09 LABOUR MARKET Flashcards
(15 cards)
How is unemployment measured and defined?
Unemployed individuals are those who:
Are not in paid employment. Are available for work. Are actively seeking work.
Note: Two countries with the same unemployment rate can differ in employment rates depending on their labour force participation rates.
What is the real wage, and how is it calculated?
The real wage measures the purchasing power of wages:
Real Wage=Nominal Wage/Price Level
It represents how much goods and services a worker can buy with their wage, influencing labour market dynamics and worker motivation.
What factors influence a firm’s wage-setting decisions?
Firms interact with:
Employees: Wages are set high enough so that losing a job is costly, motivating employees to work hard.
Customers: Prices are set by adding a markup over production costs to maximize profits.
Nominal wages depend on:
Wages at other firms.
Prices in the economy.
The unemployment rate.
What is the wage-setting curve and why is it upward sloping?
The wage-setting curve shows the real wage required to motivate workers at various employment levels.
Higher employment rates → Higher reservation wages, pushing real wages up.
Upward sloping because:
Lower unemployment reduces the fear of job loss, requiring firms to offer higher wages to motivate employees.
Explain the labour discipline model and its relation to the wage-setting curve.
Labour Discipline Model: Workers put in effort because losing a job is costly.
Key Relationship:
Lower unemployment → Less fear of job loss → Firms must raise wages to ensure workers remain motivated.
This model underpins the upward slope of the wage-setting curve.
How do firms determine the profit-maximizing price and markup?
Firms set prices where the demand curve is tangent to the isoprofit curve.
The markup represents firm’s proft margin and (µ) is: μ=1−W/P
Key Insights:
Less elastic demand → charging higher markup.
Higher competition → Lower markup → Higher real wages.
What is the price-setting curve, and what factors affect its position?
The price-setting curve This gives the real wage paid when firms choose their profit-maximizing price
It is typically horizontal because the markup is constant at given competitive conditions.
Factors Influencing the Curve:
* Competition: More competition lowers the markup, raising the real wage.
* Labour Productivity: Higher productivity allows for higher wages without reducing profits.
Describe the labour market equilibrium and its key characteristics.
Occurs at the intersection of the wage-setting curve and the price-setting curve.
Equilibrium Features:
- Firms pay the lowest wage that still motivates workers.
- Employment is at its maximum feasible level.
- Employed workers cannot negotiate for higher wages withouth risking their jobs
- Involuntary unemployment exists because:
Without it, losing a job would have no cost, reducing worker effort.
This equilibrium is a Nash equilibrium where no participant can benefit by changing their strategy unilaterally.
What is involuntary unemployment, and why does it persist at equilibrium?
Involuntary Unemployment: Workers willing to work at the prevailing wage but cannot find employment.
Motivation Mechanism: Firms maintain some unemployment to ensure losing a job has a cost, thereby maintaining worker effort and discipline.
What causes demand-deficient unemployment?
Demand-Deficient Unemployment occurs when aggregate demand falls, leading firms to:
* Reduce production.
* Lower employment levels.
How does market adjust?
Theoretically, lower wages would reduce prices, stimulate demand, leading firms to hire more workers and restore equilibrium.
In reality, adjustments are slow due to:
- Wage rigidity (workers resist wage cuts).
- Deflationary spirals (delayed purchases).
- Reduced consumer spending from lower wages.
How can governments intervene to correct demand-deficient unemployment?
- Fiscal Policy:
Increase government spending to boost demand. - Monetary Policy:
Lower interest rates to encourage borrowing and investment.
Challenges:
In small open economies, fiscal policies may have limited effects if additional demand results in higher imports rather than domestic production.
How do shifts in labour supply affect the wage-setting curve?
Increase in Labour Supply shifts wage setting curve down beacuse:
* More unemployed people increase the employment rent (job value compared to unemployment).
* Firms can offer lower wages without losing worker motivation (opportunity cost of effort)
Examples of Labour Supply Shifts:
Immigration policies increasing the labour force.
Childcare provisions boosting female labour participation.
How does the labour market influence income distribution and inequality?
The labour market determines how total output is divided between:
Employed workers (wages).
Firm-owners (profits).
The unemployed (no output share).
The Gini coefficient is a measure of inequality that rises when:
Unemployment rate increases.
Real wages decrease.
Markups increase.
Productivity increases
What role do labour unions play in wage determination?
Labour Unions: Represent employees, primarily negotiating on wages and working conditions.
Sometimes negotiate on behalf of entire sectors.
Impact:
- Increase workers’ bargaining power, potentially leading to higher wages than the wage-setting curve suggests.
Bargaining Curve: Shows wage levels resulting from union-employer negotiations, often above the wage-setting curve meaning unions have strong bargaining power.
How do unions affect productivity and employment?
Union Voice Effect:
Giving workers a voice in decision-making encourages greater effort, leading to:
Higher productivity.
Lower production costs.
Higher employment.
Trade-Off:
While higher wages can reduce firm profitability, increased productivity can offset negative impacts.
