Chapter 7 Flashcards
(15 cards)
What is the non-institutional civilian population?
Children, in armed forces, behind bars - people potentially available for civilian employment
How do the fluctuations in aggregate unemployment rate affect individual workers?
- the welfare of individual workers
- wages
How can firms decrease their employment in response to decreased demand? What are the implications for workers?
Hire few new workers/lay off workers they currently employ.
Implications:
fewer hires: less chance for unemployed to find a job –> expect to remain unemployed for a longer time
higher layoffs: higher risk to lose job
What is collective bargaining?
wage setting due to bargaining between firms and unions
Mention some common forces within wage determination in all countries
- Workers are typically paid a wage above the reservation wage
- Wages typically depends on labor-market conditions. The lower the unemployment rate, the higher the wages.
What does workers’ bargaining power depend on?
- How costly it would be for the firm to find another worker
- How hard it would be for the worker to find another job
What are efficiency wages?
That firms pay higher wages, regardless of the reservation wage, to encourage workers to be more productive.
Labor-market-condition: low unemployment rate makes it more attractive for workers to quit –> firms pay hihger wages to keep their employees
Why does the price level affect nominal wages?
Because both workers and firms care about real wages and not nominal wages. So they care about the nominal wage they receive relative to the price of the goods. In the same way firms don’t care about the nominal wage they pay, but what they pay relative to the price of the goods they sell.
Why do wages depend on expected price level, rather than actual price level?
Because wages are set in nominal terms, and when they’re set , the relevant price is not yet know.
An increase in the expected price level leads to an increase in the nominal wage in the same proportion.
What happens with wages when unemployment increases?
Decreases wages, because it weakens workers’ bargaining power.
What happens when markup increases?
All prices go up, so if you’re paid the same nominal wage, your real wage goes down. This increases unemployment, since higher unemployment is required to make workers accept this lower real wage.
The labor market functions differently than the goods and money market. Why?
- In the money or goods market, the equilibrium price was the price at which demand equals supply (market clearing)
- But we observe unemployment, i.e. at the equilibrium price (= the wage) the supply of labor is larger than the demand
- If labor markets were competitive, unemployment would lead to a decrease in the equilibrium price = wage, which would decrease supply and increase demand until the market clears and unemployment disappears
- So the fact that we observe unemployment tells us that the labor market is not a competitive market and wage-setting works differently from price-setting
What is wage indexation?
Wage indexation means that wages are set such that they are automatically adjusted to inflation. This is important when wages are set for a longer period of time, or when inflation is very volatile.
How do you expect wage indexation (the contractual feature that brings wages to increase with inflation) to impact the relation between unemployment and the change in inflation?
First, suppose absence of wage indexation. Nominal wages are set for, let’s say, 5 years. When unemployment is low, below the natural rate, production is high, and inflation increases. Because of the absence of wage indexation, nominal wages do not react immediately. No increase in the costs for firms, no further increase in prices.
Now, suppose that all wages are indexed on inflation. When unemployment is low, below the natural rate, production is high, and inflation increases. Because nominal wages react immediately to inflation, they will increase. This increase in the costs for firms will bring them to increase prices further. Inflation will increase even more.
Wage indexation increases the effect of unemployment on inflation.
Do you expect a country where wage indexation is a common wage policy to have a Phillips curve that is steeper or flatter than a country where wage indexation is rare?
When inflation is very sensitive to changes in unemployment, i.e., when the effect of unemployment on inflation is high, the Phillips curve is steeper, and vice versa.
