Chapter 4 Flashcards
What is the labour market?
It is the market that allocates workers to jobs and coordinates employment decision
Who is a part of the Adult Working Population?
Those who are over 16 years of age and are in the labour force and not in the labour force
What is the equation for the Adult Working Population (AWP)?
AWP = LF + NLF
Who makes up the labor force?
It consists of those who are over 16 years of age who are employed and those who are unemployed but are actively seeking work or waiting to be recalled from layoff
What is the equation for the Labor Force (LF)?
LF = E + U
Those who leave the labor force are leaving by what means?
Through retiring or by dropping out
What are the two ways a person can enter the labour force?
- Those who have never worked are entering the labor force
- Those who have dropped out are reentering the labor force
How can employed workers become unemployed?
By quitting voluntarily or by being laid off
How can unemployed workers obtain employment?
They can obtain employment by being newly hired or by being recalled to a job from layoff
What is the unemployment rate?
It is the ratio of those unemployed to those in the labor force
When does the unemployment rate tend to be low/high?
When the labor market is tight and high when the labor market is loose
How have workers and employers adapted to changes in the labor market?
They have adapted through the acquisition of new skills and technology
What is the wage rate?
It is the price of labor that equilibrates the labor market
What are nominal wages?
They are the wages that workers get paid per hour in current dollars
What are real wages?
They are the nominal wages divided by some measure of prices
What are the issues with using the CPI as a measure of changes in the purchasing power of workers?
Consumers change the bundle of goods and services and they buy over time in response to changes in prices but not reflected in the bundle with which the CPI is computed
The quality of goods and services change over time but the CPI does not account for changes in quality
What do wages refer to?
They refer to the payment for a unit of time/hour worked
What do earnings refer to?
They refer to wages multiplied by the number of time units/hours worked
What can employee benefits be?
They can either be payments in kind or deferred
What does total compensation consist of?
It consists of earnings plus employee benefits
What is income received by a family?
Income received by a family includes earnings, benefits, and unearned income which includes dividends or interest received on investment and government transfer payments
Where must firms operate in order to be successful?
They must operate in the labour market, the capital market, and the product market
What do firms combine in order to produce goods and services that are sold in the product market?
Labour (K) and Capital (K)
What does the total output (Q) and the mix of inputs (L and K) depend on?
It depends on output or product demand
The amount of L and K acquired at given prices: Wages (W) for L and rental cost or price for K
Choice of technology (T) available to firms
What will an increase in wage lead to?
A scale or output effect: the reduction in the scale of production or output due to the reduction in employment
A substitution effect: capital is substituted for labor in the production process
What will happen if the demand for the product increases (holding other factors constant)?
It will lead to scale or output effect as firms try maximize profits thus leading to an increase in labor demand
Where does the labor demand curve shift when the demand for the product increases?
It shifts to the right
When would more K be used in the production process?
When the the supply of capital changed and rK or pK fell by 50%, but other factors remained unchanged
What are the two opposite effects for LD when the supply of capital change and rK or pK fell by 50%, but other factors remained unchanged?
If the scale effect dominates, more workers will be required as well, thus LD will shift to the right
If the substitution effect dominates as firms adopt more capital-intensive technologies in response to cheaper capital, LD will shift to the left
What are the three levels in which the demand for labor can be analyzed?
Firm level – to analyze the demand for labor by a particular firm, we see how an increase in the wage rate of machinists affects their level of employment by a particular aircraft manufacturer.
Industry level – to analyze the effect of this wage increase on the employment of machinists in the entire aircraft industry, we utilize an industry demand curve.
Market – to see how the wage increase affects the entire labor market for machinists in all industries in which they are used, we use a market demand curve.
What happens to the demand for labor in the short run?
Employers find it difficult to substitute capital for labor and this is also true for product demand
When the labor market for a certain career is perfectly competitive and no firm will offer a wage that is above or below what the market wage indicates who is the wage taker?
The firms
What does the wage rate that prevails in the labor market depend on?
It depends on labor demand and labor supply regardless of whether labor unions and/or nonmarket factors are involved
What happens to the equilibrium wage when labor demand shifts to the right?
It rises
What happens to the equilibrium wage when labor supply shifts to the left?
It rises
What happens to the equilibrium wage when labor demand or labor supply shifts to the left?
The market wage will fall from the equilibrium wage to the new equilibrium wage
What happens when labor supply shifts tot he left and the labor demand shifts to the righ?
The market wage will rise dramatically with a net employment increase
What are some nonmarket barriers that affect the labor market?
Government programs or laws such as minimum wage laws usually serve to keep wages above market levels, which could result in widespread unemployment
Customs or institutions (labor unions) also constrain the choices of individuals and firms
Which workers are considered to be overpaid?
Workers whose wages are higher than the market-clearing wage
Which workers are considered to be underpaid?
Workers whose wages are below the market-clearing wage
What are economic rents?
They are the difference between the wage workers are actually paid on a job and the workers’ reservation wages
What is the labor supply curve of any occupation or industry?
It is a schedule of reservation wages that indicates the labor forthcoming at each wage level - each worker potentially has a different reservation wage, hence rents will differ for each
What is the reservation wage of a worker?
It is the wage below which the worker would refuse (or quit) the job in question
