Labor markets

Question 1

Medium run

Answer 1

A decade, possibly less

Question 2

What determines output in the medium run?

Answer 2

How much an economy can produce
Supply depends on how advanced the country is, how much
capital it is using, size and skill of labor force.

Question 3

Long run

Answer 3

Several decades

Question 4

What determines output in the long run?

Answer 4

Main determinants are education systems, saving rate, quality of government.
Technology depends on innovation, skill of workers depends on
education, efficiency requires laws

Question 5

Population in working age

Answer 5

Population excluding under working age (15) or above retirement age (changes)

Question 6

Labor force

Answer 6

The sum of those either working or looking for work

Question 7

Participation rate

Answer 7

The ratio of the labor force to the population in working age

Question 8

Unemployment rate

Answer 8

The ratio of unemployed to the labor force

Question 9

Employment rate

Answer 9

The ratio of employed to the labor force

Question 10

Discouraged workers

Answer 10

People who are classified as out of labor force but may take a job if they found one

Question 11

Labor market flows

Answer 11

Shows how individuals move between employment, unemployment and being outside the labor force.

Question 12

Hire

Answer 12

Workers newly employed by firms
AKA outflow from unemployment

Question 13

Separation

Answer 13

Workers who are leaving for another job or losing their jobs
AKA inflow to unemployment

Question 14

worker separations can further be divided into two

Answer 14

Leavers: Workers leaving their jobs for better ones
Layoffs: Workers losing their jobs due to changes in employment levels across firms.

Question 15

Active labor market

Answer 15

Market full of separations and hires

Question 16

Sclerotic market

Answer 16

Few separations, few hires, and a stagnant unemployment pool.

Question 17

What describes a country with a stagnant pool of workers

Answer 17

A country where the average duration of unemployment is high.

Question 18

How are wages determined?

Answer 18

Bargaining
Efficient wage theories

Question 19

Bargaining power for workers

Answer 19

Collective bargaining (unions to firms)
Nature of the job (skill level etc)
Labor market conditions ( If unemployment is low harder to find replacements etc)

Question 20

Reservation wage

Answer 20

The wage that would make you indifferent between working and being unemployed

Question 21

Efficient wage theories

Answer 21

Theories that link productivity/
efficiency of workers to wages they are paid.

Question 22

What does efficient wage theories depend on?

Answer 22

Firms - high tech- morale and commitment
Labor market conditions (low unemployment makes it more attractive to quit as its easier to find another job)

Question 23

What does the aggregate nominal wage depend on

Answer 23

W=PeF(u,z)
The expected price Pe
The actual unemployment rate u.
A catchall variable z

Question 24

What does z stand for in the wage setting equation?

Answer 24

All other variables that
might affect wage-setting

Question 25

Why does expected price level effect nominal wages?

Answer 25

Because both workers and firms care about real wages, not nominal. Workers care about wages recieved relative to the price of goods they buy. Firms care about nominal wages they pay relative to price of goods they sell

Question 26

How does unemployment relate to wages? Positively or negatively?

Answer 26

Higher unemployment indicates lower wages. This negative correlation is because of bargaining power and efficiency wages.

Question 27

Catchall variable examples

Answer 27

Unemployment benefits Employment protection Minimum wage

Question 28

Unemployment benefits

Answer 28

Higher unemployment benefit leads to higher wages. Increasing reservation wage.

Question 29

Employment protection

Answer 29

Higher protection leads to higher wages. Makes it more expensive to layoff workers so increased bargaining power.

Question 30

Minimum wage

Answer 30

Higher min wage higher wages. Raise in min wage lowers demand for unskilled labor.

Question 31

How do firms set prices?

Answer 31

Depends on costs. Which depend on production function

Question 32

Production function?

Answer 32

The relationship between inputs used and the quantity produced and the prices of these inputs.

Question 33

Under perfect competition how is price related to wage

Answer 33

P=MC

Question 34

How is price determined in markets where firms have price setting power ?

Answer 34

P = (1 + µ)W Where µ is the markup over cost

Question 35

What does the markup (µ) represent

Answer 35

µ is the percentage by which the price exceeds the marginal cost, reflecting the firm's market power

Question 36

How does the presence of a markup affect the real wage (W/P)?

Answer 36

The real wage is W/P = 1 / (1 + µ), indicating that higher markups reduce the real wage.

Question 37

What is the implication of a higher markup on employment and wages?

Answer 37

Higher markups can lead to lower real wages and potentially higher unemployment.

Question 38

The natural level of unemployment

Answer 38

Nn = L(1-un) where Nn= Natural rate of unemployment L = labor force u=unemployment rate

Question 39

The natural level of output

Answer 39

Level of production when employment is equal to natural level of employment