Labour Demand

Macroeconomics I

ECON222

Fall 2017

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Questions

What are the implications of the standard production model for

labour demand?

What about the "rise of the machines"?

The return of the Luddites?

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Simplifying assumptions

The short run

,! capital stock is xed
,! the amount of labour is variable

Workers are all alike

The wage is determined in a competitive market

Firms employ workers to maximize prot

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The MPN and the real wage

The MRPN measures the benet of employing an additional worker in

terms of the extra revenue produced:

MRPN = P MPN

,! where P is the price of output

To an employer the cost is the nominal wage: W

In real terms rms the benet is MPN and the cost is the real wage:
W
w=
P

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The labour demand curve

The MPN curve is downward sloping due to diminishing MPN

A prot-maximizing rms employ labour up to the point where

MPN = w

,! if MPN > w : hire more workers

,! if MPN < w : reduce the size of the labour force

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Aggregate Labour demand

Aggregate labour demand is the sum of the labour demands of all the
rms in the economy

It looks the same and behaves the same as a labour demand curve for
an individual rm.

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Cobb-Douglas example
Write the production technology as
1 1
Y = K 2 (AN ) 2

Then the marginal product of labour is

1 1 1 1
MPN = A2 K 2 N 2
2
Set equal to the real wage
1 1 1 1
A2 K 2 N 2 =w
2
Solving for N we get the labour demand curve:
AK
ND =
4w 2

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How does technology aect workersjob prospects?

Standard model implicitly assumes that technological change

increases the demand for labour
,! technology and labour are complements

Is this a reasonable assumption?

,! doesnt technology often substitute for labour?

Recents worries due to rapid improvement in robotics and AI

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The Luddites (1811-16)

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The Luddite Fallacy

Technology has been improving for hundreds of years but the

unemployment rates shows no rising trend

On average real wages have grown with the economy

Even if technology economizes on labour in a given sector/rm, this

generally leads to an increase in TFP due to labour reallocation
,! outward shift of aggregate labour demand
,! the hot dog parable

But technological change may aect relative demand for skilled vs.
unskilled workers

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Returns to labour and capital in the US since 1800
wages

2 .pdf

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The Hot Dog Parable (Paul Krugman)

Economy has 120 million workers employed in two industries: buns

and wieners
Initially it takes 2 person-days to produce both a wiener and a bun

Technological improvement: only 1 person-days to produce a wiener

,! how does this aect employment in each sector and overall?

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