Unit 9 - The Labour Market: Wages, Profits and Unemployment

Question 1

What type of people does the term unemployed entail

Answer 1

People who are:
- Not in paid employment or self-employed
- Available for work
- Actively seeking work

Question 2

What is the equation of employment rate

Answer 2

Employed / Population of working age

Question 3

What is the equation of unemployment rate

Answer 3

Unemployed / Labour force

Question 4

What is the equation for participation rate

Answer 4

Labour force / population of working age

Question 5

How is real wage calculated

Answer 5

Real wage is equal to the nominal wage divided by the price level of the bundle of consumer goods purchased

Question 6

What is the chain of a firms decisions

Answer 6

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)

Question 7

What is the wage-setting curve

Answer 7

The real wage necessary at each level of economy-wide employment to provide workers with incentives to work hard and well

Question 8

How does lowering the employment rate affect the labour discipline model and therefore the wage-setting curve

Answer 8

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

Question 9

What equation is used to determine a firms profit-maximising choice as well as the firm’s optimal markup above MC of production

Answer 9

price = (profit/output) + (nominal wage/ output)

Question 10

What is the equation for markup

Answer 10

1 - (wage/price)

1 - (W/p)

Question 11

What does the price-setting curve depend on

Answer 11

Competition; determines markup

Labour Productivity; determines real wage for given markup

Question 12

Where does the nash equilibrium lie in the labour market

Answer 12

Where the wage-setting and price-setting curves intersect

Question 13

Why is unemployment necessary in labour market equilibrium

Answer 13

No unemployment would mean 0 cost of job loss and therefore no effort by workers. Therefore unemployment is necessary

These are the INVOLUNTARILY UNEMPLOYED

Question 14

What is demand-deficient unemployment

Answer 14

Unemployment caused by a fall in aggregate demand

Question 15

What is aggregate demand

Answer 15

Sum of the demand for all the goods and services produced in the economy

Question 16

What is the economy response to demand-deficient unemployment

Answer 16

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

Question 17

Why doesn’t the market respond ideally to demand-deficient unemployment

Answer 17

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

Question 18

What policies could the Government introduce to expand aggregate demand

Answer 18

Monetary Policy
fiscal Policy

Question 19

What is a Labour Union

Answer 19

An organisation consisting predominantly of employees

Main activities include negotiation of rates of pay and conditions of employment for it’s members

Question 20

What is the bargaining curve

Answer 20

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

Question 21

What is the union voice effect

Answer 21

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