9 - The Labour Market: wages, profits, and unemployment

Question 1

What price will a firm set if market demand is highly elastic?

Answer 1

Lower, there is a lot of competition in the market, so higher prices will cause consumers to switch to competitors.

They cannot charge a greater markup over costs (wages, fixed costs etc.) if competition is high.

Question 2

What does the wage-setting curve offer?

Answer 2

The real wage necessary to provide workers with incentives to work hard.

Question 3

How does the firm decide on the price in the market?

Answer 3

Depending on the nominal wage set, and the elasticity of demand in the market.

If market demand is highly elastic, they will set a lower price to avoid competition.

Question 4

What is the wage-setting curve?

Answer 4

The real wage necessary to provide workers with incentives to work hard.

Question 5

What is the price-setting curve?

Answer 5

The real wage firms can afford and still profit.

Question 6

What is the equation for participation rate?

Answer 6

Labour force / (population of working age employed + unemployed)

Question 7

What is the equation for employment rate?

Answer 7

employed / labour force

Question 8

What is the equation of the labour force?

Answer 8

employed + unemployed

Question 9

Draw the wage-setting curve with labour force.

Answer 9

Question 10

What effort will workers put in if there is low unemployment in the economy?

Answer 10

Lower. There is less incentive to work hard as workers have higher bargaining power because there are many other options.

Question 11

How can the wage-setting curve be described?

Answer 11

‘if-then’ statement.

If the employment rate is x, then the Nash equil. wage will be w.

Question 12

Draw a graph to derive the wage-setting curve.

Answer 12

Blue lines are the employer’s isocost lines for effort

Question 13

Where is the feasible set of the WS curve?

Answer 13

Above the WS curve.

Question 14

What does the WS curve assume?

Answer 14

Workers either work at the rate requested by employers or do nothing (shirk)

Question 15

Draw the firm’s price decision on a graph.

Answer 15

Question 16

Draw the relationship between APL and employment.

Answer 16

Question 17

What determines the height of the PS curve?

Answer 17

• market competition
• labour productivity

Question 18

Why is there always some involuntary unemployment in labour market equilibrium?

Answer 18

If there is no unemployment, there is no employment rent as the cost of job loss = 0. Therefore, some unemployment is necessary to provide an employment rent to incentivise workers to work hard.

The gap between wage-setting curve and price-setting curve shows there are unemployed people.

Question 18

Consider now a reduction in the degree of competition faced by the firms. Which of the following statements is correct regarding the effects of reduced competition?
* The price-setting curve shifts up.
* The wage-setting curve shifts down.
* The equilibrium real wage falls.
* The unemployment level falls.

Answer 18

C.

A - less comp therefore inc. markup, reducing real wage as share of output claimed by workers falls.
B - determined by labour supply therefore unaffected.
D - PS shifts down, so intersection of two curves moves down the WS curve where unemp. inc.

Question 19

What type of unemployment is entailed by a shifting left along the PS curve?

Answer 19

Cyclical unemployment.

Question 20

Why might a reduction in the nominal wage not work?

Answer 20

• Worker resistance to cuts in the nominal wage
• Wage and price reductions might not lead to higher sales and therefore higher employment

Question 21

Why might wage and price reductions not leading to higher sales and therefore higher employment cause reductions in the nominal wage to fail?

Answer 21

As firms across the economy adjust wages, households adjust spending accordingly (as their wage has fallen), causing demand to also fall.
Alongside this, households may delay expenditure, expecting prices to fall more.

Question 22

How can the government shift the economy back to a Nash equilibrium?

Answer 22

Government policy to increase demand. By doing this, firms shift their isoprofit curves upwards, increasing output while staying at the same price.

Question 23

What government policies can shift the economy back to a Nash equilibrium?

Answer 23

• Reducing interest rate to provide incentives for people to bring forward spending decisions.
• Reducing taxation or increasing government spending both increase demand by giving people more disposable income to spend.

Question 24

If the price setting curve shifts up, what happens to the gini coefficient?

Answer 24

The mark-up of the firm falls, so (assuming there are only two classes, i.e. owners and workers) the share going to profits falls, and the share going to wages rises. This causes inequality to fall, causing the gini coefficient to fall.

Question 25

What happens to the wage setting curve when labour supply increases?

Answer 25

Shifts down. New job seekers enter pool of unemployed, increasing the expected duration of spell of unemployment, raising the employment rent causing the cost of job loss to increase, meaning at the given wage w, firms are paying too high to ensure a given worker motiviation, causing firms to adopt a lower wage.

Question 26

Draw the graph demonstrating the impact of immigration on the labour market.

Answer 26

Labour supply increases, WS curve shifts down, wages reduce from 20 to 13, profits rise requiring wages to increase along the new WS curve.

Question 27

What is the impact on workers in the country when immigration takes place?

Answer 27

Short-run = bad. Employment rent increases, causing cost of job loss to increase. Long-run = good. Wages increase back to where they were at a higher employment rate.

Question 28

Draw the impacts of a union on worker effort.

Answer 28

Question 29

What is the union voice effect?

Answer 29

The recognition of the union by the employer may increase worker's BRC.

Question 30

What effect do unions have on the wage-setting curve?

Answer 30

Employees need to be paid a higher wage to work hard, shifting the WS curve higher.

Question 31

What effect does education and training have on the price-setting curve?

Answer 31

As output per worker has risen, the price-setting curve rises leading to a rise in both equilibrium employment and the real wage.

Question 32

What effect does a wage subsidy have on the price-setting curve?

Answer 32

Costs of the firm fall, so the firm lowers its price to restore the old markup. When all firms do this, real wages rise. As a result, the price-setting curve rises.