7. The Labor Market

Question 1

Wage determination

Answer 1

w=P^e F(u,z)
P^e= expected price level
u= unemployment rate (increase in unemployment rate decreases wage)
z= variable that stands for all the other factors -un insurance, un benefits, increase in the min wage, employment protection etc (increase in z increases wages)

Question 2

Price determination

Answer 2

P=(1+m)W

Question 3

Equilibrium in the labor market

Answer 3

Real wage chosen in WAGE SETTING EQUALS real wage implied by PRICE SETTING
•Natural rate of unemployment - the equilibrium unemployment rate Un
•Natural level of output - the output associated with the natural level of unemployment