Unit 9: Week 1 (Intro To Labour Market) Flashcards
Assumptions
- Price setting firms produce ________ products. (Fill the blank)
- Who has the power in the market?
- Who sets the price?
- Differentiated products
- Firms
- Marketing Department
How does the principal agent problem explain the conflict of interest between the employer and the employee over workers effort?
- Why don’t contracts resolve this?
Contracts are offered under the assumption of effort in the product market, the product/service is visible with the buyer aware of what they receive from the supplier from the supplier.
- In contrast, in the labour market deliverables are not always defined.
Key outcomes in the labour market?
Real wages and Unemployment rate.
What does the model show?
Uses price setting and wage setting behavior of firm, which determines economy wide unemployment rate and wage rate.
- HR sets wage to promote effort
- Marketing department sets price to maximize profit with the assumption that they can sell the goods produced by the production department.
Who are the unemployed?
— Are not in paid employment or self-employment
- Includes formal and informal sectors
— Are available for work
- Excludes students or homemakers
— Are actively seeking work
- Those who have not given up the chase
HOW IS THE LABOUR MARKET structured?
___________________ _______________________ _____________________ ______________________
| |—————->| |——————>| |—————->| |
| |—————->| |——————>| |—————->| EMPLOYED |
| |—————->| POPULATION |——————>| LABOUR |—————->|—————————|
| |—————->| OF |——————>| FORCE |—————->| UNEMPLOYED |
| |—————->| WORKING |——————>| |—————->|____________________|
| POPULATION |—————->| AGE |——————>|————————– |
| |—————->| |——————>| OUT OF LABOUR |
| |—————->|______________________|——————>|______FORCE_______|
| |
|__________________|
Participation Rate
Part… Rate = Labour Force
————————————
Population of working age
Unemployment Rate
Unemployment Rate = Unemployed
——————————
Labour Force
Employment Rate
Employment Rate = Employed
___________________________
Population of working age
What is the real wage?
(Include equation)
How this affects the economy?
Nominal wage divided by the price level of the bundle of consumer goods purchased
Real wage = W
——
P
Each firm sets its own price and wage and how many people to hire
Adding this across all firms gives the total employment in the economy and the real wage
Description of price setting and wage setting
1) HR determines the lowest wage it can pay for workers to exert enough effort (Employment rent)
- {N.wage is a function of the price of other firms products}
- {N.wage is a function of the wages other firms are paying}
- {N.wage is a function of the unemployment rate in econo}
2) Marketing department sets the price of product
- {Price is the function of the wage we pay}
- {we assume firms were a constant markup over costs}
- {Price is a function of the unemployment in the country}
- { ^^^^ Depends on PED and AD ^^^^}
3) Production department decide how many workers we need
- {Depends on the production function}
WAGE SETTING CURVE
In Evernote
Gives the real wage necessary at each level of the economy - wide employment to provide workers with incentives to work hard and well.
Price setting curve
In Evernote
Gives the real wage paid when firms choose their profit-maximizing price
Define:
- Working?
- Shirking?
- Providing the level of effort that the firms managers and owners have set as sufficient
- Providing no effort at all
What influences the price setting curve?
- Competition: determines the extent in which price exceeds cost = markup. Less competition = higher markup = higher profit per worker. This means higher prices in the economy = lower real wages, pushing down the profit maximizing curve.
- Labour Productivity: For any given markup - how much a worker produces per hour determines the real wage. Greater productivity = higher real wage. Higher = shift the dotted line upwards = shift the price setting curve up = higher real wage.
How to calculate values for Price-setting curve when the firm sets the price?
Unit labour cost (wages/unit) = Nominal wage
—————————
Labour Productivity
Markup = 1. P - C. Profits per unit
–———— =———- = ———————-
Elasticity. P. Price per unit
Real wage = output per worker - real profit per worker
How to calculate values for Price-setting curve when its the economy?
Real wage =. nominal wage
———————
Price level
Nash equilibrium in the labour market
Where price setting and wage setting curves intersect. It is the Nash equilibrium as everyone is doing the best they can given what everyone else is doing.
- Firms - offering wage that ensures effective work from employees at least cost. HR cannot not recommend any other policy’s to deliver higher profits.
- Employmemt - at its highest given the wage offered. Marketing department cannot recommend any change in output or price.
- Those who have jobs cannot improve their situation by changing their behavior. Work less = unemployed. Demand more = hire someone else.
- Those who can’t get jobs want one but they can’t get one even at lower wages than those present
Why will there always be unemployment?
1) If there was no unemployment there is no cost of job loss (employment rent) because workers can lose their job and immediately get a new one with the same pay.
2) Therefore, unemployment is necessary: Employers can motivate workers to provide effort on the Job.
3) As a result, the wage setting curve is always on the left of the labour supply curve
4)
What happens at high wages with income and substitution?
Income effect dominates the substitution effect implying the worker reduces their labour supply [Earns enough]
How to actually determine the level of the price setting curve?
Markup
Average product of labour
Markup = P - MC = 1
__________ _______
P E
= (P - W/lambda)/ P
Markup on profit maximizing curve
Revenue on “ “ “ “
Production function
MRT
(P - W) is the price P * Q is the revenue Number of workers = output MRT = (P - W)/P Markup is (P-W)/P
