Labor Force, Productivity, and Aggregate Supply & Demand
The Labor Force
The labor force in an economy is defined as the total number of workers who are available for work. Basically, all males and females, normally 15-16 years and over, who can contribute to the production of goods and services. As well as actually employed people, it also includes those unemployed, as these people are available for work.
The size of the labor force depends on factors such as:
- The total size of the population of working age
- The number of people who remain in full-time education after leaving secondary school
- The normal retirement age for males and females
- The number of women who join the labor force on a full-or part-time basis
An essential measure is the labor force participation rate. This refers to the percentage of the total population of working age who are actually classified as being part of the labor force. A lower participation rate usually indicates that an economy has a high participation rate in higher education and a relatively large number of people opting for early retirement.
Size of Labor Force in Developing Economies
- Contrary to developed economies, birth rates exceed death rates in developing economies. Consequently, the total population, and hence the labor force in these countries, is increasing.
- Dependency ratios in most developing economies are high as a result of high birth rates and an increasing life expectancy. Consequently, there are more economically inactive people than those who constitute the labor force.
- Many developing economies have experienced a rapid growth in their urban populations, as there has been significant migration from rural areas. This increasing urbanization has made it difficult for these economies to provide jobs to meet the needs and aspirations of its labor force.
Labor Productivity
Productivity refers to the quantity of goods and services that a worker is able to produce in a particular period of time. (Should not be confused with production, which is an aggregate measure not directly related to a particular input)
Labor is not a uniform resource. Variations in the productivity of labor depend on the education, training, experience, and skills of the workforce.
Clearly, when a skilled workforce is equipped with large stocks of capital and technological means, productivity is invariably higher than when this is not the case. Although the labor force in an economy is a key source, the output it is able to produce is, to a large extent, directly related to the technical knowledge, skills, and motivation of that workforce.
Aggregate Demand and Aggregate Supply
Aggregate Demand
Aggregate demand is the total spending on an economy’s goods and services in a given time period. It consists of four components: Consumption, investment, government spending, and net exports = C+I+G+ (exports-imports)
Why the aggregate demand slopes down? It will slope down because a lower price level will:
- Force the net exports to increase, because there will be more exports than imports as the prices will be lower, and therefore foreign and domestic consumers will demand more. (If prices are lower in a country, they will become price competitive in the world market. Moreover, people from that country won’t feel the necessity to import because the prices in their own country are lower.)
- Increase the purchasing power of households with savings because their wealth will enable them to buy more. (They will have a lot of money, and as prices are lower, and everything is cheaper, they are able to buy more with the same amount of money)
- If the interest rates are reduced, it will stimulate and increase demand for goods such as TVs or cars, which are usually bought on credit.
Why would aggregate demand increase?
- An increase in consumption (e.g., due to lower taxes)
- An increase in investment (e.g., due to lower interest rates)
- An increase in government spending
- An increase in exports (e.g., due to a lower exchange rate)
- A fall in imports (e.g., due to quotas)
Aggregate Supply
Aggregate supply is the total output that firms are willing and able to supply at different price levels in a given period of time.
Factors that will shift aggregate supply to the right:
- Lower money wages
- Cheaper imported materials
- A greater population of working age
- More capital
- Better technology
This is an example of a shift inwards of a SHORT RUN AGGREGATE SUPPLY (SRAS).
e.g.
If money wages increase, firms will want to hire fewer people, or to produce less because it is more expensive. This is why it shifts to the left.
Moreover, if the costs fell, the shift will be to the right because firms will want to supply more.
Supply-Side Policies to Increase Aggregate Supply
Policies for the Labor Market
- Increased minimum wages may encourage people to work.
- More information on jobs available
- Education and training opportunities
- Changing or reducing taxes: (the government has to ensure that people are not worse-off working, e.g., because they now have to pay more taxes)
Policies for the Capital Goods Market
- Providing a stable business environment that encourages investment and enables firms to generate profit
- Encouraging the financial system to provide funds for investment
Policies for the Goods Market
- Encourage free trade
- Encourage small business start-ups
- Privatization
Balance of Payments
BoP: A record of all the transactions that take place between residents of their country and all other countries in the rest of the world.
- Every debit entry (+) is matched by a debit entry (-)
The Current Account
Trade in goods.
Covers items that can be touched, weighed, or counted as they are traded. (Visible goods)
The difference between visible exports and imports = Balance of trade.
Trade in services.
Covers imports and exports of services (Invisible)
The difference in trade of these goods is known as the invisible balance.
Income account:
Made up of income from investments abroad.
Covers any earnings from foreign investments and financial assets and liabilities.
The Capital Account
Records transactions which involve the transfer of ownership of fixed assets and the acquisition or disposal of non-financial assets. E.g., Land purchase or sold by a foreign embassy.
The Financial Account
Records the forms of investments overseas and the inward flow of investment from foreign residents.
This flow gives rise to flows of investment income in the current account.
Net errors and omissions is a balancing item.