Chapter 7 - The Labor Market; medium run

Question 1

when unemployment is high, workers are worse off in two ways:

Answer 1

1) employed workers face a higher probability of losing their job
2) unemployed workers face a lower probability of finding a job, can expect to remain unemployed for a longer time

Question 2

collective bargaining

Answer 2

a bargaining between unions and firms

Question 3

reservation wage

Answer 3

the wage that would make them indifferent between working or being unemployed

Question 4

workers’ bargaining power depends on:

Answer 4

a) How costly it is for a firm to find other workers

b) how hard it is for workers to find another job if they were to leave the firm

Question 5

Efficiency wage theories

Answer 5

link productivity (efficiency) of workers to the wage they are paid

a) when unemployment is high, firms have no reason to cut wages so as not to lose the best or encourage shirking
b) when unemployment is low, firms that want to avoid an increase in quits will increase wages to induce workers to stay with the firms

Question 6

natural rate of unemployment

Answer 6

NAIRU (non-accelerating inflation rate of unemployment)