Chapter Study Outline

2.1 Core Concepts I: Populations

  • The Current Population Survey (CPS) is a monthly survey of about 50,000 civilian households, which provides the data used by the Bureau of Labor Statistics (BLS) and other labor economists.
    • TP is the Total Civilian Noninstitutional Population, which includes all individuals 16 or older who are not in a prison or a mental or other type of institution. This is often abbreviated to working population. Note that TP = L + N.
      • L: the number of people in the labor force, consisting of E + U
  • E: the number of employed people in the labor force
    • Employment: includes all persons over 16 years old who, during the reference week, (a) did at least one hour of work as paid employees or were self-employed, and (b) were not working but had jobs or businesses from which they were temporarily absent
  • U: the number of unemployed people in the labor force
    • Unemployment: includes all persons over 16 years old who have no employment but have made an effort to find a job in the last 4 weeks
  • N: the number of people not in the labor force
    • Retirees are part of the total population but not part of the labor force, thus they are included in N along with students, homemakers, and marginally attached workers.
    • Marginally attached workers want a job and have searched for one in the last 12 months, but they are not counted as a part of the labor force because they have not searched for a job in the last 4 weeks.
      • Discouraged workers are a subset of marginally attached workers. They have not searched for a job in the last 4 weeks specifically because they believe there are no jobs available or none for which they qualify.
  • Because the labor market is in a nearly constant state of change, economists often characterize it in terms of ratios and flows among different states of the total population.
    • The labor-force participation rate: LFPR = L/TP
    • The employment rate: e = E/L
    • The employment-to-population ratio: EP = E/TP
    • The unemployment rate: u = U/L

2.2 Core Concepts II: Labor Costs

  • A business’s labor costs include earnings and employee benefits, which, combined, represent a very large part of the firm’s operating expenses.
    • Earnings: salaries and wages
    • Employee benefits: health insurance, paid vacations, overtime pay, paid sick leave
  • Total compensation: all types of employee compensation, including wages, salaries, nonwage cash payments, and fringe benefits
    • Measuring total compensation allows businesses to calculate the marginal cost of another worker.
    • Gross total earnings: all earnings (including overtime and paid vacation) before deductions such as tax withholdings
    • Straight time-gross earnings: earnings (excluding overtime and paid vacation) before deductions
      • W: the straight-time hourly wage rate, or gross straight-time earnings divided by hours of work
      • Wages are a rate measured in dollars per hour. Earnings are the wages accrued over a given period of time.
  • CPI: the Consumer Price Index, which tracks how much it costs the average U.S. consumer to purchase a particular fixed basket of goods
    • P: the variable representing the price index. In the base year, Pt = 100.
    • t: the base year for which the CPI is measured
    • W: the nominal straight-time hourly wage rate
    • w: the real wage rate, calculated as w = W/P
      • The real wage captures changes in real purchasing power by accommodating the effects of ongoing inflation and changes in the nominal wage.
    • COLAs: cost-of-living adjustments, which are often computed using the CPI
      • However, the CPI typically overstates the increase in the true cost of living because it does not allow for substitution between goods.

2.3 Core Concepts III: Empirical Aspects of the U.S. Labor Market

  • From 1950 to 2009 the labor force nearly tripled, from 65 million to 155 million.
    • Over the same period the labor-force participation rate for women increased by 25 percentage points, while the labor-force participation rate for men declined by 13 percentage points, resulting in a sizable increase in the overall labor-force participation rate.
    • Over the last 60 years the unemployment rate tended to hover between 4% and 7% while exhibiting a cyclical pattern that was largely consistent with business activity.
      • Major exceptions included 11% unemployment during the 1981–1982 recession and <9% unemployment during recession beginning in 2008.
  • Readers should view measurements of average earnings and wages segmented by worker and employer characteristics with caution.
    • The variable used to rank occupation compensation may present an incomplete picture. For example, the high hourly wages of airline pilots do not capture the relatively low number of hours they work and thus their lower annual earnings.
    • Sampling error may bias statistics on an occupation’s hourly wages.
    • Outliers may also bias the statistics.
  • Over the past 100 or so years, the U.S. economy has undergone structural transformation due to changes in employment as classified by industry and occupation.
    • Agriculture’s share of total employment declined from 50% to 3% from 1880 to 1980.
    • Manufacturing sector employment declined over the last 50 years while service sector employment increased.
    • Job creation and destruction helps to explain the changing composition of employment in the U.S. economy.
      • Oftentimes older and less productive jobs are destroyed as newer and more productive are created, thus changing both the level of employment and the productivity of the employed.