POE Chapter 16

. In this long-run model,

, things that may change slowly and which are assumed to be constant in medium- or short-run models—such as the size of the capital stock, and the firms operating in the economy—can fully adjust to a change in economic conditions.

lower markup

= firms exit

concave function

A function of two variables for which the line segment between any two points on the function lies entirely below the curve representing the function (the function is convex when the line segment lies above the function).

co-insurance

A means of pooling savings across households in order for a household to be able to maintain consumption when it experiences a temporary fall in income or the need for greater expenditure.

inclusive trade union

A union, representing many firms and sectors, which takes into account the consequences of wage increases for job creation in the entire economy in the long run.

Either jobseekers or those seeking to hire may not have relevant information:

As we have seen in Unit 6, economic actors with different skills and needs— jobseekers and firms in this example—look for opportunities for mutual gains from trade. But the firm and the jobseeker may not know about each other (although there is evidence that technology is improving this matching process)

Closing diffusion gaps

Closing diffusion gaps can greatly increase the speed at which new knowledge and management practices are in widespread use.

ICT is reshaping our societies.

ICT is replacing much of routine labour, in many cases further impoverishing the already poor. People who would have previously anticipated rising living standards have fewer job opportunities.

creative destruction stats process

In most economies for which data is available, at least 10% of jobs are destroyed every year, and about the same number of new ones are created. In France or the UK, every 14 seconds a job is destroyed and another one created.

To explain trends and differences in unemployment over time, we can extend the labour market model to the long run

In the long run, firms can enter/exit (so capital stock can change)

creative destruction

Joseph Schumpeter's name for the process by which old technologies and the firms that do not adapt are swept away by the new, because they cannot compete in the market. In his view, the failure of unprofitable firms is creative because it releases labour and capital goods for use in new combinations.

employment protection legislation

Laws making job dismissal more costly (or impossible) for employers. harmful to labour market performance by enlarging the diffusion and adjustment gaps, and slowing the rate of technical progress, while at the same time pushing the wage-setting curve up

capital-intensive

Making greater use of capital goods (for example machinery and equipment) as compared with labour and other inputs

Newly posted vacancies are not filled instantly because of issues with labour market matching:

Mismatch - unemployed workers may not have the skills required for the job; jobseekers and vacancies may be located in different parts of the country ▶ Jobseekers and/or employers may not know about each other ▶ Policies and technology can improve efficiency ▶ Industry-specific shocks or shocks that prevent workers from moving increase the mismatch (lower efficiency)

relationship of TP and A of CG

New technologies require new machines: The accumulation of capital goods is a necessary condition for the advance of technology, as we saw in the case of the spinning jenny. Technological advance is required to sustain the process of capital goods accumulation: It means that the introduction of increasingly capital-intensive methods of production continues to be profitable.

high unemployment + large number of vacancies

Observing a combination of high unemployment and a large number of vacancies is an indicator of inefficiency in the matching process in the labour market.

changes in unemployment

Patterns of unemployment across countries reflect differences in institutions and policies Production has become more capital intensive, without resulting in mass unemployment.

innovation rents

Profits in excess of the opportunity cost of capital that an innovator gets by introducing a new technology, organizational form, or marketing strategy. Also known as: Schumpeterian rents.

Technological change improves long-run living standards but can cause short-run unemployment by replacing labour

Technological change improves long-run living standards but can cause short-run unemployment by replacing labour However, long-run patterns of unemployment across countries are not explained by national differences in innovation over time

techno process and unemployment

Technological progress has not created rising unemployment rates. Instead it has raised the lowest wage that firms can pay while still covering their costs. As a result, technological progress expands the resources the firm has to invest in increasing production, and it also incentivizes continued investment. By focusing only on the destruction of jobs, those who worry about the end of work have ignored the fact that labour-saving technological progress also induces the investment that helps to create jobs.

Creative destruction long run effect on unemployment

The 'creative destruction' of older ways of producing goods and organizing production has led to continuous job loss as well as job creation, but not higher unemployment in the long run.

wage-setting curve

The curve that gives the real wage necessary at each level of economy-wide employment to provide workers with incentives to work hard and well.

price-setting curve

The curve that gives the real wage paid when firms choose their profit-maximizing price.

bargaining power

The extent of a person's advantage in securing a larger share of the economic rents made possible by an interaction.

Beveridge curve

The inverse relationship between the unemployment rate and the job vacancy rate (each expressed as a fraction of the labour force). Named after the British economist of the same name. two examples of what came to be called the Beveridge curve, using data from Germany and the US.

adjustment gap

The lag between some outside change in labour market conditions and the movement of the economy to the neighbourhood of the new equilibrium.

diffusion gap

The lag between the first introduction of an innovation and its general use Closing diffusion gaps can greatly increase the speed at which new knowledge and management practices are in widespread use.

John Maynard Keynes wrote:

The long run is a misleading guide to current affairs. In the long run we are all dead.

berveridge noticed During booms, unemployment will decline:

The number of vacant jobs posted by firms increases, and more workers will be employed to cope with rising demand for products.

expropriation risk

The probability that an asset will be taken from its owner by the government or some other actor.

labour market matching

The way in which employers looking for additional employees (that is, with vacancies) meet people seeking a new job.

A mismatch between the location and nature of the workers looking for jobs and the jobs available for workers:

This is sometimes a matter of skills required by firms and the skills of jobseekers. For example, research explains that one of the reasons for inefficiency in the US labour market in recent years has been that vacancies are concentrated in a few industries. The telephone engineer whose job was recently eliminated may not have the computer skills required to fill the vacancies in the company's billing department. Or the redundant workers and the vacancies may be located in different parts of the country. Travelling to another area to find a job would mean severing ties with neighbours, schools, and relatives.

relationship of technological progress and accumulation of capital goods

This process of creative destruction led to sustained increases in living standards on average because technological progress and the accumulation of capital goods are complementary: each provides the conditions necessary for the other to proceed. e.g. spinning Jenny This process allows a sustained increase in average living standards

benefits to losing job

Those who benefit may be the 1) children of the handloom weaver displaced by the power loom, or the 2) children of the unemployed typist who was displaced by the computer. They benefit by finding a job in an occupation that is more productive than the job their parents did, and they may share in the benefit from the new goods and services that are available because the power loom or the computer exist. Labour-saving technological progress can also create jobs e.g. reallocation of work from low- to high- productivity firms

how can diffusion gaps be closed

Union bargains for wages such that equivalent workers are paid the same throughout the economy. One consequence of this is that the least productive firms (which are also those paying low wages) will experience wage increases, making some of these firms unprofitable and putting them out of business.

berveridge noticed During recessions, there will be high unemployment:

When the demand for a firm's product is declining or growing slowly, firms can manage with their current staff even if a few of them quit or retire. As a result, they advertise fewer positions. In the same conditions of weak demand for firms' products, people will be laid off or their jobs entirely eliminated.

Luddites

a person opposed to new technology or ways of working

destructive part of creative destruction

affects occupations that may often be concentrated in particular regions, with large losses in wages and jobs. Families and communities who are the losers often take generations to recover. Like 'short run', the term 'average' often hides the costs to the workers displaced and communities destroyed by the introduction of new technologies.

country's economic institutions and policies can be evaluated

by 1) their capacity to keep involuntary unemployment low and 2) to sustain increases in real wages.

Conversely, job destruction is countercyclical

countercyclical= Tending to move in the opposite direction to aggregate output and employment over the business cycle it rises during recessions if the change in a variable was not correlated with the business cycle, it would be called acyclical acyclical =No tendency to move either in the same or opposite direction to aggregate output and employment over the business cycle.

In Indonesia's electronics industry—a part of the highly competitive global market

data from the late 1990s show that the firms at the 75th percentile were eight times as productive as those in the 25th percentile

average product of capital of PF

dotted blue line goes from the origin through the production functions for the old and new technologies

The US curve shifted away from the origin

due to a skill-based mismatch and limited worker mobility

The Beveridge curve can shift over time

due to changes in the labour market matching efficiency

The German Beveridge curve shifted closer to the origin

due to reforms that helped unemployed workers find jobs

most people benefit

fall in prices due to the new technology. For better or worse, creative destruction as a result of technological progress is part of the dynamism of the capitalist economic system. And while lives have been disrupted and the environment increasingly threatened by this dynamism, the introduction of improved technologies is also the key to rising living standards in the long run.

The profit rate determines the number of firms in the market. High markup =

firms enter

Beveridge curve During recessions

firms post fewer vacancies and lay off more workers due to lower demand

Beveridge curve During booms

firms post more vacancies and need more workers to cope with rising demand

Now we include capital goods (machinery, equipment, and structures) explicitly in the production function horizontal axis of PF

horizontal axis of production function= records the amount of capital goods per worker. This is a measure of what is called the capital intensity of production Capital intensity of production: capital goods per worker

Net employment change =

job creation - job destruction

slope of the production function

marginal product of capita

Technological change

means jobs disappearing in firms in which new technology substitutes for workers. Jobs also disappear as new firms enter and those unable to adapt to the new conditions shut down.

The rate at which the economy's price-setting curve shifts upward depends

on which of these attitudes towards the process of creative destruction is predominant. Economies differ greatly in this respect.

Job creation is strongly procyclical

procyclical= Tending to move in the same direction as aggregate output and employment over the business cycle. See also: countercyclical. this means that it rises in booms, and falls during recessions

The union might also support government policies that complement its role in hastening the exit of unproductive firms

raising average productivity in the economy and shifting up the price-setting curve. In this case, associations of workers can help bring about creative destruction instead of resisting it.

upward shift in the price-setting curve.

rate of increase in the productivity of labour This diffusion gap - The lag between the first introduction of an innovation and its general use. causes differences between the productivity of labour in the most advanced firms and the firms that lag technologically = impact shift of PSC

technological progress

shifts upwards production function so that the same amount of labour now produces more output ▶ This increases the APL and offsets the diminishing marginal returns to capital... ▶ Which makes it profitable to invest domestically, leading to increased capital intensity

We shall see that:

technological change is constantly putting people out of work but the countries that have avoided high levels of unemployment are among those in which the productivity of labour has increased the most

diminishing returns to capital

that the marginal product of capital is falling as we move along the production function. A production function that exhibits diminishing returns to capital is concave Concavity captures the fact that output per worker increases with capital per worker, but less than proportionally.

price-setting curve in the long-run model

the level of the real wage such that firms will neither enter nor leave the economy.

In UK, India and China

top firms are more than five times as productive as the bottom firms

vertical axis of PF

we have the amount of output per worker, also known as labour productivity labour productivity =Total output divided by the number of hours or some other measure of labour input.close. labour productivity: output per worker

Long-run equilibrium in the labour market

when 1)wages 2) employment level 3) the number of firms are constant

Long-run employment rate depends on how well policies and institutions deal with:

▶ Work incentives - depend on wage-setting curve ▶ Investment incentives - depend on price-setting curve