The labour market

Question 1

What is assumed of price in the medium run and what causes changes to the equilibrium?

Answer 1

Pice is fixed and changes to the equilibrium originate from the supply side or labour market.

Question 2

What is the participation rate?

Answer 2

Labour force / Working age population

Question 3

What is the employment rate?

Answer 3

Employed / Working age population

Question 4

What is the unemployment rate?

Answer 4

Unemployed / Labour force

Question 5

What is the production function and what is assumed constant?

Answer 5

Production (Y) = Productivity(A) X Employment(N). Productivity is assumed to be constant so a rise in employment leads to a rise in production.

Question 6

What determines a workers bargaining power?

Answer 6

Cost of replacing the worker (e.g cheap if big pool of skilled applicants, costly to replace if its a high skilled worker who is familiar with business operations) and how easy it is for a worker to find a new job. And the unemployment rate - if small pool of applicants then existing employees have high bargaining power.

Question 7

Why do firms choose to pay above the reservation wage? (wage that makes them indifferent between working and being unemployed)

Answer 7

Higher wage improves morale which increases worker productivity and less turnover.

Question 8

What does the nominal wage depend on? Give the formula for determining wage?

Answer 8

Expected price level, unemployment and catch all variables that affect wage setting. W=Pe(u,z)

Question 9

What does the catch all variables mean when determining the wage?

Answer 9

Unemployment benefits (if benefits higher, then less likely to accept jobs with low wages and so wages have to increase to incentivise them to take jobs). Minimum wage rises then average wage rises. Employment protection means that workers have more bargaining power and so increases the wage and it becomes harder to lay off workers.

Question 10

What is the price setting formula? Re-arrange to give the ratio of price level to wage?

Answer 10

P= (1+m)W….. W/P=1/1+m

Question 11

What does this equation say in terms of a change in the mark up … W/P = 1/1+m

Answer 11

A change in the mark up affects the real wage paid.

Question 12

Why is the price setting relation curve horizontal?

Answer 12

It doesn’t depend on the unemployment rate

Question 13

What does the equilibrium between wage and price setting relation portray?

Answer 13

Medium term equilibrium/level of output

Question 14

What is the medium term equilibrium?

Answer 14

F(u,z)=1/1+m as W/P=W/Pe

Question 15

What is important to remember about output/unemployment and price in the medium run?

Answer 15

The economy is at its natural rate of unemployment/output and price = expected price level

Question 16

What causes the PS and WS curves to shift?

Answer 16

PS curve shifted by mark up costs changes e.g if mark up cost increases then real wage down so PS falls. WS curve shifted by changes in catch all variables e.g if NMW increases then average real wage should increase as others paid above NMW will ask for wage rise and WS shifts up.