Lecture 5: The Labour Market Flashcards
(25 cards)
What is the natural rate of unemployment?
It’s the unemployment rate at which wage demands by workers match the price-setting decisions of firms, meaning no upward or downward pressure on inflation.
Why can’t expansionary policies work indefinitely?
Debt rises, labor shortages appear, inflation increases, and overtime or stimulus effects fade.
What is the MPL (Marginal Product of Labour)?
The additional output from one more worker, holding capital/tech constant; it decreases with more employment.
How is MPL related to labour demand?
Labour demand is the MPL curve — showing a negative relationship between real wages and employment demand.
What causes the labour demand curve to shift right?
Increases in capital or technology, which raise productivity.
What influences labour supply?
Market participation, hours worked, and opportunity costs (like leisure or education).
What are the two wage effects on labour supply?
Substitution Effect: Higher wages make leisure costly → more work.
Income Effect: Higher income increases demand for leisure → less work.
What are the key employment stats formulas?
Participation Rate = Labour Force / Non-Institutional civilian population
Employment Rate = Employed / Labour Force
(Or 1 - Unemployment rate)
Unemployment Rate = Unemployed / Labour Force
(Or 1 - Employment Rate)
What is the formula for the natural rate of unemployment?
u = p/p+s
Where:
𝑝 = probability of job loss
𝑠 = probability of finding a job
How does labour protection influence unemployment?
It can reduce 𝑝 (job loss), but also reduce 𝑠 (job finding), raising the natural rate of unemployment.
What are the main types of unemployment?
Frictional, Structural, Seasonal, and Cyclical.
What is underemployment?
Workers involuntarily working part-time but available for more work.
What causes labour market deviations?
Minimum wage, unions, market power, taxes, efficiency wages, frictions, mismatches.
Why might firms pay above-market wages?
To boost morale, reduce turnover, and increase productivity.
How are wages and prices set in the labour market?
Wage-Setting:
W=P⋅F(u,z)
Price-Setting:
P=(1+μ)⋅W
Where 𝜇 = markup, and 𝑧 includes factors like benefits or union power.
What increases the natural rate of unemployment?
Higher unemployment benefits (↑z)
Higher markups (↑μ)
→ Both reduce real wages and increase natural unemployment.
What can reduce the natural unemployment rate?
Boost productivity (A)
Promote competition (lower μ)
Reform unemployment benefits (lower z)
What is a reservation wage?
The minimum wage a worker is willing to accept, influenced by unemployment benefits and personal opportunity costs.
What does the Insider vs. Outsider theory explain?
It explains how employed workers (insiders) can negotiate higher wages, making it harder for unemployed workers (outsiders) to find jobs.
How does market power of firms affect wages?
Firms with more power can set wages below competitive levels, leading to lower employment and higher unemployment.
What is the “wedge” in labour markets?
The gap between what employers pay and what employees receive, due to taxes and social security contributions.
What are labour market frictions?
Obstacles like search costs, lack of information, or bureaucratic hurdles that slow down matching workers with jobs.
What causes mismatches in the labour market?
Differences in skills or location between available jobs and workers — e.g., a factory in one region, unemployed workers in another.
Why would a firm pay more for routine vs. skilled jobs?
Firms relying on worker commitment and morale pay more to boost quality; routine-task firms are less sensitive to this.
