Understanding the Labour Market: Wage-Setting, Price-Setting, and Unemployment, Diapositivas de Fundamentos de Gestión

¡Descarga Understanding the Labour Market: Wage-Setting, Price-Setting, and Unemployment y más Diapositivas en PDF de Fundamentos de Gestión solo en Docsity! The labour market (Unit 9) What kind of market is it? Like this? Or Like this? Or even like this? econ OUTLINE A. Introduction B. Measuring unemployment C. Price-setting and wage-setting D. Labour market equilibrium E. Division of output and labour unions F. Labour market policies O CO reecon B. Measuring unemployment The unemployed are the people who: are not in paid employment or self-employment are available for work are actively seeking work B. Measuring unemployment de Jo lo] blbdl Unemployed Population Out of labour METAS! coreecon B. Measuring unemployment Two countries with the same unemployment rate participation rate = can differ in their employment rates if one has a high participation rate and unemployment rate = L¿Mployed labour force the other has a low one. labour force population of working age The structure of the labour employed ¡ ¡ employment rate = lation of working age market differs widely across popula g ag countries. O CO reecon C. Price-setting and wage-setting The real wage is the nominal wage divided by the price level of the bundle of consumer goods purchased. w real wage = — 1. each firm decides on its: price, wage, how many people to hire 2. adding up all of these across all firms gives the total employment in the economy and the real wage O CO reecon C. Price-setting and wage-setting Write one fact from the chart Figure 1: Real compensation per hour worked, deflated by CPI (1995-2017) 1500 1a00 tna vna ma 1000 ana 1900 190, 1909 2001 2002 20 207 2009 20m 2 20m 207 Germany ——Japan —— United Kingdom Dataset LES A - á ecostazoss 7 United States Euro Area (19 countries) O CO reecon C. Price-setting and wage-setting Nominal wage = f(other firms” prices and wages, unemployment rate) y Price = f(own nominal wage, demand for own product) y Output = floptimal price, demand curve) y Number of employees = f(output, production function) O CO reecon C. Price-setting and wage-setting 48,000 + + Estimated from US data * Uses data on unemployment rates and wages in local areas 47,000 y 46,000 + 45,000 44,000 Real annual earnings (2013 $) 43,000 | 42,000 20 15 10 5 0 Unemployment rate (%) O CO reecon C. Price-setting and wage-setting Firm's optimal price lies where the demand curve is tangent to an isoprofit curve (unit 7). The firm then hires a number of employees necessary to produce the quantity of output demanded at that price. C. Price-setting and wage-setting Firm's optimal price lies where the demand curve is tangent to an isoprofit curve (unit 7). Price, p ($) The firm then hires a number of employees necessary to ! eno denon, produce the quantity of output 0 -—— demanded at that price. Units of output, q (and hours of Labour, n) Xu * , = C. Price-setting and wage-setting The price-setting curve = the real wage paid when firms choose their profit-maximizing price. It depends on: * competition, which determines markup e labour productivity, which determines real wage for given D. The labour market equilibrium The wage-setting and price- setting curves are two sides of the economy. The Nash equilibrium of the labour market is where the wage- and price-setting curves intersect. Real wage 0 : Labour supply o ai Average product of labour, A Xx o Pp etting i i 1 Wage-setting curve No work done: wage ¡s ! too low for adequate effort; Employed Unemployed Employment, N O CO reecon D. The labour market equilibrium All parties are doing the best they can, given what everyone else is doing: e The firms are offering the least wage to ensure workers' effort * Employment is the highest it can be, given the wage * Those who have jobs cannot improve their situation by asking for higher pay or working less hard e Those who do not have jobs would like to work, but cannot persuade firms to hire them by accepting lower wage (labour discipline concerns) O CO reecon D. The labour market equilibrium Low aggregate demand moves the economy from labour market equilibrium (X) to point B. Bis not a Nash La RQUESuRRIy Equilibrium: ¡casas e Firms could lower a ] | wages 3 efaanda * Lower costs => lower LD prices Veces o a * Increase output and 3 | | Uremployment at employment Employment, N O CO reecon D. The labour market equilibrium Point B is not a Nash equilibrium: e Firms could lower wages without lowering workers' effort * Lower wages allow them to cut their prices * Lower prices stimulate demand —> output rises e Firms hire more workers to produce more ... Unemployment falls back to X O CO reecon D. The labour market equilibrium Real economies do not function so smoothly: * Workers resist cuts to their nominal wage (lower morale, strikes) * Lower wages means people spend less > aggregate demand falls further * Falling prices across the economy may lead consumers to postpone their purchases in hope to get even better bargain later E. Division of output and labour unions The labour market determines the division of the economy's output between employed workers, the unemployed, and firm-owners. Gini coefficient will rise with: * unemployment rate T 1.0 e real wage y bo * markup 1 3 eL e productivity T Labour supply Y : Average i v . ; product = Profit | ' oflabour 3 A i ps y Price- y ¡ setting = Wage-setting ; curve S curve Wage E 3 Ú (———— A y 40 80 90 Employment, N Gini coefficient: 0.36 100 qn --y S ca E 60 o Y E “% 0 7 010 20100 Unemployed Employed Owners Cumulative share of the population from lowest to highest income (%) O CO reecon E. Division of output and labour unions Labour union = an organization consistin . . . saniza 8 Where workers are organized into trade unions, predominantly of employees. Its main activities include the the wage is not set by the employer but instead is negotiation of rates of pay and negotiated between union and firm. conditions of employment for its members. The bargained wage can be above the wage- setting curve + the wage-setting curve is about the employer's threat of firing a worker * the union can threaten to “dismiss” the employer by going on strike wered by p 3 A Y g mployees co Ez E 3 E 3 2 do e po E E 5 po 5 Y a o 2 2 8 2 Ñ Z a E. Division of output and labour unions Bargaining curve indicates the wage that the union-employer bargaining process will produce for every level of employment. Real wage Its position above the wage- setting curve depends on the relative bargaining power of the union and the employer. Wage-setting curve (no union) borrar rre ains [erasmo Average product of labour Bargained wage-setting curve (union, no voice effect) B Price-setting curve NUNION N' Employment, N O CO reecon F. Labour market policies Shifts in the price-setting curve: 1. Education « training: labour productivity 7 2. Wage subsidy: Production costs and prices J, Shifts in the wage-setting curve: 3. Lower unemployment benefit: reservation wage Shifts in labour supply curve: 4. immigration policies: labour supply 7 5. childcare provision: female labour participation T' O CO reecon 3UILIHIITIA Py 1. Behaviour of firms sets wages and employment in an economy * The wage-setting curve tracks the combinations of wages and unemployment feasible with workers” effort * The price-setting curve determines the real wage corresponding to profit-maximising price 2. There will always be involuntary unemployment * Incomplete contracts e. Deficient demand 3. Labour unions bargain over wages with firms, which affects employment + Voice to workers may improve their effort and productivity O CO reecon In the next unIt e Acloser look at financial markets: the banking system * How individuals choose borrowing, saving, and consumption e Banks: Firms that create money in the process of supplying credit