immigration to a country can grow the labor supply and potentially depress wages, particularly if newly arrived workers are willing to accept lower pay. An aging population can deplete the supply of labor and potentially drive up wages.

These factors don't always have such straightforward consequences, though. A country with an aging population will see demand for many goods and services decline, while demand for healthcareincreases. Not every worker who loses his job can simply move into healthcare work, particularly if the jobs in demand are highly skilled and specialized, such as doctors. For this reason, demand can exceed supply in certain sectors, even if supply exceeds demand in the labor market as a whole.

Factors influencing supply and demand don't work in isolation, either. If it weren't for immigration, the U.S. would be a much older, and probably less dynamic society, so while an influx of unskilled workers might have exerted downward pressure on wages, it likely offset declines in demand.

Other factors influencing contemporary labor markets, and the U.S. labor market in particular, include: the threat of automation as computer programs gain the ability to do more complex tasks; the effects of globalization as enhanced communication and better transport links allow work to be moved across borders; the price, quality and availability of education; and a whole array of policies such as the minimum wage.