Labor market

Question 1

un poco una intro

Differences between short and long term

Answer 1

Differences between short and long term
Expansionary fiscal and monetary policies reach their limits in the medium term:
* If the state is indebted for expansionary fiscal policy, taxes need to be increased in the medium term (or debts are “inflated away”).

• There is a lack of suitable staff on the labor market for government additional expenditure (G, such as infrastructure programs) (Germany in 2020).

*In the short term, employees accept overtime, in the medium term overtime is reduced or paid (wages, prices 1)

• Massive tax cuts increase Ya and thus the demand for goods, but the supply only increases to a limited extent (see previous points). As a result, companies increase prices - inflation.
• Likewise, prices will rise in the medium term (inflation) if the central bank expands the money supply significantly.

In the medium term, we have to expand our analysis to include the aspects of the labor market and inflation.
Resource scarcity:
*In the short term, demand determines GDP. Production factors (labor, capital) can be under-utilized / over-loaded.
* In the medium term, the economy returns to a balance in which production corresponds to production potential.

Question 2

Labor demand

Answer 2

Labor demand of the economy
By means of the marginal product of labor, we can develop a labor demand curve - a relationship between the company’s real wage and the level of employment. If we change the real wage (see figure above), this affects the desired level of employment. The MP: shows the negative relationship between real wage and demand for labor. In other words: the MPL curve corresponds to the working demand curve.

Graph representation: y axis being real wage, and employement x axis. Demand linea hacia bajo sin frenos por que si los wages son higher la demand d employement es menor (pq ya esta caro)

Question 3

Labor supply

Answer 3

Is influenced by:
- participation in the labor market
–> Extensive labor supply
- selection of the worker quantity
Opportunity costs of labor (leisure, education, activities).

labor supply
We assume that the real wage increases. This affects in two ways the labor supply. First, it will be more expensive not to work. The cost of another hour of leisure time is the salary that could have been cared for if worked. A rise in real wages increases the cost of leisure, and that alone leads to an increase in labor supply. This is referred to as the substitution effect (when the price of a commodity (in this ase of leisure) increases, people try to substitute something else (in this case work).
But in respect to an increase in real wages, there is a second effect, which points in the opposite direction. People become more prosperous and want to consume more goods, including leisure.
This income effect causes people to consume more leisure time and work less when the real wage increase. How the labor supply develops in the case of a rise in wages depends on whether the income or the substitution effect dominates.
Two effects of higher wages
* Income Effect: Higher income > richer > more consumption of leisure ©️ labor supply decreases
* Substitution Effect: Work is compensated well, and leisure becomes “more expensive”
> less consumption of expensive good leisure -> labor supply increases

Question 4

Important formulas

Answer 4

Participation rate
Employment rate
Unemployment rate

Question 5

Natural rate of unemployment

Answer 5

Natural rate of unemployment
The natural rate of unemployment is the balance in which unemployment has no tendency to change. To ensure that unemployment remains constant, inflows must be as high as the outflows from unemployment. Because of this fact, we can develop an equation for the natural unemployment rate.
The inflow into unemployment equals the number of employees (L) multiplied by the probability that a person loses their job (p). The outflow of the unemployment is equal to the number of unemployed people (U) multiplied by the probability of finding a job (s).
A natural rate of unemployment is referred to when the inflow corresponds to the outflow.
pL=s-U
We know that, by definition, employed and unemployed people constitute the labor force (LF), so we can rewrite
LF -L+U
L=LP-U
The equilibrium condition can therefore be formulated as follows:
p(LF-U)=S・0
(Calculoooos)
In other words: The natural rate of unemployment, the higher the probability of an unemployed person finding a job ((s)), the lower the natural rate of unemployment.
u= p/p+s

Question 6

Types of unemployment

Answer 6

• cyclical –> si hay recession
  -structural –> normal amlo
  -frictional –> in between i natural, como un student
  -seasonal –> trabajos d verano

Question 7

Deviations of the perfect labor market

Answer 7

Deviations from the “perfect” labor market:
* Minimum wage (also implicit in unemployment benefit -> reservation wage)
* Unions: Insider vs. Outsider Theory
* Market power of the firms
*Efficiency wages
* Taxes and social security contributions (- wedge between income and costs)
* Frictions like search or information costs (see Hartz I to III in Germany)
* Mismatch between supply and demand in relation to regions and qualifications
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

Question 8

resumen labor supply y demand mas tecnico

Answer 8

Labor supply
Factors of central importance in wage negotiations:
* Expected price level (increase)
* Bargaining power of the two sides
Reservation wage of employees
W = P° F(u. z) (+ y -) cheekc signs
* The nominal wage W rises in the expected price level pe
Relevant for the employees is the real wage W/P.
Nominal wages decrease in the unemployment rate (u).
* The nominal wage depends on other factors (z) such as unemployment insurance or minimum wage.

Labor demand
Firms need workers for production.
Assumption: firms have a production function Y = A * N.
* Output Y is determined by productivity A and employment N.
* Note: for simplicity, we assume a constant marginal product, so that the labor demand curve is horizontal.
so that Y = N
Marginal cost of an additional unit of production = W/A.
In perfect competition: price = marginal cost « wage = W/A
The wage offered corresponds to the marginal product of the labor.

Question 9

Equilibrium of the labor market

Answer 9

Supply side:
If the actual price level P corresponds to the expected price level p. the
result is W = P * F(u. z)
We divide both sides by P and obtain the wage-setting relation:
W/P = F(u.z).

Demand side:
The price level is determined by the firms’ price: P = (1 + 1) W’/A
We can paraphrase this and obtain the price-setting relation:
W’/P = A/(1 + u rara).
In the medium-run equilibrium on the labor market we find:
remember*

Question 10

Effects of change in u rara and an increase in z

Answer 10

dilo outloud