Chapters 7-10 Flashcards
Duration of unemployment
The average length of time people spend unemployed
The average duration of unemployment equals?
The inverse of the or proportion of people leaving unemployment each month
Long term unemployment
Generally considered 12months or more unemployed
Collective bargining
The process of wage determination whereby firms and unions bargin
What are the two determinants of bargaining power?
How costly it would be to replace the worker were they to leave. and How easy it would be for the worker to find their next job. If it is costly to replace the worker and they can find their next job more easily then the worker will have more bargaining power.
The nature of the bargaining power is also determined by what?
The nature of the job. If there is a low skill set required the worker is more easily replaceable.
Labour market conditions. If there is high unemployment the firm will have an easier time finding a replacement
Efficiency wages theories
The idea that if an employer pays more than the worker’s reservation wage then they are going to be more productive and feel good about their job. Also means they are more likely to remain rather than leave
What does the aggregate nominal wage depend upon?
The expected price level Pe, The unemployment rate and a ‘catchall’ variable that stands for all other things which might affect wage setting
Why does the price level effect nominal wages?
Because workers are more concerned with how much goods they can buy with their money. Similarly firms are more concerned with how much the pay relative to the goods they sell.. Both are concerned with W/P
What is the effect of an increase in the unemployment rate?
Wages decrease
What is a factor which would be encompassed in the ‘Catchall’ variable?
Unemployment insurance - payment of benefits to those who lose their jobs
What is the marginal cost of production?
the cost of producing one more unit of output. Which in the simplification of the production function (which is Y=N) is equal to W
What is the equation for the determination of prices?
P = (1+μ)W where μ is the mark up (if there was perfect competition in the goods market μ =0)
What would be the price if the market had perfect competition?
W
What determines μ?
The product market relation. It has a positive relation
What is the wage setting relation and what does it say?
W/P = F(u,z)
it also implies a negative relation between the real wage and the unemployment
What is price setting relation?
Derived from divide the price determination equation by W
Gives ratio of the price level to the real wage implied by the price-setting behaviour. We invert this to get it in terms of the real wage.
What does this equation say? W/P = 1/1+μ
price-setting decisions determine the real wage paid paid by firms. An increase in mark up would mean the firm would increase their prices and subsequently the real wage would decrease
How do graphically illustrate the price and wage setting relations?
Unemployment on the x axis, real wage on the y.
WS is a downward sloping curve
PS is a horizontal line cutting the y axis at 1/1+μ
What is the equilibrium in the labour market?
Requires that the real wage in the wage setting relation be equal to that of the real wage in the price setting relation.
F(u,z)=1/1+μ
What is the natural rate of unemployment?
The level of unemployment where the WS and PS curves intersect
What would an increase in z (i.e. unemployment benefits) cause?
Unemployment becomes less ‘painful’, increases the wages set, real wage increases, the natural rate of unemployment increases. The WS curve shifts upwards
What would an increase in μ cause?
The mark up means that firms increase the prices of their goods and thus the real wage decreases and un increases.
What is the natural level of employment?
Derived from u=U/L it is given by Nn=L(1-un)