20-11-2023

The Labour Market

In-class Group Presentation for Policy Makers
Errol D’Souza
Class should self select into groups.

• 11 to 12 persons per group.

• Each group presents for 15 minutes

• Group membership and topic chosen must be

indicated to Shreya ─ on a first in basis.

Email: errol@iima.ac.in

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Topics (1) Topics (2)

1) GDP of India: trends and outlook

• https://www.rbi.org.in/Scripts/BimonthlyPublications.aspx?head=Survey%20of%20Professional%20Forecasters%20-%20Bi-
monthly
6) Labor Market in India
• https://www2.deloitte.com/us/en/insights/economy/asia-pacific/india-economic-outlook.html • https://rbi.org.in/scripts/PublicationsView.aspx?Id=20647
• https://pib.gov.in/PressReleasePage.aspx?PRID=1855783
2) Economic Statistics at the State level
• https://www.rbi.org.in/Scripts/StateStatisticsFinances.aspx
7) Indian Economy at different sectors
3) India Industry Performance (e.g., Industrial Outlook – https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=1245

Survey (IOS))
• https://www.rbi.org.in/Scripts/QuarterlyPublications.aspx?head=Quarterly%20Industrial%20Outlook%20Survey 8) Banking Sector (money and credit, liquidity
• https://www.rbi.org.in/Scripts/QuarterlyPublications.aspx?head=Quarterly%20Order%20Books,%20Inventories%20and%20Capacity%20Ut
ilisation%20Survey conditions, …)
– https://www.rbi.org.in/Scripts/AnnualPublications.aspx?head=Trend%20and%20Progress%20of%20Ba
4) Inflation Expectations: Inflation Expectation Survey of nking%20in%20India

Households (IESH) – https://www.rbi.org.in/Scripts/HalfYearlyPublications.aspx?head=Monetary%20Policy%20Report

• https://www.rbi.org.in/Scripts/QuarterlyPublications.aspx?head=Inflation%20Expectations%20Survey%20of%20Households
• https://www.rbi.org.in/Scripts/HalfYearlyPublications.aspx?head=Monetary%20Policy%20Report 9) Financial stability in India
5) Consumption Demand (e.g., Consumer Confidence • https://www.rbi.org.in/Scripts/FsReports.aspx

Survey (CCS)) 10)Fiscal Policy in India (Union Budget)

• https://www.rbi.org.in/Scripts/QuarterlyPublications.aspx?head=Consumer%20Confidence%20Survey
– https://www.pib.gov.in/PressReleasePage.aspx?PRID=1895315
– https://www.indiabudget.gov.in/economicsurvey/doc/eschapter/echap03.pdf

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Errol D’Souza

Topics (3)
11)Open-economy India (trade, exchange rates, …)
– https://m.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1085
– https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1394 Aggregate Demand

12)State of the Global Economy

• https://www.imf.org/en/Publications/WEO/Issues/2023/10/10/world-economic-outlook-october-2023

13)Global Economic and Financial Risks

• https://www.imf.org/en/Publications/GFSR
– https://rbidocs.rbi.org.in/rdocs//PublicationReport/Pdfs/5CHAPTER13F7BC1B353D241828
187E91649DF1584.PDF

14)Fiscal Policy Committee

• https://www.indiabudget.gov.in/doc/frbm1.pdf

15)Monetary Policy Committee

– https://www.rbi.org.in/Scripts/HalfYearlyPublications.aspx?head=Monetary%20Policy%20Report

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Errol D’Souza Errol D’Souza

Interest rate

The aggregate demand curve depicts the relation

between the aggregate quantity of goods M 
LM  
demanded, C + I + G ,and the price level, P  P0 

E
For a given price level the aggregate output that i0
households, firms, and government demand
is where the IS and the LM curves intersect

Suppose that the nominal money supply is M and IS

the initial price level is P0

Real money supply = M / P0 Aggregate Income

Y0

Initial LM curve is LM ( M / P0 )

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Interest rate
If the price level decreases to P1 , the real money
supply shifts the LM curve to the right to M 
LM  
LM ( M / P1 )  P0 
M 
E LM  
Aggregate quantity of output demanded is now Y1 i0  P1 

i1

IS

Aggregate Income
Y0 Y1

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Errol D’Souza i M 
Errol D’Souza

LM  
 P0 
If the price level decreases to P1 , the real money M 
supply shifts the LM curve to the right to LM  
Interest rate

E  P1 
i0
LM ( M / P1 )
i1 F

Aggregate quantity of output demanded is now Y1

IS
Decrease in the price level increases the aggregate Y0 Y1 Aggregate Income
Y
quantity of output demanded from Y0 to Y1 P
Aggregate Price Level

This negative relation between the price level and

P0 E/
aggregate output demanded is shown as the
downward sloping AD curve P1 F/

The aggregate demand curve relates a given price

level to the demand for output and is derived AD

from simultaneous equilibrium in the goods Y0 Y1

Y
Aggregate Income
(IS) and money (LM) markets. Figure 9.1: The Aggregate Demand (AD) Curve

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Why is the AD curve downward sloping? Why is the AD curve downward sloping?

Reduction in price MS /P  Reduction in price MS /P 

MS Md MS Md
 implies extra money balances which are  implies extra money balances which are
P P P P
used to purchase bonds used to purchase bonds

Nominal interest rate 

Consumption ↑ Investment ↑

Output/Income ↑

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Errol D’Souza i M 
Errol D’Souza

LM  
What factors shift the AD curve?  P0 

i1 F
Interest rate

As aggregate demand is determined by the intersection i0

E

of IS and LM, this implies that holding the price

level constant, any factor that causes the IS (G1 )
interaction of the IS curve and the LM curve to IS (G0 )
shift to the right (left) will shift the AD curve to
Y
the right (left) Y0 Y1 Aggregate Income

P
The next two slides depict how (1) an increase in
Aggregate Price Level

government expenditure and (2) an increase

P0 F/
in money supply shift the AD curve E/

AD(G1 )
AD(G0 )
Y
Y0 Y1 Aggregate Income

Figure 9.2: Increase in Government Expenditure

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i M 
Errol D’Souza Errol D’Souza

LM  
 P0 

M 
Table I: Factors that shift the AD Curve
LM  
Interest rate

E  P0  Factor Direction of Shift

i0  

1) An increase in government IS and AD shift to right

i1 F
expenditures
2) Increase in taxes IS and AD shift left
IS
3) Increase in the productivity of capital IS and AD shift right
Y
Y0 Y1 Aggregate Income 4) Increase in expected inflation IS and AD shift right
P 5) Increase in expected future output IS and AD shift right
(rise in permanent income)
Aggregate Price Level

6) Increase in Nominal Money Supply LM and AD shift right

P0 F/
E/ 7) Reduction in real demand for money LM and AD shift right
due to increased use of credit cards
M 
AD 
 P0 
 
M 
AD 
P
 0
Y
Y0 Y1 Aggregate Income

Figure 9.3: Increase in Nominal Money Supply

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The Labour Market Firm’s Objective Function

Produce that level of output that maximizes

profits given by total revenue less total
Labour Demand and Supply costs
pY : Total revenue

wN + p K (r +  )K : Total cost
Max  = pY − wN − p K (r +  )K

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Firm’s Objective Function Wage rate

Max  = pY − wN − p K (r +  )K

In the short run, K = K

w
Also firm operates in competitive markets.

Max  = p Y − w N − p K (r +  )K pMPN

= pF (K , N ) − wN − p (r +  )K
K
Labour Demand

Set the first order condition equal to zero, F (K , N ) N D*

ND
p −w=0
F (K , N ) N
or, p (MPN ) = w or, p =w Figure 7.1: Demand for Labour
N

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Labour Supply: Labour Supply:

Individuals choose between labour and leisure whilst

Preferences: U = U (C , l )
• allocating time between labour supply and
leisure activities
Time Constraint: H = N S + l
• spending income from all sources on
consumption Income
Preferences: U = U (C , l )
Labour Income Non-Labour Income
Time Constraint: H = NS +l w S
N V
p

w S
Budget Constraint: C = N +V
p
C : expenditure on consumption goods

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Insert time constraint N = H − l into income constraint

S
Consumption w w
H +V = C + l
p p
w S
C= N +V
p All H hours devoted to leisure
w
= (H − l ) + V Then, C = V
p

w w
Hence, H +V = C + l
p p

We employ this to draw the budget constraint - V E

Hours of leisure
O
H

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Consumption w w Consumption
H +V = C + l Joining the two points where
p p
l = H and l = 0 gives the
w If leisure is not taken, l = 0 w budget constraint
C= H +V H +V
p p
w
C= H +V
p
w
slope =
p

V E V E

Hours of leisure Hours of leisure

O O
H H
Figure 7.2: Budget Line of Individual

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Individual’s Objective: Individual’s Objective:

Max U (C , l ) Max U (C , l )
w S w S
such that C = N + V such that C = N +V
p p

MU l w
=
MU C p

Slope Slope
of of
Indifference Budget
Curve line

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Consumption In equilibrium the individual

offers N S * hours of labour What if the wage
w services increases to w / ? Panel B

w/
H +V H +V
p p

R
w
H +V
p
P
U (C, l ) = U

V E E

S*
N
l
Hours of leisure NS 
H
Figure 7.3: Optimal Labour Supply Figure 7.4: Effects of a wage increase

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Panel A
In this case, unlike the Panel B

w/
w/
H +V previous diagram, the w/
H +V H +V
p p p
supply of labour decreases
R R R
w w w
H +V H +V H +V
p p p
P P
P

E
E E

l l l
NS  NS  NS 

Figure 7.4: Effects of a wage increase Figure 7.4: Effects of a wage increase

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Substitution Effect Income Effect Substitution Effect

Income effect – at high dominates dominates dominates
wages individuals want Panel B Panel A Panel B
to enjoy more leisure w/ w/ w/
H +V H +V H +V
and move from P to Q p p p

R R R
Substitution effect – w w
H +V
Q
w
H +V Q H +V Q
At high wages leisure p p
P p
time is more expensive P P
and the individual
finds it difficult to E
E
E
afford to take time off
from work: move from
l l l
Q to R NS  NS  NS 

Figure 7.4: Effects of a wage increase Figure 7.4: Effects of a wage increase

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MU l w w
Substitution Effect Nominal wage rate =  MRSC ,l =
w MU C p p
dominates
We will assume Panel B

from now on w/
H +V p(MRSC ,l )
p
that the
substitution R
effect dominates w
H +V Q
p
P

Hours of Labour, N S
l
N  S

Figure 7.5: Labour Supply Schedule

Figure 7.4: Effects of a wage increase

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Putting Demand for labour equal Nominal wage What is the effect of increasing price
Nominal wage rate
w to Supply of labour on the labour market?
w Panel A

p(MRSC ,l ) p1 (MRSC ,l ) Price increases from

p0 to p1
p0 (MRSC ,l )

E/ No change in labour
E demand or supply
E

p1MPN
pMPN p0 MPN
Employment
N N
ND = NS ND = NS Employment

Figure 7.6: Labour Market Equilibrium

Figure 7.7: Effect of Price Increase

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w
Nominal wage Real wage MRSC ,l =
w p
w An increase in the price causes an excess demand
Panel A p Panel B
for labour given by N D / − N S /
p1 (MRSC ,l ) MRSC ,l
This bids up the nominal wage to the point where
p0 (MRSC ,l ) demand equals supply. In equilibrium,
E/ w1 w0
= p1 − p0 w1 − w0
p1 p0 =
w0 p0 w0
E p1
MPN the percentage increase in the wage equals the
p1MPN percentage increase in the price and the
p0 MPN real wage is constant, or,
w1 w0
N / /
N =
ND = NS Employment NS ND Employment p1 p0
ND = NS
As the price increases what happens to the Aggregate
Figure 7.7: Effect of Price Increase Supply of output?

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Nominal wage p1 (MRSC ,l ) Errol D’Souza Nominal wage p1 (MRSC ,l ) Price

Errol D’Souza

w w p
p0 (MRSC ,l ) p0 (MRSC ,l )
Panel A Panel A Panel D
AS

p1
Classical
Supply
p0
Curve

p1MPN p1MPN
Output
p0 MPN p0 MPN
N N Y
ND = NS Employment ND = NS Employment
Y Y
From the production Y Y
Panel B
Y = F (K , N )
function we get the Panel B
Y = F (K , N )
Panel C

output produced
from the labour hired

Next we relate price

and output produced
450 Y
N N
N N
Figure 7.8: Aggregate Supply (Real Wage)

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