Chapter 7 - Labour Market Flashcards
The labor market equilibrium is when:
the supply of labour = demand of labour
In labour market equilibrium, are all people employed and all vacancies filled? Why/why not?
No, because jobs and workers are heterogeneous - jobs differ in qualifications/skills required/locations, etc
What are the 4 types of unemployment?
Frictional, structural, voluntary, and involuntary
The number of workers firms want to employ depends on:
- Cost of employing and additional worker (real wage)
- Benefit of employing an additional worker (MPL)
- Profit maximization (MPL > Real wage)
- Labour demand curve
What is MPL?
MPL = the marginal product of labour - the extra output a worker produces
What is real wage?
The amount in terms of goods and services the firm has to pay to hire
What happens to the value of production and profits when MPL > real wage?
Value of production increases and profit is maximized
How can firms increase profitability when MPL > the market determined real wage?
Hiring more workers
What is the equation for MPL?
MPL = W/P
W = nominal wage
P = profits
What does the labor demand curve show?
The amount of labour the firm would like to employ at any given wage
What does it mean if MPL is left of point A?
MPL exceeds the market-determined real wage, and firm can increase profit by hiring more workers
What does it mean if MPL is right of point A?
MPL is lower than real wage and the firm should not hire more workers
What does Lda represent on the labor demand curve?
The amount of labour the maximizes profits
Can firms effect real wages?
No, real wage is market determined (subject to competition)
What should firms do in terms of hiring when MPL = real wage?
Stop hiring
When number of workers go up, what happens to MPL?
MPL goes down, lowering the benefit of each new worker
What happens when real wage increases?
MPL decreases, lower than new real wage, firms reduce demand for labor to where the MPL increases to the new real wage
True or false: real wages are high and amount of capital vs workers is large in poor countries
Fales: This is true for rich countries, the opposite is true for poor countries
Poor countries have low real wages and more people working than machines because when real wages are low, it is cheaper to use people for labour than buying machines.
When real wages are high, more cost effective to buy machines instead of pay more people
What does the labour demand curve represent/show?
Represents relationship between real wage and number of workers firms would like to employ, and shows how changes in real wage affect number of workers firms want to hire due to other factors
What causes movement along the labor demand curve?
Change in real wage
What causes shifts of the labour demand curve?
Changes in all other variables beside real wage i.e. current and expected productivity, cost of hiring/firing, expected economic growth, expected real wages, payroll taxes
When real wages go up, labour demand goes:
down
When firms are demanding less labour, real wages go:
down
When firms are demanding more labour, real wages go:
up
Real wage is the relative price of ___ in terms of ___ and the price of ___ in terms of ____
consumption ; leisure ; leisure ; consumption
Are consumption and leisure considered goods?
Yes, increases utility
What is the substitution affect from higher real wage?
Choose less of relatively higher price (leisure) - reduce leisure, work more
Choose more of relatively lower price (consumption) - increase consumption
What is the income effect from higher real wage?
Working same number of hours = more consumption so prefer more leisure, work less
When is the substitution effect stronger than the income effect from real wage increase?
When increased wage is temporary
When is income effect stronger than the substitution effect from real wage increase?
When wage increase is permanent
What is the main effect of a change in the real wage on the labour supply curve?
Changes in hours and number of workers
When real wage goes up, labour supply goes:
Up
What does the labour supply curve show?
Shows real wage and labour supply relationship / how the change in real wage affects the number of workers/hours
What shifts the labour supply curve?
Wealth and tax rates
What causes the labour supply curve to shift left?
Increased wealth
How does a lower tax rate affect the labor supply for jobs where hours can be chosen? Does the marginal or average tax rate apply?
Has both income and substitution effects, lower tax rate = higher after tax income and consumption, but effect on labour supply depends on effects of income and substitution effects; based on marginal tax rate - worker decides whether to give up hour of leisure for hour of work
How does a lower tax rate affect the labor supply for jobs where hours cannot be chosen? Does the marginal or average tax rate apply?
Only substitution affect; based on average tax rate - worker can only decide whether to work or not, choice depends on average tax, because worker decides to give up 2000 hours of leisure for work income net of average tax rate
Where does the labour market equilibrium occur?
When real wage makes both supply and demand equal
When there is excess supply of labour, what happens to real wage? What happens when there is excess demand?
Excess supply = real wage falls
Excess demand = real wage increases
If real wage is below equilibrium, is there a labour or job shortage?
Labour shortage
If real wage is above equilibrium, is there a labour or job shortage?
Job shortage
If real wage is below equilibrium, what must happen to get back to equilibrium?
Wages must increase to attract workers, to increase real wage
If real wage is above equilibrium, what must happen to get back to equilibrium?
Workers must accept lower wages, to decrease real wage
Is supply or demand greater when there is a labour shortage?
Demand is greater than supply
Is supply or demand greater when there is a job shortage?
Supply is greater than demand
If labour demand shifts right, what happens to demand?
Excess demand is left at the old wage, real wage increases, work hours and employment increases
If labour supply shift right, what happens to employment and wages?
Increase employment, lower real wage, lower wealth, less leisure to work more instead, shift supply curve right
How is unemployment and employment measured?
Survey with three categories: employed, unemployed, and not in the labour force
What is the labour force participation rate? What is it’s equation?
Proportion of adults working or looking for work
= labour force/adult population
What is the employment rate and it’s equation? What is the unemployment rate and it’s equation
Proportion of adults employed
= Employed/adult population
Proportion of adults unemployed in the labour force
= Unemployed/labour force
Labour force equation
employed + unemployed
What does the unemployment rate not include?
People moving from “out of labour force” to unemployed (looking)
People moving from unemployment to not in labour force
Seasonal variation
Did the pandemic increase unemployment? What did the pandemic do to participation rate and the employment rate?
The pandemic raised unemployment from the lowest it had been since 1976, to the highest
Reduced the participation rate and employment rates to lowest since 1976
The derivative of the production function with respect to labour is equal to:
the marginal product of labour (W/P = MPL)
Adult population vs labour force
adult population = labour force and out of labour force
labour force = employed and unemployed
