Labour Market Week 10 & 11
What is employment rent?
The economic rent a worker receives Difference between net value of her job and net value of the next best alternative - being unemployed
How is utility per hour of work calculated?
net utility per hour = wage − disutility of effort per e.g. paid £12 an hour and effort working for an hour has a utility cost of £2. New utility per hour is £10
What is a reservation wage?
What an employee would get in alternative employment, or from an unemployment benefit or other support, were he or she not employed in his or her current job.
What is the principle agent problem?
A principal delegates an action to another individual (agent), but the principal does not have full information about how the agent will behave. Example a manager the principle highers a works the agent, but does not truly know how hard they will work and they have different motivations
What would be the effect of an in increase in unemployment benefits on a workers best response function?
A rise in the unemployment benefit increases the reservation wage and shifts the worker's best response curve to the right.
What is the price setting curve?
The curve that gives the real wage paid when firms choose their profit-maximizing price.
What is involuntary unemployment?
Being out of work But willing to work at the wage that other workers like you are receiving.
What is moral hazard in the labour market?
Contractual issue which arises from information asymmetries when someone (the principal) delegates some task to someone else (the agent). The agent may be motivated to not fully complete the contract and put in maximum effort or not be able to work to the highest standard.
What would be the effect of an in increase in unemployment on employment rent?
Decrease in employment rent The next best alternative of being unemployed has increased so the economic rent diffrence between next best option and employment has decreased
What is a key difference between Employment rate and Unemployment rate?
Employment rate is population of working age that are in paid work or self-employed, Including economically inactive, like students Unemployment rate is proportion of the labour force that is unemployed not including people like students only those employed and those looking for work
What is total employment? In the Employment Rent model (how is it calculated)
Employment rent per hour times the number of hours of work she will lose if her job is terminated. total employment rent=employment rent per hour x expected lost hours of work the shaded area in the figure.
In the labour discipline model, what is the isocost line for effort?
Every point on the line where the ratio of effort to wage is the same. Higher wages correspond to higher effort. But the employer is indifferent between all points along this line.
In the labour discipline model when wage is high what is the slope of the best response curve?
Flatter Experiencing diminishing returns Increases in wages will have a smaller effect on effort. More unpleasant to work even harder when you're already working almost your hardest
How are employment rate and Unemployment rate connected?
High employment rate often means low unemployment Low employment rate often means high unemployment Not always the case south Korea has low employment rate and low unemployment rate
What are characteristics high employment rents?
High salary Job benefits like medical insurance Enjoyable job Good location close to home Negative stigma around being unemployed Low unemployment benefits
What would be the effect of increased unemployment and fewer job vacancies on a workers best response function?
If unemployment rises, the expected duration of unemployment increases. So the worker's reservation wage falls and the best response curve shifts to the left.
What is an incomplete contract?
Important information, like the employee's effort, is asymmetric or non-verifiable.
what is an asymmetry of information?
Information that is relevant to the parties in an economic interaction, but is known by some but not by others
In the labour discipline model, what is the optimal point? (equilibrium wage)
Isocost line that is tangent to the worker's best response curve (feasible set) MRS = MRT the marginal rate of substitution, the slope of the isocost line for effort Is equal to the marginal rate of transformation ,higher wages into greater effort, the slope of the best response function
What would likely result in low employment rents?
Low salary Economic boom Low unemployment and high job vacancies Highly skilled worker that would receive a high wage and easily work elsewhere High unemployment benefits
What are example of high employment and low unemployment countries and why?
Norway and Scandinavian countries Due to more women in the labour force
What is the unemployment rate?
Proportion of the labour force that is unemployed - those looking for work
What is the employment rate?
Proportion of the population of working age that are in paid work or self-employed
What is the participation rate?
Proportion of the working age population that is in the labour force.
In the labour discipline model when wage is low what is the slope of the best response curve?
Steep Increasing wages will initially have larger effect on effort It's easier to increase effort from a level of nothing to 0.1
How is the interaction between the employer and worker in the labour discipline model like a subsequential ultimatum game?
The employer chooses the wage The worker chooses the level of effort they put into the job (taking into account the costs of losing her job if she does not provide enough effort.)
What is the best response function in the labour discipline model?
The optimal amount of work that a worker chooses to perform for each wage that the employer may offer. Employer's feasible set of combinations of wages and effort that it gets from the worker Slope along this curve is the marginal rate of transformation MRT
What is the wage setting curve?
The real wage necessary at each level of economy-wide employment to motivate workers to work hard and well.
In the labour discipline model, for a employer to minimise costs what isocost line will they want to pick?
The steepest isocost line for effort, where the cost of a unit of effort is lowest
What does the shape of best response function in the labour discipline model depend on?
Utility the wage (things that can be bought with it) Disutility of effort Reservation wage Probability of getting fired when working at each effort level
What is someone who is unemployed?
Where a person who is able and willing to work is not employed. They haven't worked in the last 4 weeks Have been actively looking for work
How is the employment rent calculated?
employment rent = employment rent per hour × hours per week × number of weeks unemployed
What is disutility of working?
unpleasantness of going to work and working hard all day
