Chapter 7 Flashcards
A given unemployment rate may reflect either
- An ACTIVE labor market: Many separations and hires, i.e, many workers entering and exiting unemployment
- A SCLEROTIC labor market: Few separations and hires, and a stagnant unemployment pool
three striking features of the QLFS
- shows the average monthly flows.
- Separations include quits and layoffs.
- The average duration of unemployment — the length of time people spend unemployed— in South Africa is 8 to 9 years!
Unemployment Rates in the BRICS Countries
South Africa has the highest unemployment rate among the BRICS nations, which is four times higher than Brazil and Russia. Although the government is addressing the issue, unemployment remains a challenge and affects both employed and unemployed workers
Relationship between Unemployment Rate and Proportion of Unemployed Workers Finding Jobs
Higher unemployment is associated with lower proportions of unemployed workers finding jobs.
Relationship between Unemployment Rate and Separation Rate
The separation rate from employment is strongly related to the official unemployment rate, with higher unemployment leading to higher separation rates and increased likelihood of job loss for employed workers.
When unemployment is high, workers are worse off in two ways:
- Employed workers face a higher probability of losing their job.
- Unemployed workers face a lower probability of finding a job; or they can expect to remain unemployed for a longer time.
Wage Determination
- Sometimes wages are set by collective bargaining — a bargaining between unions and firms.
- In South Africa, 1/3 worker in formal employment is affiliated to an union.
- The higher the skills needed to do the job, the more likely there is to be bargaining between employers and individual employees.
- Collective bargaining plays an important role in South Africa, Japan and most European countries.
facts about wage determination
- Workers are typically paid a wage exceeding their reservation wage — the wage that would make them indifferent between working or being unemployed.
- Wages typically depends on labor-market conditions: The lower the unemployment rate, the higher the wages.
Workers’ bargaining power depends on
- How costly for the firm to find other workers
- How hard for workers to find another job if they were to leave the firm
Efficiency wages
- Efficiency wage theories link the productivity of the efficiency of workers to the wage they are paid.
- Firms may want to pay a wage above the reservation wage in order to decrease workers’ turnover and increase productivity.
- Firms that see employee morale and commitment as essential to the quality of workers’ work will pay more than those whose activities are routine.
- When unemployment is low, firms that want to avoid an increase in quits will increase wages to induce workers to stay with the firms.
The aggregate nominal wage W depends on:
- the expected price level Pe
- the unemployment rate u
- a catch-all variable z
Expected price level
- Both workers and firms care about real wages (W/P), not nominal wages.
- The nominal wage depends on the expected price level (rather than the actual price level) because when nominal wages are set, the relevant price levels are not yet known.
variable Z examples
- UNEMPLOYMENT INSURANCE as the payment of unemployment benefits to workers who lose their jobs
- EMPLOYMENT PROTECTION makes it more expensive for firms to lay off workers
Price Determination
- The prices set by firms depends on their costs, which in turn depends on the nature of the production function
- The production function is the relation between the inputs used in production and the quantity of output produced, and on the prices of these inputs
price-setting relation
Price-setting decisions determine the real wage paid by firms.
