Lecture 7 - The Medium Run Labour Market

Question 1

What does employment measure?

Answer 1

The number of people aged 16 years and over in paid work.

Question 2

What is the employment rate?

Answer 2

The proportion of people aged between 16 and 64 years who are in paid work.

Question 3

What does unemployment measure?

Answer 3

People without a job who have been actively seeking work within the last four weeks and are available to start work within the next two weeks.

Question 4

What is the unemployment rate?

Answer 4

The unemployment rate is not the proportion of the total population who are unemployed. It is the proportion of the economically active population (those in work plus those seeking and available to work) who are unemployed.

Question 5

What does economic activity measure?

Answer 5

People without a job but who are not classed as unemployed because they have not been actively seeking work within the last four weeks and/or they are unable to start work within the next two weeks. Our headline measure of economic inactivity is for those aged between 16 and 64 years.

Question 6

What factors affect these trends?

Answer 6

• Increases in pension age imply less retirements.
• Female participation to the workforce.
• “Discouraged workers”.
• Skills/age/gender.
  The UK unemployment rate is estimated at 3.9% (relevant data source is ONS).

Question 7

For January 2020, average regular pay, before tax and other deductions, for employees in Great Britain…

Answer 7

Was estimated at £512 per week in nominal terms. The figure in real terms (constant 2015 prices) is £471 per week.

Question 8

Sometimes wages are set by…

Answer 8

Collective bargaining - a bargaining between unions and firms.

Question 9

Collective bargaining plays an important role in…

Answer 9

Japan and most European countries.

Question 10

Comparatively, only slightly more than 10% of…

Answer 10

US workers’ wages are set by collective bargaining.

Question 11

The higher the skills needed to do the job, the more likely…

Answer 11

There is to be bargaining between employers and individual employees.

Question 12

Workers are typically paid a wage exceeding their…

Answer 12

Reservation wage – the wage that would make them indifferent between working and being unemployed.

Question 13

Wages typically depends on labour market conditions. The lower the unemployment rate…

Answer 13

The higher the wages.

Question 14

Workers’ bargaining power depends on what?

Answer 14

• How costly for the firm to find other workers.

- How hard for workers to find another job if they were to leave the firm.

Question 15

Efficiency wage theories link the…

Answer 15

Productivity of the efficiency of workers to the wage they are paid.

Question 16

Firms may want to pay a wage above the reservation wage in order to…

Answer 16

Decrease workers’ turnover and increase productivity.

Question 17

Firms that see employee moral and commitment as essential to the quality of workers’ pay will…

Answer 17

Pay more than those whose activities are routine.

Question 18

When unemployment is low, firms that want to avoid an increase in quits will increase wages to…

Answer 18

Induce workers to stay with the firm.

Question 19

Both workers and firms care about real wages (W/P), not…

Answer 19

Nominal wages.

Question 20

The nominal wage depends on the expected price level (rather than the actual price level) because…

Answer 20

When nominal wages are set, the relevant price levels are not yet known.

Question 21

An increase in the unemployment rate…

Answer 21

Decreases wages.

Question 22

Higher unemployment either…

Answer 22

Weakens workers’ bargaining power, or allows firms to pay lower wages and still keep workers willing to work.

Question 23

Who does statutory redundancy pay in the UK apply to?

Answer 23

It applies to those working for their current employer for 2 years or more. It is proportional to age and length of service:

• Half a week’s pay for each full year (under 22)
• One week’s pay for each full year (22 or older, but under 41)
• One and half week’s pay for each full year (41 or older)
• Length of service is capped at 20 years.

Question 24

As of April 2020, the minimum wage for 25+ is…

Answer 24

£8.72 per hour. This is an increase from £8.21 (April 2019).

Question 25

Monetary and fiscal policy are unable to push unemployment below the…

Answer 25

Natural rate of unemployment or the structural rate of unemployment.

Question 26

There is a trade off between unemployment and inflation. This is illustrated by what?

Answer 26

The Philips Curve.

Question 27

Where is the medium run equilibrium?

Answer 27

When output is at the level corresponding to natural unemployment.