Chapter 6 Flashcards
what is the natural rate of unemployment in the efficiency wage model? whats the expression?
level of unemployment which is where firms dont have the incentive to over/ under bid in wage setting
W^d = Wu^n = a/b
what can an increase in aggregate demand do? what will these lead to?
since the nominal wage rigid an increase in AD increases employment in the SR but as unemployment falls below the natural rate there will be high wage and inflation increases
so CB increases IR which brings AD back down and unemployment up
what does the EW model say can increase unemployment?
high hiring costs as firms increase wages to reduce turnover costs
high on the job search and high exogenous quitting of jobs into unemployment
increasing turnover increases unemployment
whats the wage setting equation relating to desired wage, unemployment and average wage level?
W^d = (1 + a - bu)W
a and b are constants and positive
setting W^d = w helps find the natural rate of unemployment
what are the implications of minimum wage?
raises unemployment among low skilled workers made worse by skill-biased technical change
what temporary shocks have persistent effects on unemployment?
workers who lose job in downturn lose skills
wages are set in negotiations between firms and unions represent the insiders
what is the exit rate from unemployment? How does this give us the expected duration?
x = lambda f + v
duration is the limit of the sum:
1 + (1-f) x 1 + (1-f)^2 1 + (1-f)^3 = 1/x…
what 3 factors does the duration of unemployment depend on?
- rate of unemployment
- rate of seperation
- exit rate from the labour force
whats the dynamic wage equation showing desired wage overtime? whats it say?
change in desired wage/ Wt-1 = change in wage t/ Wt-1 - b(ut-u^n)
says if unemployment is higher than its natural level then firms want to raise wages less than the average wage increase
how can we define the natural rate of employment?
N^n = (1-u^n) L
what is the matching process and why do unemployed workers play an important role?
trying to find good matches between workers and jobs - heterogenous
if unemployed workers search less intensively with less ability or they are more fussy then unemployment will have a weaker effect on wage pressure = U^n
Explain wage bargaining and the role of unions. How may co-ordination of wage bargaining help?
unions with strong bargaining power put upward pressure on wages and to compensate LR unemployment must increase.
The real wage increases in the SR but in the LR there is required return on capital so real wage cant increase
it helps avoid a situation where competing wage demands lead to a low LR level of employment
what is the labour force? what is unemployment as a share of this? what is the natural rate?
L = N + U
u = U/L
the natural rate u^n is the LR equilbrium of unemployment
what is the job finding rate in a simple model of turnover? when does it increase/decrease?
f approx = s/ lambdau + s
lambda measures the willingness and ability of unemployed workers to compete for jobs
it increases if turnover is higher and decreases with a higher unemployment rate
what do firms have to do while setting a wage and why?
firms have to balance the cost savings from reduced wages against the increased risk of losing workers as turnover is costly for firms
they may not reduce wage even if unemployment is high
how to calculate job openings per period? what about total no. job seekers?
Ns + NZf
Seekers = U + Ns + NZ
NZ is if they leave because they find a new job
what does f stand for?
f is the probability of finding a new job
