ABSTRACT
As it functions on a daily basis, the labor market of the US economy produces outcomes with respect to wages, hours of work, employment, unemployment, productivity, and many other variables of public interest. In this chapter, some of the most important of these labor-market trends and developments will be presented with a view to integrating them with the economic expansions and contractions in postwar business-cycle activity. In particular, the welfare of labor-force participants varies considerably but not uniformly during business cycles. When an economy suffers through a recession, output falls almost by definition, but we need to know how the derived demand for labor services reacts to this shock. Firms rely mainly on reducing the number of employees rather than the hours per worker, even though the former process would be much more egalitarian in its welfare effects. Also, despite elaborate attempts to prove that everyone is making optimal decisions in the labor market, there is extensive evidence of involuntary unemployment and job vacancies existing side by side. Moreover, the data show that those who remain employed during a recession are better off because of higher wages and constant hours. Finally, the popular appeal of Okun’s Law derives from the belief that there are wide-spread benefits to a reduction in the unemployment rate through productivity gains, but this obscures the even more compelling law of diminishing returns to a factor. Hence, a downward-sloping and relatively stable labor-demand curve establishes a negative relationship between employment and wages and a positive relationship between unemployment and the welfare of the large majority of those in the labor force who have jobs and are secure in their employment.
