Download Efficiency Wages and Unemployment: Macroeconomics Week 4 Assignment and more Assignments Economics in PDF only on Docsity! Economics 3133-001 Dr. Reed University of Oklahoma Spring 2006 WEEK #4 ASSIGNMENT 1. Read Chapter 7 in Macroeconomics. 2. Read Handout #2: “On the Desirability of Reducing Unemployment With Monetary and Fiscal Policy” Be prepared to answer the following questions in class: 3. Fill in the following blanks: “For most of the past century, the unemployment rate has averaged about _________ %. There are two notable exceptions. In the 1890s, there was a major recession where the unemployment rate reached ________ %, and in the 1930s, during the Great Depression, the unemployment rate reached ________ %. 4. According to the text, what question are new-Keynesian economists concerned with answering? In your own words, explain the “puzzle” that new-Keynesian economists (and others!) attempt to solve. 5. What is “efficiency wage theory?” 6. According to the text, what are the “three main strands” of efficiency wage theory? In particular, give three answers to the following question: “Firms pay a wage higher than the amount necessary to attract new workers because…” (1) (2) (3) 7. In plain English, explain what “turnover costs” are. 8. What impact would raising the efficiency wage have on the firm’s turnover costs? Explain your answer. 9. Equation 7.1 on page 182 states that L P wcL P wY ⎟ ⎠ ⎞ ⎜ ⎝ ⎛−−=π . In plain English, explain what this equation is saying. According to this equation, will a firm necessarily earn higher profits if it pays its workers lower wages? 1 10. The bottom panel of Figure 7.3 is very misleading. What the author calls the “Efficiency wage employment curve” should be interpreted as follows. It identifies the level of employment the firm would choose to employ for every possible efficiency wage. The firm chooses one point along this curve, representing a single ⎟ ⎠ ⎞ ⎜ ⎝ ⎛ L, P w combination, to maximize its profits. With this in mind, explain in your own words why there is no “labor demand curve” according to the theory of efficiency wages. NOTE: According to efficiency wage theory, the firm chooses both ⎟ ⎠ ⎞ ⎜ ⎝ ⎛ P w and L. This is in contrast to the classical theory, which states that the firm is a “price taker” with respect to ⎟ ⎠ ⎞ ⎜ ⎝ ⎛ P w and only chooses L. 11. What point is Figure 7.4 on page 185 being used to make? 12. Note that in Figure 7.4, there is an excess supply of labor at the efficiency wage (w/P)*. With that in mind, answer the following questions. 12A. According to classical theory, how would the labor market respond to this situation of excess labor supply? Could firms increase their profits by lowering their wages? Why or why not? 12B. According to efficiency wage theory, how would the labor market respond to this situation of excess labor supply? Could firms increase their profits by lowering their wages? Why or why not? 13. What evidence does the text provide for the existence of “efficiency wages?” 14. [From Handout #2] What is “good” unemployment? 15. [From Handout #2] What is “bad” unemployment? 16. [From Handout #2] What implication does the distinction between “good” and “bad” unemployment have for evaluating government actions (e.g., monetary and fiscal policies) to lower the unemployment rate? Be prepared to elaborate on your answer. 2
