Week 9 Flashcards
What is the demand for labour driven by?
Firms wanting to create a good/service
Who supplies labour in the labour market?
Households
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
In the supply and demand model for the labour market, what does quantity refer to?
Number of workers, hours worked, etc.
In the labour market, what does price refer to?
Wage rate
What economic principle does labour exhibit?
Diminishing marginal product
How is the value of the marginal product VMPL expressed?
VMPL = P * MPL
What condition leads a firm to hire an extra worker?
If the worker adds more to revenue than to cost
What type of curve does the demand for labour typically follow?
Downward-sloping demand curve
What do indifference curves illustrate in the context of labour markets?
An individual’s choice between consumption and leisure
How does a higher wage affect the choice between consumption and leisure?
Increases consumption and decreases leisure due to substitution effect
What is the income effect of a higher wage on leisure consumption?
Leisure becomes more affordable, leading to increased consumption of leisure
What do classical economists believe about the real wage rate?
It indicates purchasing power
What does the horizontal demand curve imply for individual workers?
They can work ‘as much as they want’ at the equilibrium wage rate
What is the classical view on unemployment at equilibrium?
Everyone who wants to work can find a job
What are the classicists’ explanations for real world unemployment?
Voluntary or due to union/government interference
What may prompt a government to implement a minimum wage?
To raise wages perceived as too low
List the justifications for implementing a minimum wage.
Promoting fairness/equity
Reducing income inequality or poverty
Incentivising work
Social responsibility
What effect does a minimum wage set above equilibrium wage have on the labour market?
Results in excess supply of labour (unemployment)
What causes wage disparities?
Differences in jobs
Differences in workers
Discrimination
What are compensating differentials in the context of job differences?
Wages vary due to job characteristics
How does education/training affect wage differences?
Different levels of human capital lead to different earnings
What factors can lead to discrimination affecting wages?
Prejudice
Historical or cultural norms
What’s the formula for MPl?
MPl = change in output / change in labour input
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.
