The labour market wages employment and

What is the unit labour cost

(Nominal wage)/ (labour productivity) W/λ

What causes the gini coefficient to rise with labour market ?

- A larger fraction of employees are without work - The real wage falls and nothing else changes - Productivity rises and nothing else changes indicates the mark up rises

How does demand deficient unemployment appear in the model for the labour market ?

- Point X unemployment is at it labour market equilibrium level - Point B there are additional people looking for work also involuntarily unemployed. Additional unemployment at B is down to low aggregate demand Point B is not a nash equilibrium as HR would notice at point B they could hire the same number of employees and pay them a lot less making higher firm profits and lowering price setting curve

Why does wage and price cutting not work smoothly in reality ?

- Worker resistance to a reduction in the nominal wage Lowering nominal wages cuts actual monetary amount received by all workers. This can lower moral and cause conflicts like strikes disrupting productivity -Wage and price reductions may not lead to higher sales and employment Fallin prices for an individual firm leads to higher sales however falling prices across entire economy can lead to cutback in pending as consumers hope to get better bargains later. As well as this as wages fall people may spend less.

Example of expansive government policy ?

-Monetary: Making borrowing cheaper by reducing the interest rate. Provides incentives for people to bring forward spending decisions on thing purchased with credit -Fiscal: Increase gov spending or reduce tax rates

When there is cyclical unemployment and the wage is cut where will firms price cutting stop

-New lower wage isoprofit curve passing through B is now steeper than demand Therefore they lower the price until isoprofit becomes a tangent to demand curve once more

How to derive the price setting curve ?

1 firm sets it price Assume labour is the only input 2 Price level in the economy as a whole and the real wage 3 Prifts, wages and price setting curve

What happens to the labour market equilibrium following an increase in the labour supply

1) New job seekers would enter the pool of the unemployed 2) Increases the expected duration of spell of unemployment 3) By raising cost of a job loss, employment rent increases 4) Firms would then need to be paying more than neccesary to ensure worker motivation 5)so firms lower wages

What is the labour supply curve ?

A labor supply curve shows the number of workers who are willing and able to work in an occupation at different wages.

What shift the WS curve

A shirk monitor to check every employees effort unemployment benefits Duration of unemployment Change in disutility of effort

What is a trade union?

An organization that can represent the interest of workers in negotiations with employers over issues like pay and working conditions

What determines the height of the price setting curve.

Competition- Intensity of competition in the economy determines the extent to which firms can charge a price that exceeds their costs, that is, the mark up. The lower the competition the greater the mark up Steeper demand curves lead to higher markups increasing profit per worker. This causes higher prices across the whole economy leading to lower real wages. Pushing price setting curve down. Labour productivity: For any given mark up Labour productivity determines the real wage. Greater labour productivity the higher the real wage consistent with a given mark up

How does the government increasing the level of Aggregate demand affect the firm ?

Could be done through fiscal or monetary policy.

How does increased competition in the market affect the equilibrium unemployment and inequality

Equilibrium moves from A to B

How can the government help return from point B back to the nash equilibrium ?

Government can increase its own spending and expand the demand facing firms. This would make firms realise that they were producing less than the profit maximising amount and employ more rather than lower wage Use of Government policy is much faster way of reducing unemployment than relying on firms

How to work out the markup ?

Higher the elasticity the lower the firm's price and markup Define the markup as µ

How is wage decided in a firm ?

Human resources calculates the lowest wage it can pay, cannot undermine the workers motivation and based on prices of other firms products and unemployment wage. This is the nominal wage rate. Marketing department sets the price based on firms nominal wage and the shape and position of demand curve facing the firm. the marketing department then calculate the amount of output the firm will sell Production department then uses this info to determine how many employmentees have to be hired to achieve the desired output

What effect does a change in productivity have on the ps curve ?

If the λ increases then the w/p will also increase

Why will there always be some involuntary unemployment in labour market equilibrium ?

If there was no unemployment cost of job loss would be 0 means there is no employment rent Unemployment is necessary to motivate workers to provide effort on the job Gap between wage setting curve and labour supply curve shows unemployment

What is unemployment caused by a fall in Aggregate demand called ?

It is cyclical unemployment or demand deficient unemployment

How is average product of labour split up

It is split into real profit per worker π/p and the real wage W/P

What does derived demand for labour mean ?

It principle that relates a firm increasing their output will demand more labour hiring more staff

How to show distribution of income at labour market equilibrium ?

Left side shows labour market 80 employees of 10 identical firms There are 10 unemployed people Equilibrium is at point A where real wage is sufficient to motivate workers Right side shows lorenz curve unemployed people receive no income if there are no unemployment benefits. Price setting panel shows that total output is divided up so workers receive a 60% share and employers receive the rest Gini coefficient is therefore 0.36

How do we simplify the worker motivation problem and wage curve

Let there be only 2 levels of effort Working providing effort managers and owners deem as sufficient Shirking providing no effort at all Above the wage setting curve are the combinations where workers work and below are the combinations where workers shirk.

What is equilibrium unemployment ?

Number of people seeking work but without jobs at the equilibrium of the labour market. Part of the nash equilibrium where neither employers nor workers could benefit from changing behaviour Unemployment is also termed as excess supply

The effects of immigration on labour graphically

Originally 5 million labour force 1 million unemployed 500,00 migrants join labour force Wage setting curve shifts downwards a threat of job loss is greater so lower wage offered Firms profits rise so they hire more workers labour market moves from b to c employment and wage rise until they meet price setting curve

What are people that are unemployed ?

People who : Are without work during a referenced period usually 4 weeks, where they were not in paid employment or self employment Were available for work Were seeking work, which means they had taken specific steps in that period to seek paid employment or self employment

Short term and long term effects of increasing labour supply on the market

Short term effects existing workers are negatively impacted as wages fall and expected duration of unemployment rises In the long run however real wage is restored and incumbent workers are no worse off

What is the participation rate ?

Shows the proportion of the working age population that is in the labour force.

What is involuntary unemployment

State if being out of work but preferring to have a job at the wages and working conditions that otherwise identical employed workers.

Where is the equilibrium in the labour market

The Equilibrium is a nash equilibrium where the wage and price setting curves intersect all parties are doing the best they can Each firm sets the nominal wage where the isocost curve is at a tangent to the best response function Firm offer wage ensuring effective work from employees at their lowest cost Employment is at its highest it can be given wage offered, Those with jobs cannot improve their situation by changing their behaviour Those who fail to have jobs would much rather have jobs.

What is the nominal wage ?

The actual amount received in payment for work in a particular currency Real wage is the nominal wage adjusted to take account of changes in prices between different time periods. it measures the amount of goods and services workers can buy Real wage is the nominal wage divided by price level of standard bundle.

What is the 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. Labour force is the furthest vertical line to the right has a value less than 1 dependent on the participation rate Inactive workers lie to the right of the labour force line Employment rate is the vertical line to the left of the labour force indicating the share of the pop who are acc working Unemployment rate is the proportion of the labour force who are not employed

What is the price setting curve ?

The curve that gives the real wage paid when firms choose their profit-maximizing price. Gives the real wage that is the outcome of choice by the firms marketing department of a profit maximising price for products

What is employment rent

The economic rent a worker receives when the net value of her job exceeds the net value of their next best alternative

Where is the profit maximising point on the price setting curve

The profit maximising point on the price setting curve is point B

What is the wage share in an economy?

The ratio of the real wage per worker day to output per worker day w/λ

Where is the firms profit maximising choice of price quantity and employment

This is assuming the only cost the firm has is labour

What is the labour force ?

Those who are employed and those available for work. You are inactive in the work force are of working age and able to work but choose not to in order to pursue other things.

How do trade unions affect the wage setting

Trade union presence means the wage is not determined by HR but through negotiations

Why does MC=AC= W/λ

as the wage divided by productivity is the cost needed to increase 1 extra unit

What is a formula for real wage ?

w/p = λ-λµ where λµ = real profit per worker real wage = output per worker - real profit per worker µ has to be between 0 and 1 If µ increases the real wage will decrease.