Labour Market and Phillips Curve Flashcards
(10 cards)
difference between short-run and medium-run policies (+how long they last)
-in the short-run: policies can include changing interest rates or government budgets to affect demand (monetary policy: reducing interest rates, increase c, shift LM curve, fiscal policy: reduce t or increase G to shift the IS curve), last 18-24 months
-in the medium-run: labour market reforms (change z- bargaining power) and product market institutions (m= mark up- competition between firms) last 2-5 years
labour market overview (EU data 2019) and equations for rates
from top to bottom:
-total pop- 513.5m
-working age population: 330.1m
-labour force: 241.1m, out of labour force 89.8m
-employed: 225.7m, unemployed: 15.4m
equations
-unemployment rate= U(unemployment)/ L (labour force
-employment rate: N (employment)/L (Labour force)
US employment and dates (and definition of a recession)
recession: two consecutive quarters of negative GDP Growth. unemployment rate correlated w/recessions
-73-74 (OPEC oil embargo), 79-80 (Iranian revolution)
-90-91 (first Gulf War)
-2001 (Dotcom bubble)
-2008 (Global financial crisis)
wage determination equation, variables and relationship, assumption and two graphs
-equation: W=P^eF(u, z)
-variables: P^e- expected price level, u- unemployment, z- bargaining power
-relationship: if the expected price level is high, workers will demand higher wages (positive relationship).if unemployment is high, it is easier for firms to hire (low demand) so there will be lower wages (negative relationship). if bargaining power is high (through strong TU power, high min wage) then wages will be higher (positive relationship)
-assumption: price level and expected consumption are equal
-first wage-setting graph (unemployment on x, real wages (W/P) on y, negative diagonal line- wage setting curve)- at high unemployment there will be lower real wages
-second wage-setting graph (output on x, real wages on Y, positive sloping WS curve)- at high output, real wages are higher
price determination: what firms base prices on and examples, assumption made from this, perfect competition and equation,
-firms base prices on their costs of production
-examples: cost of labour, raw materials and capital- firms also base costs on how productive these are
-assume labour is only cost (Y=N)
-perfect comp: cost of producing one additional unit of output is wage paid to workers
-equation: W/P=mpl
price determination: imperfect competition and equation, graph showing how mark-up changes based on comp and explanation, both graphs combining price setting and wage setting
-many goods markets are not competitive and firms charge prices higher than their marginal cost
-equation: P=(1+m)W
-graph: mark-up on y and comp on x- bent downward sloping curve
-explanation: as market structure tends to monopoly, m is larger. as market structure tends towards perfect comp, m tends to zero and wage equals price level
-first graph- U on x, real wages on y, downward sloping WS curve, horizontal PS curve. equilibrium at 1/1+m and Un
-second graph- Y on x, W/p on Y, upward sloping WS curve and horizontal PS curve. equilibrium at Yn and 1/1+m
neoclassical natural rate of unemployment and new equation (sort of summary of factors) and graphs (with explanation) of natural rate of unemployment
-combining wage-setting and price setting relation: F(u, z)=1/(1+m)
-level of unemployment: determines neoclassical natural of unemployment. change in z and m can affect Un
-factors which increase z will increase wages
-factors that increase m will decrease wages (e.g. less product market comp)
-first graph: set up as normal. a rise in m will decrease 1/(1+m), leading to a fall in real wages (PS shifts down)
-second graph: set up as normal. a fall in minimum wages reduces bargaining power, WS shifts left and W/P falls
variations in natural rate across countries: Europe, facts, US
-Europe: labour market rigidities are often blamed for Europes high rate of u- generous benefits, protection etc.
-fact 1: unemployment not always high in Europe despite design of labour market
-fact 2: many countries had low u before 2008
US reasons:
-globalisation, weaker TU, aging pop
natural rate of unemployment (single + arguments)
-we assume natural rate u (neoclassical)
-however, contains bias- implies can do nothing about equilibrium and policymakers should not intervene
-traditional Keynesian, post and some new do not believe in a single rate:
-u in equilibrium driven by s/d. economy can have multiple equilibriums, or no equilibrium
Phillips curve intro: history, explanation and constructing curve (equations and graphs)
-history: Phillips, 58, found evidence of relationship between wage inflation and unemployment. Samuelson and Solow found similar evidence 00-68 (booming econ, low u, few workers, can bargain for higher wages and inflation rises). however, relationship broke down in 70s- negative relationship between u and change of inflation
constructing
-equations: combine wage price setting F(u, Z)- P=(1+m)P^e(1-alpha(u) +z)
-now: pi t= pi^et-1+(m+z)-alpha(ut)
-graph: price and unemplyoemtn rate- downward sloping. expected inflation and unemployment rate crosses through x
