UNIT 1: the labour market

Question 1

Unemployed

Answer 1

1. not in paid employment or self employment (formal or informal)
2. available for work (excl students, homemakers)
3. actively seeking work

Question 2

participation rate

Answer 2

labour force/population of working age

Question 3

unemployment rate

Answer 3

unemployed/labour force

Question 4

employment rate

Answer 4

employed/population of working age

Question 5

Types of unemployment

Answer 5

1. frictional unemployment
2. cyclical unemployment
3. structural unemployment

Question 6

frictional unemployment

Answer 6

individuals who are between jobs but have skills to be employed and will be employed in the short run

Question 7

cyclical unemployment

Answer 7

seasonal and related to downturn in the business cycle

Question 8

structural unemployment

Answer 8

mismatch between skinns available in the workforce and skills required by the market. no increase in wage can negate the fact that the unemployed cannot perform the skills required by firms

Question 9

nominal wage

Answer 9

actual amount of money a worker is paid per time period, negotiated each year

Question 10

real wage

Answer 10

wage that takes into account real purchasing power of the nominal wage by tracking price changes in the economy

Question 11

real wage index

Answer 11

(nominal wage index/consumer price index)*100

Question 12

Deriving the wage setting curve

Answer 12

1. unemployment rate increases
2. bargaining power decreases, employers able to choose from more potential workers
3. reservation wage decreases
4. NB: measures the combinations of wages and unemployment feasible with workers effort

Question 13

wage setting curve shifts

Answer 13

1. changes in reservation wage = movement along the curve
2. changes in employment rent = shifts the wage setting curve

Question 14

formula for price (distribution of output)

Answer 14

price = (profit/output)+(nominal wage/output)

Question 15

Price setting curve

Answer 15

constant, shows the real wage consistent with firms profit maximising, depends on competition, which determines markup, and labour productivity, which determines real wage given the markup.

Question 16

Price and wage setting in summary

Answer 16

1. HR department determines lowes wage it can pay to induce enough effort given unemployment, other firms wages and prices
2. Marketing department sets the price for a product based on a constant markup given the demand curve and the wages paid
3. production department determines how many workers the firm needs to produce profit maximising quantity

Question 17

Labour market equilibrium

Answer 17

1. nash equilibrium where wage and price setting curves intersect
2. firms are offering lowest wage to ensure workers effort
3. employment is the highest it can be given the wage
4. those who have jobs cannot improve their situation with more pay or less effort
5. accepting a lower wage will not persuade firm to hire any more people

Question 18

involuntary unemployment

Answer 18

there will always be excess supply in the labour market equilibrium because no unemployment means zero cost of job loss and therefore no effort. Some unemployment is necessary to motivate workers

Question 19

demand deficient unemployment

Answer 19

increase in unemployment caused by a fall in aggregate demand

Question 20

Automatic adjustment for demand deficient unemployment

Answer 20

1. firms lower wages without lowering effort
2. lower wages allow them to cut prices
3. lower prices stimulate demand
4. output rises
5. firms hire more workers to produce more
6. unemployment falls back to equilibrium levels

Question 21

Automatic adjustment in practice

Answer 21

1. workers resist cuts to nominal wages (wages are sticky downwards)
2. lower wages lead to less spending, causing a fall in aggregate demand
3. falling prices may lead consumers to postpone spending
4. government intervention needed through monetary or fiscal policy

Question 22

labour supply and unemployment

Answer 22

1. labour force increase causes greater pool of unemployed
2. longer expected time in unemployment line
3. higher employment rents
4. lower cost of effort

Question 23

factors that contribute to a rise in gini coefficient

Answer 23

1. increase in unemployment rate
2. decrease in real wage
3. increase in markup
4. increase in productivity without change in real wage

Question 24

bargained wage setting curve

Answer 24

1. wage not set by firm, negotiated between firm and union
2. above the wage setting curve
3. indicates wage that the union-employer bargaining process will produce for every level of employment
4. position above wage setting curve depends on relative bargaining power
5. increases unemployment similar to insufficient aggregate demand

Question 25

The union-voice effect

Answer 25

1. real data does not always align with union = high unemployment assumption 2. providing employees with input may induce increased effort for same wage 3. bargained wage curve shifts down 4. overall effect of labour unions on employment ambiguous

Question 26

Labour market policies: shifts in price setting curve

Answer 26

1. education and training increase labour productivity without changing markup causes higher price setting curve and a move up along WS curve 2. wage subsidy lowers production costs, holding markup constant the price lowes and we move up along WS curve

Question 27

Labour market policies: shifts in wage setting curve

Answer 27

lower unemployment benefits will decrease the reservation wage

Question 28

shifts in labour supply curve

Answer 28

1. immigration policies impact labour supply 2. childcare provision increases female labour participation