Topic 4: Labour Markets & Philips Curve Flashcards
(21 cards)
What is the effect of monetary policy in the short run?
Adjusting interest rates (shifts in LM curve)
This policy influences liquidity and borrowing in the economy.
What does fiscal policy involve in the short run?
Government spending and tax adjustment (shifts in IS curve)
This policy aims to influence overall economic activity.
What are the two types of medium run policies?
Supply-side policies:
* Labour market reforms (Z)
* Product market reforms (M)
These reforms aim to improve the efficiency and flexibility of the economy.
How is the labour force defined?
Population of working age - population out of Labour force
This definition helps to measure the active workforce available in the economy.
What is the formula for the unemployment rate?
U/L = U%
U is the number of unemployed and L is the labour force.
What is the employment rate formula?
N/L = N%
N represents the number of employed individuals.
What correlation exists between unemployment and recessions?
Unemployment is correlated with recessions, such as after the first Gulf War
This relationship highlights the economic impact of external events.
What does the wage-setting equation represent?
W = P^eF(u,z)
W is the nominal wage, P^e is the expected price level, u is the unemployment rate, and z represents institutional factors.
What happens to wages in a very low unemployment scenario?
Higher WU may be needed to hire new workers
This indicates increased competition for available labor.
What is the price determination under perfect competition?
Price equals marginal cost: P=W
This reflects optimal pricing strategies in competitive markets.
What is the relationship between the natural rate of unemployment (u’) and real wages?
Equilibrium unemployment where real wage set by workers = real wage implied by Firm pricing
This concept connects labor market outcomes with pricing strategies.
What happens if institutional factors (z) increase?
Workers can bargain for higher wages; firms face higher costs and hire fewer workers
This leads to an increase in unemployment.
What are the reasons for high European unemployment?
- Generous unemployment benefits
- Strong employment protection
- Higher minimum wages
- Powerful unions
These factors contribute to a less flexible labor market.
What has caused the rise in the US natural rate of unemployment in the 1980s?
- Globalization
- Weaker trade unions
- Aging workforce
- Increased disability claims
These elements reflect changes in labor dynamics.
What is the neoclassical model’s view on unemployment?
Claims there is a ‘natural’ rate of unemployment (u) and policymakers shouldn’t intervene
This perspective emphasizes market self-correction.
What do Keynesian views argue about unemployment?
Disagree with the concept of a single natural rate; demand influences equilibrium unemployment
This perspective highlights the role of aggregate demand in labor markets.
What does the Philips curve illustrate?
Inverse relationship between wage inflation and unemployment
This relationship was first observed by A.W.J. Philips in 1958.
What are the components of the wage-setting and price-setting equations in the Philips curve?
Wage-setting: W = P^eF(u,z); Price-setting: P = (I+m)W
These equations reflect the dynamics of wage and price determination.
How does an increase in markup (m) affect wages and hiring?
Firms pay lower real wages; workers accept fewer offers at lower wages, leading to higher unemployment
This illustrates the impact of market power on employment.
What does a decrease in institutional factors (z) lead to?
Workers have less bargaining power, leading to lower wages and firms hire more workers
This results in decreased unemployment.
What is the role of sensitivity of inflation to unemployment (a) in the Philips curve?
It measures how changes in unemployment affect inflation rates
This sensitivity illustrates the trade-off between inflation and unemployment.
