<p> Labour Economics Introduction: Some Preliminaries</p><p>- Objectives of Labour Economics: </p><p>- To explain and evaluate labour market outcomes. </p><p>- Labour market outcomes?</p><p>- Compensation, wages, benefits, pay structure (price variables)</p><p>- Employment, unemployment, skill composition, types of jobs, hours worked (quantity variables)</p><p>- Other? union status; hiring and promotion practices; work rules; form, nature & length of contracts etc.</p><p>- Outcomes reflect the interplay of:</p><p>(1) decisions of buyers and sellers of labour services; </p><p>(2) institutions; and </p><p>(3) government.</p><p>1 - Role of Markets:</p><p>- Market economies: decision-making is largely decentralized.</p><p>-Decision makers: - individual buyers and sellers.</p><p> i.e. employers and employees (workers).</p><p>- Millions of workers are sorted into millions of jobs; thousands of wage rates.</p><p>- Wages, job matches, contract provisions reflect interaction of employers and workers.</p><p>- simple contracts: wage-hours provisions</p><p>- complex: contracts for long-term matches (wage progression, career paths, pensions and benefits)</p><p>- Explaining this process and its consequences is a major task of labour economics.</p><p>2 - Role of Institutions and Centralization:</p><p>- Main institutions: unions, professional associations and, in some countries, employer organizations.</p><p>- North American labour markets are among the most decentralized in the developed world. </p><p>- large non-union sectors</p><p>- decentralized bargaining within the unionized sector common.</p><p>- Many developed countries: more centralization</p><p>- union coverage higher</p><p>- bargaining often more centralized: industry or even economy-wide bargaining may occur.</p><p>- models and approaches needed for these arrangements too. </p><p>3 - Role of Government in Labour Markets:</p><p>- Markets, individual and union contracts are important but:</p><p>- they are highly regulated by government</p><p>- affected by many government programs.</p><p>- governments can be major employers. </p><p>- Studying the effects of government a key task.</p><p>- Government intervention in labour markets (Canada):</p><p>- Employment/Labour standards legislation (mainly provincial)</p><p>- Minimum wages - Minimum overtime premia - Maximum hours - Minimum vacation pay - Working age - Notice of layoff requirements - Maternity leave - Equal pay and pay equity - Health and safety regulation.</p><p>- Collective bargaining legislation (mainly Provincial) - regulates collective bargaining, union formation, strike/lockout rules.</p><p>- Public education and training programs. - helps determine workforce skill levels.</p><p>4 - Income Maintenance programs: - Workers' compensation (Provincial) - (Un)Employment insurance (Federal) - Social assistance or welfare (Provincial) - Public pension plans (Federal).</p><p>- Taxation: - income taxes affect sellers decisions - payroll taxes affect buyers decisions.</p><p>- Government as an employer (roughly 20% of employment)</p><p>- Public administration, health, education, social services, local government services, transportation, utilities all have significant public sector employment. </p><p>- More centralized: dominant employer, high unionization.</p><p>- Other countries?</p><p>- government involvement varies substantially</p><p>- more direct role in wage determination in some countries.</p><p>- active labour market policies in Sweden</p><p>- United States more laissez faire than Canada. </p><p>5 - The (micro) economic approach:</p><p>- Decision makers are assumed to be rational and self-interested. </p><p>- Implication: decisions are made based on a comparison of its benefits and costs. </p><p>- Best decision changes when factors determining the benefits and costs of the decision change. </p><p>- This approach underlies the models covered in the course. </p><p>- Is this realistic?</p><p>- Are people really like rational calculating machines?</p><p>- What about role of custom/tradition, altruism, notions of fairness in affecting decisions? Are these inconsistent with rationality?</p><p>- “Models” – simplification implied but hopefully captures something important. </p><p>- simplification: manageable, ignore unessential detail. </p><p>- Ultimate test? do the models make predictions that fit the data.</p><p>- Other possible approaches?</p><p>- Descriptive approaches: describe actual arrangements, their evolution. (Institutional economics; sociological approaches) </p><p>- Group behavior e.g. classes and conflict (Marxian approaches, Radical economics)</p><p>- Behavioral economics and psychological approaches.</p><p>6 - Some current issues in labour economics:</p><p>- Is current US unemployment and low employment structural or cyclical?</p><p>- Long-term unemployment: what are its long-term consequences?</p><p>- Aging populations and the workforce: implications? policies?</p><p>- New technologies and labour markets: polarization? what will people do? does AI mean no good jobs?</p><p>-Trade with China and India: what does it do to Canadian labour markets? </p><p>- Declining unionization: are private sector unions doomed? </p><p>- Inequality trends : </p><p>- why have the very rich gotten so much richer?</p><p>- what is happening to labour’s share of national income?</p><p>- Are high minimum wage rates a good idea?</p><p>- Can governments create jobs or do they just change the mix of jobs? </p><p>7 Data on Labour Market Outcomes: Major Sources</p><p>- Labour economics is “data intensive”.</p><p>- Good starting points:</p><p>Statistics Canada Web site: http://www.statcan.gc.ca</p><p>CANSIM Database (link off Statistics Canada’s main page): time series.</p><p>Lakehead library site: Data and Statistics (Government Info/Data), access to a variety of data sources. </p><p>See data source links on course website. </p><p>(1) Labour Force Survey:</p><p>- Monthly. See Labour Force Information Cat. 71-001. </p><p>- See course website for link to the latest release. </p><p>- Survey of roughly 62,000 households.</p><p>- Main source of data on: - Employment - Unemployment</p><p>- See questionnaire (in Guide to the Labour Force on website). Data includes:</p><p>- Hours of work - Industry - Occupation - Job tenure - Time unemployed - Reason last job ended, etc.</p><p>8 - Wage, union status and additional job data since 1997.</p><p>- Also provides information on worker characteristics. - Age, sex, education - Province, region.</p><p>- These can be cross-referenced with labour market outcomes.</p><p>- Historical LFS data.</p><p>- LFS has existed since 1946 (but major revisions).</p><p>- Labour Force Historical Review extensive tables for data back to 1976. (Access via Library webpage: Government Info/Data link then use “Equinox” or ODESI)</p><p>- Older data: Historical Labour Force Statistics (paper – Library) Historical Statistics of Canada (see below).</p><p>(2) Survey of Employment, Payrolls and Hours (SEPH)</p><p>- Monthly. See: Employment, Hours and Earnings Cat. 72-002</p><p>- Employer data: mix of administrative (tax data) and employer survey data.</p><p>- Data reported by detailed industry and province. - Number of employees - Hours of work - Weekly and hourly wages and salaries.</p><p>9 (3) Census:</p><p>- Every 5 years (since 1961 every 10 before that back to 1871).</p><p>- Wage and salary income, occupation and industry employment.</p><p>- Good personal and family characteristic data.</p><p>- Widely used in studies of wage differences and inequality. </p><p>- 2011 results are just being released ("National Household Survey")</p><p>(4) Survey of Labour and Income Dynamics:</p><p>- Predecessor: Survey of Consumer Finances</p><p>- A panel survey: follows same people over time. </p><p>- Annual data on incomes, poverty, inequality: Income in Canada </p><p>- Has a Statistics Canada page (search “Income in Canada”) </p><p>- Some tables with income, poverty data back to 1976. </p><p>(5) Historical Sources for Canada</p><p>Historical Statistics of Canada now online: (http://www.statcan.ca/english/freepub/11-516-XIE/sectiona/toc.htm)</p><p>CANSIM (see above) – has some historical data. </p><p>10 (6) U.S. Data:</p><p>- Data from the U.S. counterparts of the Labour Force Survey (Current Population Survey) and SEPH are reported in:</p><p>Employment and Earnings (paper) U.S. Bureau of Labor Statistics (BLS).</p><p>- BLS website: http://stats.bls.gov/ (data available free)</p><p>- Federal Reserve Economic Data (FRED) website: http://research.stlouisfed.org/fred2/</p><p>- many US and some international data series (electronic)</p><p>(7) International data</p><p>European Union (EUROSTAT): http://epp.eurostat.ec.europa.eu</p><p>International Labor Organization (http://laborsta.ilo.org/)</p><p>OECD (http://stats.oecd.org/)</p><p>Bureau of Labor Statistics: Foreign Labor Stats Page http://stats.bls.gov/fls/home.htm</p><p>11 Real and Nominal Wages </p><p>- In economic models the wage (compensation) variable is usually a measure of the real wage (real compensation).</p><p>Real wage = the wage adjusted for changes in the price level over time. </p><p> e.g., </p><p> labour supply: workers likely care about what their wages will buy, i.e. compared to the prices of consumer goods. </p><p> labour demand: employers care about how the wage paid compares to the price of the product produced.</p><p>Measuring the Real Wage:</p><p>- Nominal wage data: wage in actual dollars</p><p>Retail worker in 1966: $1.00 hour</p><p>Retail worker in 2013: $10.25 hour</p><p>- These figures are not comparable over time.</p><p>- Inflation adjustment required.</p><p>- Real Wage: - nominal wage adjusted for changes in the price level.</p><p>- constant dollar wage, i.e., wage in terms of a base year.</p><p>12 - Calculating the real wage</p><p>(1) Obtain a relevant price index:</p><p>Consumer Price Index (Base year 2002) June 1966 17.5 June 2013 123.0</p><p>- Base year? year in which the index equals 100</p><p>- Prices in 2013 were more than 7 times higher (123/17.5) than in 1966. </p><p>(2) Convert the nominal wage data into CPI Base Year (2002) dollars:</p><p>Real Wage = (Nominal Wage) x (100/Price Index)</p><p>1966 $1.00 x (100/17.5) = $5.71 2013 $10.25 x (100/123.0)= $8.33</p><p>What if you want the real wage in 2013 dollars?</p><p>Real wage in = (Nominal wage) x (Price index in 2013) 2013 dollars (Price index)</p><p>- where the price index has 2002 as its base.</p><p>- so 1966 wage of $1 is worth $7.03 in 2013 dollars ($1x 123.0/17.5)</p><p>13 Measuring Economic Relationships: Ordinary Least Squares Regression </p><p>- References: see Ch. 1, Appendix of Benjamin, Gunderson, Lemieux & Riddell. </p><p>- Concerned with:</p><p>- Measuring the relationship between variables.</p><p>- Testing hypotheses about the measured relationship.</p><p>- Regression and related techniques are widely used in labour economics.</p><p>- Classification of Variables: </p><p>Dependent variable: the variable you are trying to explain.</p><p>Explanatory or independent variables: the variables you are trying to explain the dependent variable with.</p><p>14 Example: Wages and education.</p><p>Say that 12 people are surveyed and each is asked their wage and number of years of education. Say this is the result: </p><p>Person: Wage(W) Years of Education (ED) 1 $12.00 13 2 $24.00 17 3 $11.00 8 4 $15.00 12 5 $13.00 13 6 $20.00 16 7 $9.00 10 8 $10.00 6 9 $13.00 10 10 $15.00 14 11 $8.00 2 12 $9.00 3</p><p>- Scatter plot: plots the 12 observations of W vs. ED</p><p>- Suggests a positive relationship. - How to measure it? </p><p>15 - Linear Regression: assumes a linear relationship between the two variables.</p><p>W = a + b ∙ ED + e Eq. (1)</p><p> a = intercept or constant b = slope measuring the effect of a rise in ED on W</p><p>“a” and “b” are the coefficients or parameters of the regression.</p><p>“e” : error term (relationship is inexact due to measurement error, uncontrolled for variables, etc.)</p><p>- Choose a and b so that (Eq. 1) most closely fits the scatter pattern.</p><p>- Best fit? Method of ordinary least squares (OLS)</p><p>- OLS chooses a and b to minimize the sum of the squared, vertical distances between the fitted line and the data points.</p><p>(actual calculations done with statistical software)</p><p>For the example the best fitting line has: a=4.69, b=0.83</p><p>W = 4.69 + 0.83 x ED</p><p>- Interpreting output:</p><p>- Slope coefficient: an extra year of education raises the wage by 0.83 (83 cents).</p><p>- Intercept: if ED=0 predicted wage is $4.69 </p><p>16 - Statistics commonly included in a regression output:</p><p>(a) Std. error of a, b: a measure of the uncertainty of the estimates. </p><p>The larger it is relative to the size of the coefficient (a or b) the less reliable is that estimate.</p><p>Example: std. error of a = 1.92 std. error of b = .17</p><p>(b) t-statistic: </p><p> t-statistic= (coefficient estimate) (Std. error)</p><p>- tests whether the coefficient estimate differs from 0.</p><p> i.e. tests for the existence of a relationship between the variables.</p><p>Example: t-stat of a = 2.44 t-stat of b = 4.88</p><p>- Rule of thumb (larger samples): </p><p>Absolute value of t > 2.0 relationship is statistically significant.</p><p>Absolute value of t<2.0 relationship not statistically significant.</p><p>- Output is sometimes presented with the t-statistics or std. errors in brackets below or beside the coefficient estimates:</p><p> e.g., W = 4.69 + 0.83 x ED (2.44) (4.88)</p><p>17 - R2 is a measure of goodness of fit.</p><p>- Range 0-1 : near 0 poor fit, near 1 close fit.</p><p>- it measures share of the variation in W that is explained by the estimated equation.</p><p>R2 = .704 , 70.4% of the variation in W (around its mean) is explained.</p><p>- Multiple Regression (more than one explanatory variable):</p><p>- In practice, the value of an economic variable depends on many variables.</p><p>- Multiple regression fits the relationship between a dependent variable (e.g. wage) and several explanatory variables.</p><p> e.g. Wage might depend upon: - Years of education (ED) - Ability (IQ) - Seniority (SEN) - Union status (UNION)</p><p>Multiple regression fits (still linear):</p><p>W = a + b x ED + c x IQ + d x SEN + f x UNION + e</p><p> by choosing: a,b,c,d,f to minimize the sum of squared deviations of the equation from the values of W. </p><p>18 - Importance of multiple regression? </p><p>- Simple version: did the estimate of "b" reflect education or omitted variables that are correlated with education?</p><p> e.g. education vs. ability</p><p>- Muliple regression allows you to isolate the effect of each explanatory variable on the dependent variable. </p><p>Dummy Variables:</p><p>- Dummy variable: has a value of 0 or 1</p><p>- Equals 1 if the observation satisfies a certain condition, 0 if it does not.</p><p>Examples: - Married or not - Woman or Man - Has a university degree or not.</p><p>- Coefficient on a dummy: shows the effect on the dependent variable of satisfying the condition vs. not satisfying it.</p><p>- Sometimes a series of dummy variables describe the same characteristic.</p><p> e.g., age, educational attainment, industry of employment. </p><p>- Say maximum educational attainment can be one of three possibilities and define a dummy variable for each possibility: </p><p>Less than high school LHS=1 (HS=MHS=0) High school HS=1 (LHS=MHS=0) More than high school MHS=1 (LHS=HS=0)</p><p>19 Notice that: LHS+HS+MHS=1 for any given person. </p><p>Say that wages (W) are determined as follows:</p><p>W = a LHS + b HS + c MHS </p><p> substitute: LHS=1-HS-MHS then</p><p>W = a (1-HS-MHS) + b HS + c MHS </p><p> so: W = a + (b-a) HS + (c-a) MHS </p><p>- In this last equation LHS=1 is the default category for educational attainment.</p><p>- Coefficients on HS and MHS are interpreted as the effect on W of being in either HS or MHS rather than the default category (LHS=1). </p><p>- Ordinary least squares is a common statistical method in labour economics. </p><p>- not the only method. </p><p>- output from many other methods can often be interpreted in much the same way as OLS. </p><p>- Handout: Earnings equation table from Krueger (1993) </p><p>- another standard way to present regression output.</p><p>- remember it is just a linear equation! (write out the equation for the example)</p><p>20 SUPPLY AND DEMAND IN LABOUR MARKETS</p><p>- Sources: BGLR, Ch. 1 and Ch. 7 pp. 191-202.</p><p>- Basic model of price and quantity determination.</p><p>Price of labour:</p><p>- wage rate (all compensation)</p><p>- Wages NOT income</p><p>- wage (W): price of labour per hour, per week</p><p>- income: wages and salary income plus all other forms of non-labour income (investment income, transfer income, etc.)</p><p>Income = W x (Time Worked) + Non-labour income</p><p>Measures of the quantity of labour</p><p>- Possible Units? Number of people Hours, weeks of work</p><p>- Time period: day, week, year.</p><p>- Level of “aggregation”? many possible levels of application</p><p>- Specific type of job.</p><p>- Related jobs: e.g - same occupations - same skill level </p><p>21 - Aggregate: - Across many (possibly all) job. - Demographic groups.</p><p>- Level of focus depends upon problem under study.</p><p>Labour supply (LS)</p><p>- The amount of labour time people in the relevant market are willing to work.</p><p>- Economic approach: a person’s labour supply decision reflects a comparison of the costs and benefits of supplying labour. </p><p>- benefit of supplying labour? Pay! - cost? Value of time in other uses. </p><p>- Some key determinants of labour supply:</p><p>- Wage rate</p><p>- probably a positive effect on LS</p><p>- higher pay: work more attractive vs. other uses of time.</p><p>- If pay is high in a particular type of job: people switch from alternative jobs.</p><p>- Wages paid at other jobs: value of time in another job.</p><p>- Tastes/preferences: determines value of non-work time, value of money.</p><p>- Size of the adult population: how many decision-makers?</p><p>- Labour supply curve - (Probably) upward sloping in wage (W)- LS diagram.</p><p>- Changes in values of determinants of LS , other than the wage, shift the LS-curve.</p><p>22 Labour Demand (LD)</p><p>- Amount of labour that employers in the relevant market would like to hire. .</p><p>- Economic approach? Labour demand decision reflects a comparison of the costs and benefits of hiring labour.</p><p>- cost? What the employer must pay the worker. - benefit? Value of the worker’s time to the employer e.g. value of output produced. </p><p>- Some determinants of labour demand:</p><p>- Wage level: - Negatively related to LD.</p><p>- Technology: determines how much labour is needed to produce a given amount of output.</p><p>- Output market conditions, e.g., output price.</p><p>- Cost or price of other inputs.</p><p>- Labour demand curve</p><p>- Downward sloping in wage (W)- LD diagram.</p><p>- Changes in values of other determinants of LD shift the LD-curve. </p><p>23 Labour Market Equilibrium </p><p>- Equilibrium: - values of W (wage) and L (labour) where LS=LD </p><p>- equilibrium? no pressure for W or L to change</p><p>- Call equilibrium wage W* </p><p>- Consider W<W* </p><p>- Excess demand for labour LS<LD </p><p>- labour shortage: employers rationed ; workers have no problems finding jobs </p><p>- Workers: "pay more or I will go elsewhere".</p><p>- Employers: some are willing to pay more rather than do without. </p><p>- Result? Wage rises.</p><p>- Consider W>W* </p><p>- Excess supply of labour LS>LD </p><p>- More job applicants than jobs.</p><p>- Employers: "take less or I'll hire someone else" </p><p>- Workers: some are willing to take less rather than be out of a job</p><p>- Result? Wage falls.</p><p>24 - Is it a “good” outcome? Potentially “efficient”.</p><p>- All jobs created are created because the employer and worker expect to gain i.e. benefits > costs to both decision-makers. </p><p>- Each job match creates a surplus:</p><p>At a given level of L:</p><p>- Height of labour demand curve: maximum some employer in this market would pay for extra L.</p><p>- Height of labour supply curve: minimum some worker needs to be willing to supply extra L.</p><p>- Surplus on a given job?</p><p>- Employer: difference between maximum would pay and the wage. </p><p>- Worker: difference between wage and the minimum they need to be willing to work.</p><p>- All jobs created at supply-demand equilibrium create some surplus for both employers and workers. </p><p>- The supply-demand outcome generates the maximum amount of surplus from this market.</p><p>(add up the surpluses from each job to get total surplus)</p><p>- in this sense the outcome is a good or “efficient” one.</p><p>25 Usefulness of the supply-demand model:</p><p>- Provides a framework for explaining wages and employment:</p><p>- shifts in supply and demand curves change wages and employment. </p><p>- levels of wages and employment reflect values of variables that shift supply and demand curves. </p><p>- Imagine the Canadian labour market as a network of markets: - use it to think about wage structure, job share by skill & occupations.</p><p>Limitations of the Supply-Demand model applied to labour markets:</p><p>- Competition assumed: union sector? few employers? Public sector? - extensions needed! (will look at some of these)</p><p>- No explanation of unemployment: excess supply disappears. - what's missing? Unemployment appears bounded but why doesn't it disappear? What explains fluctuations in unemployment?</p><p>- Wages often seem more rigid than Supply-Demand suggests.</p><p>- treats wages like any other price: adjusts to equate supply and demand.</p><p>- Does the wage play other roles than just equating supply and demand? e.g. incentives, insurance, effects on morale? </p><p>- Are wages locked-in with long-term employment relationships? i.e. is Supply-Demand only appropriate for short-term jobs or entry- level jobs?</p><p>- Assumes away information problems - how do workers and employers find each other? (search models) - sorting and selection problems.</p><p>26 Application: Government Job Creation initiatives</p><p>- Job creation initiatives may involve hiring more public employees or via grants or tax incentives that lead to private businesses expanding.</p><p>- Supply-Demand perspective: both shift labour demand right.</p><p>- size of horizontal shift in labour demand are job openings directly created by the initiative. </p><p>- unless labour supply is perfectly flat actual change in employment is smaller than the horizontal shift in labour demand.</p><p>- actual rise in total employment will be smaller the steeper is labour supply. </p><p>- extreme? - if labour supply is vertical the policy creates no new employment.</p><p>(policy moves fixed labour supply from other jobs into the new jobs created by the initiative: displacement )</p><p>- policy does raise wages if labour supply vertical.</p><p>- what is more likely relatively flat or relatively vertical labour supply?</p><p>Think about:</p><p>- national labour market vs. localized labour market. </p><p>- booming economy vs. depressed economy.</p><p>27 Application: R. Freeman (2006) “Labor Market Imbalances: Shortages, or Surpluses or Fish Stories” (see website)</p><p>- How will the US labor market change over the next two decades? - he adopts a supply-demand framework.</p><p>- Two major factors are often mentioned:</p><p>(1) Demography: aging population and labour force, fewer young entrants, maybe eventually smaller workforce. </p><p>- Will there be shortages? (Supply shifts left especially in market for entry positions)</p><p>- Fewer workers, less output, smaller GDP likely.</p><p>- Is this a big problem?</p><p>- Supply-Demand model: wages will rise in affected markets. - this will eliminate shortages.</p><p>- GDP may be lower but GDP per worker may rise!</p><p>- Freeman doesn’t see this as much of a problem. </p><p>(2) Globalization of the labour market:</p><p>- A number of large countries have entered the world economy in recent years:</p><p>- China, India, former Soviet Union.</p><p>- Previously: little trade between these countries and the rest of the world. </p><p>- Freeman: as if the global labour supply has doubled. </p><p>28 - Effect in US (or Canada): - Shift in labour demand left (some of the goods and services now produced in the new economies instead).</p><p>- Pressure on wages to fall. </p><p>- low-skill workers only? (he thinks not: Russian skill levels, Indian programmers, etc.)</p><p>- But: prices of traded goods and services will fall too. i.e. real wages will fall less. </p><p>- Employment in US? Not likely to fall much (overall labour supply close to vertical?)</p><p>- Freeman thinks (2) not (1) is the bigger issue for the future. </p><p>- Note: simple, some insights, uses only supply-demand.</p><p>- Later section on labour demand: Katz and Murphy explanation of skilled- unskilled wage differentials is also an application of supply-demand. </p><p>29 ("race between education (supply) and technology (demand)")Appendix: An Algebraic Example of Supply and Demand</p><p>LS = labour supply POP = population W= wage rate LD= labour demand ISPG = measure of income support program generosity PIND = output price index PK = price of physical capital </p><p>- Variables whose values are determined in this market (endogenous): W, LS , LD</p><p>- Variables whose values are taken as given, i.e. determined outside this market (exogenous): POP, ISPG, PIND, PK</p><p>Say that these are the estimated Supply and Demand equations: </p><p>Labour supply: </p><p>LS = 400 + 25 W + 1.0 POP – 10 ISPG </p><p>- POP, ISPG shift the labour supply curve, i.e. more POP more supply, more generous income support (↑ISPG) less supply. </p><p>Labour demand: </p><p>LD = 500 – 75 W + 30 PIND + 20 PK</p><p>- PIND and PK shift the labour demand curve: higher output prices (↑PIND) more demand, higher price of capital (↑PK) more demand. </p><p>Equilibrium: LS = LD (= L call L the equilibrium quantity.)</p><p>400 + 25 W + 1.0 POP – 10 ISPG = 500 – 75 W + 30 PIND + 20 PK</p><p>Solve for the value of W (that equates supply and demand): </p><p>W = (100 + 30 PIND + 20 PK – 1.0 POP +10 ISPG ) / 100</p><p>30 To get the equilibrium quantity of labour substitute the solution for W into either the labour supply or labour demand equation (doesn’t matter which since LS = LD at this wage):</p><p>L = 400 + 25 W + 1.0 POP – 10 ISPG = 400 + 25 x {(100 + 30 PIND + 20 PK – 1.0 POP +10 ISPG ) / 100 } + .0 POP – 10 ISPG = 425 + 7.5 PIND + 5 PK + 0.75 POP - 7.5 ISPG </p><p>Note: - The equilibrium levels of W and L depend on the shift variables (POP, ISPG, PIND, PK).</p><p>- rise in POP or fall in ISPG shift the supply curve right – in diagram this will raise L and lower W (the same is true in the equations for equilibrium W and L) ;</p><p>- rise in PK or rise in PIND shift the labour demand curve right: in a diagram this would raise the equilibrium W and L (same is true in the equations for equilibrium PIND and PK).</p><p>31</p>