[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

In macroeconomics, we stress aggregates—the economy’s total output, rather than
the output of individual industries or types of goods and services. We examine total
employment, and average wages. In looking at these aggregates, we ignore the richness
of the microeconomic detail that captures the thousands of different products
that the economy produces and the many characteristics that differentiate one
worker from another. The basic premise of macroeconomics is that we can learn a
great deal about the aggregates, as well as gain insights into many important policy
issues, without inquiring into such details.
To bring our macroeconomic perspective into focus, we discuss each of the three
major markets—labor, product, and financial capital—in turn. We then describe
how real wages and the real interest rate play critical roles in balancing supply and
demand in these markets so that the economy can maintain full employment.
The Labor Market
Full employment in the labor market occurs when the demand for labor equals the
supply of labor. No qualified worker who wishes to get a job at the going market
wage will fail to get one. No firm that wants to hire a worker at the going wage will
fail to find a qualified employee. Adjustments in wages ensure that this will occur. Of
course, when economists say that there is full employment of the labor force—that
the demand for labor is equal to the supply of labor—there are still always some
workers who will be unemployed. As we learned in Chapter 22, this unemployment
occurs as workers transition between jobs and new entrants to the labor force search
for positions, as mismatches occur between the location or skill requirements of
new jobs and those of the unemployed, and as unemployment in some sectors
fluctuates to reflect normal seasonal patterns. These sources of unemployment are
called frictional, structural, and seasonal unemployment. Thus, even at full employment,
the unemployment rate will not be zero.
In understanding how the economy reaches full employment, the relationship
between nominal wages (w) and the price level (P) is very important. Workers earn
wages, and they use those wages to buy goods and services. What matters to workers
is how much their wages will buy. If a worker’s wage goes from $6 per hour to $12
per hour but at the same time the prices of all the things she buys also double, the
real value of her wage has not changed. What workers care about is their real wage,
the nominal wage corrected for changes in the price level. Firms also will be concerned
with the real wage, since what will matter to them is the cost of labor (the
nominal wage) relative to the price firms receive for their output (the price level).
The real wage is obtained by dividing the nominal wage by the price level, or
w/P. The real wage provides a measure of the purchasing power of wages. Average
nominal wages, the price level, and average real wages since 1965 are shown in Figure
24.1. As the figure illustrates, nominal wages have risen significantly over this period.
But the prices of the goods and services that workers buy have also risen. When we
correct for the increases in the price level, the real wage actually declined during
the first half of the 1990s and by 2002 was little changed from its value in 1980.
THE LABOR MARKET ∂ 527