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24 Cards in this Set
- Front
- Back
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What are the assumptions of the Labor Market?
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-Firms supplying inelastically (we will assume this because our focus is demand and we used to build the IS/LM model)
-The production function is composed is: Y= f(Costs, prices, technology) (This is for a specific firm) - Labor productivity (A) is constant ----This is a characteristic of Medium-run assumption ----Economic growth, where A grows is a feature of the long-run |
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What determines how much a firm produces?
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-Costs: Raw material and wages
-Revenue (Prices)- How much additional products will generate -Technology |
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What is the Aggregate Production function?
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Y= A*N
Y= output (aggregate) aka GDP A= "Labor productivity" (roughly the level of technology) N=Employment |
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What does our simplified Production Function (Y=N) entail?
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Output in the special units from above are equal to the number of employees.
This means: 1. If a firm wants to produce more output, it must hire more employees 2. The firms costs are wages |
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What happens when wages increase?
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-As wages increase, firms will hire fewer workers
-As wages increase, more people will want to be employed |
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What is the reservation wage?
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The wage that would make you indifferent between working and being unemployed
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Why are employees are paid above their reservation wage
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-Workers have bargaining power
-Firms may want to pay higher (reduce turnover and costly training) |
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What are efficiency wage theories?
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Economic theories that list productivity to wages
(Wages may be set above their equilibrium level on purpose in order to increase worker productivity) |
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Why do we care about the P^e (expected price level)?
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-Employees care about prices, because they care about real wages
-Firms care about wages relative to the price their product |
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Why is P^e called the expected price?
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People are forward thinking
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What happens when the unemployment rate rises?
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As the unemployment rate rises:
1) Supply of available labor increases 2) It is easier to replace workers and it is harder to find a new job (These reduce bargaining power) 3) Turnover rates go down, so employers have to pay less of a premium to stop people from quitting |
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What is z (other things)?
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1) unemployment insurance
2) employment protection higher levels of 1) and 2) increase wages because they make unemployment a "better" option |
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What is the marginal cost of of output?
What is the marginal revenue output? |
MARGINAL COST:
Wage (W) MARGINAL REVENUE: Price (P) |
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In perfect competition, what is the Price?
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W=MC=MR=P
P=W |
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What are some market imperfections?
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These capture the effects of market power, we think of firms as charging a MARKUP over marginal costs
-Monopolies -Patents -Production differentiation -Trade barriers |
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What is a Markup?
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The difference between marginal revenue and the cost of a good
P= (1+m)W where m is the markup |
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What is the price setting relation?
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W/P = 1/(1+m)
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What is the wage setting relation?
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W/P = F(u, z)
u= unemployment rate z= other things that influence wages |
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What is "Un"?
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Un= The natural rate of unemployment
or The structural rate of unemployment |
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What does the equilibrium in the labor market mean?
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1) 1/(1+m) is set by firms, and determines the real wage
2) All that is left to determine is the unemployment rate 3) The unemployment rate depends on how much people want to unemployed at a given wage 4) The unemployment rate Depends on how difficult it is to be unemployed |
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What are the endogenous/exogenous variables?
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ENDOGENOUS:
W/P and u (u is the important variable) EXOGENOUS: L, z and m |
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What are the employment/unemployment variables?
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u= the unemployment rate
U= number of people unemployed L= labor force N= number of people employed |
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Why do we care about unemployment?
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We care about output:
u= U/L= (L-N)/L (L-N)/L= 1-N/L N=(1-u)L Now recall our production function: Y=N AND ALSO BECAUSE 1) Welfare of unemployed 2) Higher unemployment indicates inefficient human capital allocation |
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How do you determine a markup?
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Use:
P=(1+m)W W=Wages= Costs P=Prices |
