Medium run closed economy (Labour market: PS/WS) Flashcards
Why does the PS curve diverge from the LD curve?
Because firms have monopoly power and charge a mark-up on the cost of labour (profit)
How is involuntary employment created?
Imperfect competition means that the WS curve diverges from the LS curve - there are people willing to work that cannot
What happens if you try to get rid of involuntary unemployment?
Upward pressure on prices, resulting in higher-than-expected inflation. Only at the NAIRU (WS=PS) do expectations match.
Why are the LD and PS curves downward-sloping?
MPL is falling. In the short run capital is fixed, so adding more workers means paying each worker less.
Why might the PS curve be flat? [2]
EITHER firm mark-ups are counter-cyclical (e.g. entry threat greater in a boom so they accept less profit) OR if demand for labour is elastic (small wage change = big change in employment) - and both PS and MPL are flat
Can you do the maths for the PS mark-up?
Demand for i’s product = AD * price of product relative to competition
Maximise profits s.t. output being a function of labour and s.t. the demand curve
Gives pi/w = θ/(1-θ) * 1/MPL
Shows that firm mark-up depends on the elasticity of demand for their product.
What shifts the LD curve (and thus the PS curve) outwards? [4]
1) Rise in labour productivity
2) Increase in capital per worker
3) Technological progress
4) Increase in price of raw materials
What shifts the PS curve closer to the LD curve? [4]
1) Fall in the firm’s mark-up - e.g. due to a change in competitive conditions
2) Fall in cost of employment - e.g. business regulation, employment regulations
3) Fall in taxation - people work more, higher output…
4) Fall in the real interest rate - firm borrowing costs are lower so they don’t need such a big mark-up to cover
Why does the WS curve diverge from the LS curve? [4]
Because workers have power:
1) Unions
2) Bargaining - wages
3) Monopolistic competition - e.g. consultants, film stars
4) Efficiency wages - firms pay people more than they’re worth in order to keep them
What shifts the LS curve (and thus the WS curve) outwards? [5]
1) Demographics
2) Preference changes
3) Changes in discount/interest rates
4) Expectations about future wages
5) A fall in benefits payments - people more willing to work
What shifts the WS curve closer to the LS curve? [3]
1) Unions given less legal protection
2) Lower trade union density
3) Hysteresis - dependence of system on history, such that periods of high unemployment will increase the NAIRU
What are the causes of hysteresis? [3]
1) Insider-outsider view - those in work don’t care about the unemployed
2) People who have been unemployed are tainted and discriminated against
3) Long-term unemployment reduces skills, and people leave the workforce - those left have greater bargaining power, shifting WS even further left
Why might the WS curve be to the right of the LS curve?
If the industry is a monopsony (only one employer)
What impact does immigration have in a perfectly competitive market?
LS shifts outwards. Move along LD curve - downward pressure on real wages, employment and output increase. In the long run, new investment comes on stream and the wage can go back up (LD shifts out).
What impact does immigration have in an imperfectly competitive market?
LS shifts outwards, but WS stays the same. Wages stay constant, no impact on output. Involuntary unemployment increases.
