Unit 9 The labour market: Wages, profits and unemployment

Define '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.

Define 'price setting curve'

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

Define 'population of working age'

A statistical convention, which in many countries is all people aged between 15 and 64 years.

Define 'labour force'

The number of people in the population of working age who are, or wish to be, in work outside the household. They are either employed (including self-employed) or unemployed.

Define 'participation rate'

The ratio of the number of people in the labour force to the population of working age.

Define 'unemployment rate'

The ratio of the number of the unemployed to the total labour force. (Note that the employment rate and unemployment rate do not sum to 100%, as they have different denominators.)

Define 'employment rate'

The ratio of the number of employed to the population of working age

Why is unemployment rate not directly related to employment rate?

two countries with the same unemployment rate can differ in their employment rates if one has a high participation rate and the other has a low one.

Define '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.

Define 'real wage'

The real wage is the nominal wage divided by the price level of the bundle of consumer goods purchased. Real wage = W/P

Chain of firms decisions

Nominal wage f(other firms prices and wages, unemployment rent)
to
price = f(own nominal wage, demand for own product)
to
output = f(optimal price, demand curve)
to
number of employees =f(output, production function)

define 'labour union'

an organisation negotiating rates of pay and employment conditions for its members

Why must there always be involuntary unemployment in a labour market equilibrium?

To create a economic rent for job loss - incentive for people to work hard in jobs

what is demand-deficient unemployment?

The increase in unemployment caused by the fall in aggregate demand

What would happen if demand deficient unemployment occurred? what would happen to wage setting/price setting curves?

would move to B, firms will see they can reduce wages and move down to wage-setting curve. but they know they can reduce prices now cos costs have fallen, so real wage should return to X in long run as W/P scales by same amount.

Why doesn't automatic adjustments work in practice when looking at recession and wage-setting/price-setting curves

Workers don't want wages reduced, lower wages mean people spend less, AD falls more, prices going down, speculation of consumers reducing AD further.

What factors increase the GINI coefficient?

Rise in umemployment, real wage goes down, markups go up, productivity goes up