lecture 7

Question 1

What two main factors influence wage determination in the labor market?

Answer 1

1. Bargaining power of workers and firms.
2. Efficiency of workers.

Question 2

Under what conditions will the wage be set above the reservation wage?

Answer 2

• When wages depend on labor market conditions and bargaining power.
• Firms pay more than the reservation wage to ensure worker retention and productivity.

Question 3

How does the unemployment rate affect workers’ bargaining power?

Answer 3

• Lower unemployment → Higher bargaining power for workers (easier to find other jobs).
• Higher unemployment → Lower bargaining power (harder to find jobs).

Question 4

Why do workers and firms care about real wages (W/P) instead of nominal wages (W)?

Answer 4

• Workers: Care about the purchasing power of wages (how much goods/services they can buy).
• Firms: Care about labor costs relative to product prices for profitability.

Question 5

What factors can influence the wage-setting process besides bargaining power?

Answer 5

1. Unemployment insurance (net replacement rate & duration).
2. Employment protection (cost of layoffs).
3. Minimum wage regulations.

Question 6

What is the production function when assuming one worker produces one unit of output?

Answer 6

• Y
=
A
N


Y=AN
• Assuming A
=
1


A=1, the function simplifies to:Y
=
N



Y=N
  (Output equals employment.)

Question 7

How does markup (μ) affect price determination in the product market?

Answer 7

• Markup (μ): The difference between price (P) and production cost (W).
• If μ
=
0


μ=0: Perfect competition → P
=
W


P=W.
• Higher μ


μ: More market power → Higher prices relative to wages.

Question 8

Explain the relationship between employment protection and wage determination.

Answer 8

• Higher employment protection increases the cost of layoffs, which can:
  
  • Strengthen workers’ bargaining power.
  • Lead to higher wages.
  • But may also discourage hiring, potentially raising unemployment.

Question 9

How does an increase in z or μ affect the natural rate of unemployment?

Answer 9

• ↑ z (institutional factors) → ↑ real wages demanded → ↑ natural unemployment (firms hire fewer workers).
• ↑ μ (market power) → ↓ real wages offered by firms → ↑ natural unemployment to restore equilibrium.