35hour workweek

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35-hour workweek

• France is studying impact of national legislation
  mandating a 35-hour work week.
• Implemented by the Jospin government (socialists)
• Questioned by the conservatives, who are now in
  power

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• Socialists theres a lot of unemployment in
  France this can be reduced if each person works
  fewer hours
• Conservatives High unemployment is due to high
  unemployment compensation
• Legislating 35-hour week reduces Frances
  competitiveness.
• WSJ 10/8

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Krugman article

• News-Press 10/8, p. 11
• Or New York Times web site.
• Lump of Labor Poor Excuse for Jobs Deficit
• Lump-of-labor fallacy theres fixed number of
  jobs
• Automation will it reduce the of jobs?

4
Krugman, continued

• Conservatives commentators use the fallacy to
  argue that the failure of employment to increase
  isnt attributable to the failure of Bush policy
• Bush policy tax cuts for the rich
• Krugman no reason to expect this to create
  jobs, and it hasnt.

5
Classical Economics

• Chapter 7

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Classical Economics

• Neoclassical economics (same thing, for our
  purposes)
• 18th, 19th century economists
• Adam Smith (1776), David Ricardo (1810), John
  Stuart Mill (1848), Alfred Marshall (1890)
• Term due to John Maynard Keynes, General Theory
  of Employment, Interest and Money (1936)
• No (adequate) theory of business fluctuations
  before Keynes
• Still true today (?)

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Classical Economics

• Assumes prices, wages are flexible
• Therefore there is no involuntary unemployment
• Everyone in this room is an unemployed mail
  carrier
• But are we involuntarily unemployed?
• Theory of business fluctuations would be in
  Volume II, which never got written
• But there were very severe episodes of
  unemployment
• 1890s, Great Depression

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Keynesian economics

• Prices and wages are inflexible (over the short
  run)
• In fact, this is pretty much the definition of
  the short run, for the purposes of macroeconomics
• Keynesian economists thought, and think, the
  short run might last a long time, and is
  important
• Classical economists thought, and think, that the
  short run is really short, and isnt important
• In this chapter were looking at classical
  economics
• Keynesian economics is different.
• Consistent with micro?
• Brought in the macro-micro distinction

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Review of (the relevant) Micro

• Classical macroeconomics looks at macroeconomic
  phenomena using microeconomic analysis
• Keynesian macroeconomics uses different theory
  (especially in the early years after Keynes wrote
  in 1936)

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Main analytical tool

• aggregate production function
• Assume one good corn that can be either eaten
  now or saved (invested) as seed
• Capital saved up past consumption good
• Save (invest) a lot and youll have less corn to
  eat now, but more in the future

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Aggregate production function

• Aggregate output depends on capital (stored up
  corn saved in the past) and labor
• And maybe also land but well be ignoring that
• Characterize it by isoquants combinations of
  factors that yield a given level of output

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Isoquants

• An isoquant shows the labor-capital combinations
  that produce a given level of output.
• Each isoquant should be labeled with how much
  output is produced.
• Isoquants that lie upward and to the right are
  associated with higher output levels

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Aggregate production function

• You can look at the aggregate production function
  in a different way graph output as a function
  of the labor input, holding capital constant at a
  given level.
• Or vice versa output as a function of capital,
  holding constant the labor input (that is, output
  per worker).

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Aggregate production function

• Here were holding constant the level of the
  capital input

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Principle of Diminishing Returns

• As you add one factor, holding the other(s)
  constant, output increases but at a diminishing
  rate
• Check it out on the preceding diagram the curve
  gets flatter

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Marginal Product of Labor

• Can graph labor input (holding constant capital,
  as above) against marginal product of labor

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Real wages

• In this one-good world, there arent any relative
  prices.
• No money so far, so no nominal prices
• The only relevant price is the real wage
• wage per week expressed in units of corn

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Equilibrium in the factor market

• Assume that the amount of capital a given firm
  has is fixed.
• Under constant returns to scale, which we are
  assuming, this just determines the size of the
  firm
• How much labor will the firm hire?
• Until marginal product of labor real wage
• Otherwise it couldnt be maximizing profit
• (This is assuming pure competition the firm
  cant influence price, so the additional to
  revenue is proportional to the marginal product
  of labor)

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Amount of labor hired
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Demand for Labor

• This means that the firms demand for labor
  (meaning demand for labor curve) coincides with
  the marginal product of labor curve!

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Labor demand

• Note that this curve is identical, except for
  relabeling of the vertical axis!

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Conclusion

• If the real wage is high, firms will hire very
  little labor (in relation to capital), and
  conversely
• Think US vs. India

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Equilibrium

• We have been talking about the theory of the firm
• I.e., about what will the firm do when it faces
  given factor prices (in this case, given real
  wage)?
• Now we go to the equilibrium problem put all
  the firms together.
• What determines the equilibrium level of the real
  wage?
• Assume no flows of labor or capital across
  countries

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Equilibrium Real Wage

• The equilibrium values of factor prices
  specifically, the wage -- must cause firms to
  demand factors in the proportions they exist in
  the country
• Suppose that the amount of labor and capital in a
  country are fixed (no immigration, capital
  export, etc.)
• Equilibrium real wages will be high in a country
  with a lot of capital and not much labor (US)
• And low in the opposite case (Mexico, India)