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econ0002 > Unit 9 > Flashcards

Unit 9 Flashcards

1
Q

What’s Unit 9 about?

A

How the economy wide market for labour determines wages, employment and the distribution of income.

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2
Q

outcome of wage setting process across all firms in economy is

A

wage setting curve, which is wage associated with each unemployment rate

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3
Q

Excess supply of labour/involuntary unemployment is

A

a feature of labour markets, even in equilibrium.

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4
Q

This unit model for firms:

A

price setting firms, selling differentiated products, large number of identical workers.
- assume only input to production is labour - so only cost is wage

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5
Q

HR job

A

HR are in charge of wage setting need to set it sufficiently high to motivate employees to work hard and well - need employment rent.

  • sets nominal wage W
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6
Q

Marketing Department Role:

A

Profit maximising markup determines the division of firm’s revenues between profits and wage

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7
Q

How wages are determined?

A
  • HR determines lowest wage it can pay without demotivating.
  • Marketing sets price of product depends on the firm’s nominal wage and demand curve.
  • Production department calculates how many employees have to be hired
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8
Q

Definition of wage setting curve

A

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

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9
Q

Definition of price setting curve

A

gives real wage paid when firms choose their profit maximising price.

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10
Q

How is the population split?

A

Population -> population of working age > labour force + inactive -> employed + unemployed.

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11
Q

Participating rate =

A

labour force/ population of working age
= employed + unemployed/ population of working age

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12
Q

Unemployment rate =

A

Unemployed/ labour force

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13
Q

Employment rate

A

employed/ population of working age

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14
Q

How is the wage setting curve set up?

A
  • labour force vertical line furthest to right, value less than 1 as x axis is proportion of working age population
  • Inactive workers to the right of labour force
  • Employment rate is vertical line to the left of labour force
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15
Q

Higher unemployment rent impact on different models.

A

Higher unemployment rent reduces reservation wage because longer expected period of unemployment if they lose job, which reduces employees bargaining power and thus shifts BRC to the left.

On the BRC/Isocost curve, the corresponding WL and WL1 at differing unemployment rates are the same as the real wage on the wage setting curve.

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16
Q

You can simplify the worker motivation problem and wage curve by letting there just be 2 effort levels:

A
  • Working: providing level of effort that firms owners and managers have set as sufficient
  • Shirking: providing no effort at all
  • Any wage below wage setting curve, workers do not work - they shirk, any point on or above the wage setting curve is the feasible set
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17
Q

Job of different departments

A

HR knows prices, wages and EMP in other firms - sets norminal wage W
Marketing knows all of the above and firm’s demand function, sets price of output, p
Production knows all of the above and labour productivity and amount firm can sell - sets firms employment.

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18
Q

If we assume 1 hour labour produces 1 unit output

A

hire n* hours of labour = q*, which is the employment rate.

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19
Q

What will determine the height of the PS Curve:

A
  • Competition - less competition = higher E = lower 1/E = greater markup = higher profits per worker and higher prices across whole economy = lower real wages, pushing down price setting curve.
  • Labour productivity - determines real wage, higher prod shifts dashed line upwards, keeping markup unchanged, price setting curve shift up - raising real wage
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20
Q

Unit labour cost =

A

nominal wage/labour prod

21
Q

Markup =

A

(p-mc)/p = 1/e

22
Q

Real wage =

A

nominal wage/ price level

23
Q

Equilibrium

A

WS = PS, which is an NE
- HR department have chose profit and effort maximising nominal wage, as would shirk if lower
- labour is forced to work, as less effort would lead to unemployment which is bad as they have UE rent. Already putting in max effort.

24
Q

Analysing the equilibrium point:

A
  • firms offering minimum wage at which ensures effective work - cant go lower
  • Employment is highest given wage offered, marketing dept cant recommend change in price or output
  • Those on jobs can’t change behaviour
  • Unemployed cant get a job but seek one - involuntary unemployment.
25
Q

Do we need unemployment?

A

no unemployment means cost of job loss is zero, so no employment rent, so less motivation, therefore need it, it follows that in any equilibrium, where wage and PS curves intersect, there must be unemployed people.

26
Q

If at Point B, where employment much lower than equilibrium

A

HR would say unemployment is high, shift PS down and pay less.
- leads to a lower price as isoprofit intersects demand curve lower
- now employment has to go back up to meet quantity of output
- now back to equilibrium that we started out

27
Q

Role of gov policy

A

Gov could adopt policies to increase its own spending and expand demand facing firms. In this case at point B firms find out they producing less than profit max amount and employ more people instead of wanting to reduce wages. As seen below.

28
Q

Wage share =

A

real wage per worker per day/ output per worker per day

29
Q

Gini will rise if:

A
  • larger fraction of employees without worker, so first kink shifts right
  • Real wage falls, second kink shifts down
  • Productivity rises, markup rises, so second kink shifts down
30
Q

Short term impact of Increase in labour supply leads to outward shift of WS curve due to:

A
  • New jobseekers would enter the pool of unemployed
  • Which would increase the expected duration of a spell of unemployment
  • Raised cost of job loss, increases employment rent enjoyed by employed workers at the current wage and employment
  • Firms would then be paying more than necessary to ensure worker motivation
  • Initially wage falls.
31
Q

Long term impact of Increase in labour supply leads to outward shift of WS curve due to:

A

Profits rise, firms hire more, all the way til new equilibrium at PS = WS1.

32
Q

Where workers are organised into trade unions assuming no voice effect

A

wage is not set by HR but instead determined through process of negotiation between union and firm
- Unions can dismiss employers through strikes, so bargaining power of firms fall
When unions set the firm’s wage, profits are much lower, but it appears on the WS PS model that after the WS shifts inwards, wage same, employment lower than if firms were allowed.

33
Q

Union above sets firm’s wage and employees reciprocate.

A

If the employees interpret the employer’s recognition of the trade union and its willingness to compromise with them over a higher wage, as a sign of goodwill, BRC rotates up. Lead to point D
- could lead to a shift away from previous union effect which was same wage lower employment to same wage even higher employment than initial.

34
Q

2 effects of union:

A
  • It may be able to get the firm to pay higher wage
  • May reduce disutility of work and shift BRC up
35
Q

Education and training policies:

A
  • higher prod of labour
  • output per worker has risen, so real wages and PS curves must also rise
  • rise in employment and real wage
36
Q

Wage subsidy policy

A
  • Costs of firm have now fallen, optimal markup hasn’t changed, firm lower its price to restore old markup.
  • When all firms do this, prices of goods that workers consumes fall, and real wages rise
  • Price setting curve rises up, higher wage, higher employment
37
Q

Is the equilibrium Pareto efficient?

A

no

E.g. someone asks for work at a slightly lower wage but will work as hard as the others = firm profits up and employment rent.
- While technically feasible, not economically feasible as no way to enforce that deal, so employer wont hire.

Nash equilibrium in the labour market is Pareto inefficient

38
Q

Real wage =

A

W/p = k(1-u)
Real wage = labour prod(1-markup)

39
Q

Higher level of employment impact on WS

A

Workers will demand higher wages to switch as employment rent is lower, so curve shaped upwards convex.

40
Q

If immigration comes

A

Wage setting curve shifts down, wage falls, need to up output to meet new demand, so employ more workers by increasing wage back to old wage level.

41
Q

Higher unemployment benefit impact on WS

A
  • on labour discipline, reservation wage rises.
  • translate to higher wage setting curve, higher wage demanded at each employment level
  • same employment as before but higher employment
42
Q

Simplifying assumption for this whole model

A

Only input to production is labour
- profits determined by nominal wage, priced and average output per worker per hour
- workers either put in full effort or zero effort

43
Q

What type of unemployment in WS/PS model?

A

Structural unemployment

44
Q

Impact of a policy to reduce barriers to imports

A
  • higher imports = higher competition = lower markup = higher real wage = PS curve shifts up
45
Q

Impact of a policy to reduce barriers to business startups

A

Higher competition = lower markup = higher real wage = PS shifts up

46
Q

Impact of a policy to reduce barriers to unskilled imitation

A

Higher unemployment duration = higher employment rent + lower reservation wage = lower WS curve

47
Q

Impact of policy to subsidise RnD

A

Higher productivity = higher real wage = PS curve shifts up

48
Q

Impact of a wage subsidy

A

Lower costs, while markup remains constant = higher real wage

econ0002 (18 decks)

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