Unit 9 - The Labour Market: Wages, Profits and Unemployment Flashcards
What type of people does the term unemployed entail
People who are:
- Not in paid employment or self-employed
- Available for work
- Actively seeking work
What is the equation of employment rate
Employed / Population of working age
What is the equation of unemployment rate
Unemployed / Labour force
What is the equation for participation rate
Labour force / population of working age
How is real wage calculated
Real wage is equal to the nominal wage divided by the price level of the bundle of consumer goods purchased
What is the chain of a firms decisions
Nominal wage (other firms’ prices and wages, unemployment rate)
Price (own nominal wage, demand for own product)
Output (optimal price, demand curve)
Number of employees (output, production function)
What is the wage-setting curve
The real wage necessary at each level of economy-wide employment to provide workers with incentives to work hard and well
How does lowering the employment rate affect the labour discipline model and therefore the wage-setting curve
It would shift the workers best response curve to the right (labour discipline model) and increase wage. This would result in a upward sloping wage-setting curve
What equation is used to determine a firms profit-maximising choice as well as the firm’s optimal markup above MC of production
price = (profit/output) + (nominal wage/ output)
What is the equation for markup
1 - (wage/price)
1 - (W/p)
What does the price-setting curve depend on
Competition; determines markup
Labour Productivity; determines real wage for given markup
Where does the nash equilibrium lie in the labour market
Where the wage-setting and price-setting curves intersect
Why is unemployment necessary in labour market equilibrium
No unemployment would mean 0 cost of job loss and therefore no effort by workers. Therefore unemployment is necessary
These are the INVOLUNTARILY UNEMPLOYED
What is demand-deficient unemployment
Unemployment caused by a fall in aggregate demand
What is aggregate demand
Sum of the demand for all the goods and services produced in the economy
What is the economy response to demand-deficient unemployment
firms can lower wages without lower workers’ effort
Lower wages allow price cuts
Lower prices stimulate more demand leading to more output required
Higher output means more employment is needed to meet demand
Why doesn’t the market respond ideally to demand-deficient unemployment
Workers resist nominal wage cuts (lower morale, strikes)
Lower wages means people spend less –> AD falls further
falling prices across the economy means consumers may postpose purchases in hopes to get even better bargains later
What policies could the Government introduce to expand aggregate demand
Monetary Policy
fiscal Policy
What is a Labour Union
An organisation consisting predominantly of employees
Main activities include negotiation of rates of pay and conditions of employment for it’s members
What is the bargaining curve
Represents the bargaining wage (above the wage setting curve) at every level of employment. The position above the wage-setting curve depends on the relative bargaining power of the union and employer
What is the union voice effect
The idea that providing employee with a voice may induce them to provide more effort for the same wage
Bargaining wage curve shifted down
Overall effect of labour Unions on employment ambiguous
