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Lec 3 labor market equilibrium

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University of Toronto St. George

th Eco 209 lec 3 Sept.30 , 2010 Labor demand Y=AF(K,N), W=MPN w w w ND1 ND2 ND Firm 1 Firm 2 Total Aggregate labor Demand : the sum of ND1 and ND2 Supply of Labor Utility max by individual NS depends on w and labor-leisure(normal goods) choice Change in w => income effect & substitution effect For an individual An increasing in w (real wage) results in 1. Sub effect makes leisure more expensive => reduction in leisure (normal goods) or increasing in labor supply 2. Income effect: increasing in wage => increasing income => increasing consumption in leisure (normal goods) or decreasing in labor supply (not always true for an individual), but Aggregate labor supply: upward sloping: implicate aggregate sub effect > income effect w NS N Shift in NS 1. Rightward or upward shift a. Decreasing in wealth b. Decreasing in future wage (expectation) c. Increasing labor force (participation rate increases, proportion of population who is looking for a job) after World War ii (women labor force) meantime, do not have enough capacity to offer jobs Shift in ND Positive technological change => shifts ND to the right (decreasing demand for non- skill workers and increasing demand for skill workers) UR(unemployment rate)= (labor force- employment)/ labor force *100 Currently LF= 18.6million, unemployment=1.5 million, UR= 8% KlµL[Z>Á Y (y bar) J Y)/ ybar =2(u-ubar) cyclical unemployment rate U: actually unemployment rate, ubar: full unemployment rate/potential rate Gap between potential GDP and actual RGDP If want to reduce unemployment, real GDP should increase by 3% and more Percentage change in RGDP Cobb-Douglas production function Data suggests that this formula fits the data for Canada w= MPN= dy/dn= .7 k^.3*N^.3= .7* (k^.3/N^
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