8 The Labour Market, Wages, and Unemployment Flashcards
Define unemployment rate
The fraction of the labour force that is unemployed.
Equation for unemployment rate
Unemployment rate = number of unemployed/size of the labour force
Two key principles of unemployment
- Even at the best of times, many workers are losing jobs while many others are finding new ones.
- The most of the total weeks of lost work are accounted for by people who are unemployed for a long period of time.
Basic labour market supply and demand model
Wage on y-axis, level of employment on x-axis.
The intersection between supply and demand also determine the employment-population ratio (if population N is fixed, the ratio is L/N.
What would happen to labour supply if the government introduced an income tax on workers of τ?
Initially, the firm continues to pay a wage w but the worker only keeps (1-τ)w.
Then, labour supply shifts upwards by τ (less willing to supply their time for less returns), intersecting labour demand at a new quantity L’, which means the wage the firm has to pay increases to w’. It can be assumed that this would decrease the employment-population ratio.
What would happen to labour demand if the price of oil rose suddenly?
+ diagram
To cut costs, firms would be less willing to employ labour, which would shift demand downward.
A new equilibrium is found at wage w’ and employment L’.
What would happen to labour demand if the price of oil rose suddenly?
+ diagram
Assume wage rigidity.
Wages are known to be “sticky” and are not as flexible as other factors of production.
Hence, despite a fall in demand, they will stay at their previous level.
Define natural rate of unemployment
The rate that would prevail if the economy was in neither a boom nor a recession.
Define cyclical unemployment
The difference between the actual rate and natural rate, associated with the business cycle and short-run fluctuations.
Define frictional unemployment
Inevitable unemployment resulting when workers are changing jobs in a dynamic economy.
Define structural unemployment
Unemployment resulting from the labour market institutions that match up workers and firms. E.g. firing and hiring costs, unemployment benefits and minimum wages.
Equation for actual unemployment. Which parts equate to the natural rate?
Actual unemployment = frictional + structural + cyclical
Natural rate of unemployment = frictional + structural (independent of business cycle)
What is the equations used in the bathtub model (initially)?
When do we say employment has reached a steady-state? Equation?
Equation for unemployment rate
Implications of the unemployment rate on policy on the natural rate of unemployment
Only way to alter NRU:
Change the job finding rate (schemes like job centre)
Change the job separation rate (labour protection laws)
Although, they can have unintended consequences, e.g., firms being reluctant to hire if they cannot fire.
Factors affecting job separation and matching
(6)
What does present discounted value tell us?
The current value of something in the future, taking into account interest rates.
Present discounted value equation
Recurring payments pdv equation
You win the lottery, you get the prize of $1,000 in 5 years, the interest rate is 10%, what is the pdv?
$621
Yearly $100 payments for 20 years, interest rate is 10%, what is the pdv?
How can we show the rising return to education diagrammatically?
Define skill-biased technical change
New technologies (such as the computers and the Internet) that may disproportionately improve the productivity of highly skilled workers.
What is another main explanation for rising was inequality?
Globalisation.
Before: large supply of educated workers in the US → low wages relatively
After: rest of the world had less educated workers → wages rise
