Week 9 Flashcards by Frank Fermor

What is the demand for labour driven by?

Firms wanting to create a good/service

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Who supplies labour in the labour market?

Households

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List the assumptions made when discussing labour markets.

Labour is homogenous

There is a single equilibrium wage for labour

Workers have no bargaining power

There is no limit on the amount of labour supplied

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In the supply and demand model for the labour market, what does quantity refer to?

Number of workers, hours worked, etc.

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In the labour market, what does price refer to?

Wage rate

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What economic principle does labour exhibit?

Diminishing marginal product

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How is the value of the marginal product VMPL expressed?

VMPL = P * MPL

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What condition leads a firm to hire an extra worker?

If the worker adds more to revenue than to cost

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What type of curve does the demand for labour typically follow?

Downward-sloping demand curve

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What do indifference curves illustrate in the context of labour markets?

An individual’s choice between consumption and leisure

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How does a higher wage affect the choice between consumption and leisure?

Increases consumption and decreases leisure due to substitution effect

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What is the income effect of a higher wage on leisure consumption?

Leisure becomes more affordable, leading to increased consumption of leisure

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What do classical economists believe about the real wage rate?

It indicates purchasing power

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What does the horizontal demand curve imply for individual workers?

They can work ‘as much as they want’ at the equilibrium wage rate

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What is the classical view on unemployment at equilibrium?

Everyone who wants to work can find a job

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What are the classicists’ explanations for real world unemployment?

Voluntary or due to union/government interference

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What may prompt a government to implement a minimum wage?

To raise wages perceived as too low

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List the justifications for implementing a minimum wage.

Promoting fairness/equity

Reducing income inequality or poverty

Incentivising work

Social responsibility

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What effect does a minimum wage set above equilibrium wage have on the labour market?

Results in excess supply of labour (unemployment)

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What causes wage disparities?

Differences in jobs

Differences in workers

Discrimination

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What are compensating differentials in the context of job differences?

Wages vary due to job characteristics

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How does education/training affect wage differences?

Different levels of human capital lead to different earnings

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What factors can lead to discrimination affecting wages?

Prejudice

Historical or cultural norms

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What’s the formula for MPl?

MPl = change in output / change in labour input

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What defines employed people?

Those who are working in a paid job.

What defines unemployed people?

Those who want to work but are without a job.

How is the labour force defined?

The total number of employed plus the total number of unemployed.

What are economically inactive individuals?

Those not looking for jobs.

According to ONS, who is considered employed?

Anyone who carries out at least one hour of paid work a week or is temporarily away from the job.

According to ONS, who is considered unemployed?

Anyone without work but available and seeking work.

What are the two basic ways to measure unemployment?

Labour force survey Claimant count

What is the formula for calculating the unemployment rate?

Unemployment rate = (No. unemployed / Labour force) * 100.

What is the labour force participation rate?

The percentage of the adult population that participates in the labour force.

What is the formula for the labour force participation rate?

Labour force participation rate = (Labour force / Adult population) * 100.

What are the inflows into the unemployment pool?

Sackings Redundancies/layoffs Quits New entrants & re-entrants

What are the outflows from the unemployment pool?

Hires Withdrawals (people becoming economically inactive)

What is frictional unemployment?

Unemployment arising because it takes time for workers to search for and find new jobs.

What is structural unemployment?

Unemployment occurring due to a mismatch between the skills of unemployed people and skills required for vacant jobs.

What is cyclical unemployment?

Unemployment associated with fluctuations in the business cycle.

What is the natural rate of unemployment?

The assumption that there is a small persistent level of unemployment in the long run.

What does full employment represent?

A situation where there is no cyclical unemployment, just some persistent frictional and structural unemployment.

What two factors influence the rate of unemployment?

Job separation Job finding

What causes frictional unemployment?

Jobs are different Workers have different abilities and preferences Geographical mobility varies Imperfect flow of information about vacancies

What policies can decrease the natural rate of unemployment?

Government unemployment agencies enhancing the flow of information Unemployment insurance (benefits) Job training programs

What is wage rigidity?

The fact that wages may be slow to adjust to a level where labour supply equals demand.

What factors contribute to wage rigidity?

Minimum wage laws Power of labour unions Efficiency wage

What are the pros of unemployment?

Frictional unemployment Structural unemployment

What are the cons of unemployment?

Bad for resource allocation Loss of tax revenue for government Higher unemployment benefits Less consumer spending for firms Cyclical unemployment

What is the relationship between output and unemployment?

An inverse relationship.

What does Okun's law state?

In order to keep the unemployment rate steady, real GDP needs to grow at close to its potential.

What is the relationship between unemployment and inflation captured by?

The Phillips curve.

What did Lipsey argue regarding money wages?

They will rise when there is excess demand for labour.

What was the impact of stagflation on the Phillips Curve?

The relationship broke down.

What does the expectations-augmented Phillips curve suggest?

There is no unique Phillips curve, but an array of short-run PCs, each associated with a different expected rate of inflation.

How is the long-run Phillips curve regarded?

As vertical at the natural rate of unemployment.

What did Phillips discover in 1958?

An inverse relationship between inflation and unemployment for the UK.

What did Samuelson and Solow advocate regarding unemployment and inflation?

The idea that policymakers could make a trade-off between the two.

What did Milton Friedman introduce regarding expectations?

Showed that there was no trade-off in the long run.

True or False: Phillips was the first to identify a relationship between inflation and unemployment.

False.

True or False: S&S believed the relationship between inflation and unemployment was stable.

False.