HE2002 - The Labour Market

• A person is employed if he or she worked full-time or part-time during the past week or is on vacation or sick leave from a regular job
• A person is unemployed if he or she did not work during the preceding week but made some effort to find work
• Labour Force = Employed + Unemployed
• A person is considered to be out of labour force if he or she did not work in the past week and did not look for work
• Unemployment rate = Unemployed / Labour Force = Unemployed / (Employed + Unemployed)
• Employment rate = Employment / Population available for work
• Participation rate = Labour force / Population age 16+
• Duration of unemployment is the length of time people spend unemployed
• Discouraged workers are not actively looking for a job, they will take it if they find one
• In order to decrease their employment in response to a decrease in demand, firms can 1) Hire fewer new workers. 2) Lay off the workers they currently employ
• If firms hire fewer new workers, the chance that an unemployed worker will find a job diminishes. High unemployment means more job applicants but fewer hire means fewer job openings. Therefore, it makes it harder for unemployed to find jobs.
• If firms lay off the workers they currently employ, then employed workers are at a higher risk of losing their jobs
• When unemployment is high, the proportion of unemployed becoming employed within one month is lower
• When unemployment is higher, a higher proportion of workers become unemployed
• When unemployment is high, workers are worse off in 2 ways: 1) Unemployed workers face a lower probability of becoming employed (they can expect to remain unemployed for a long time) 2) Employed workers face a higher probability of becoming unemployed
• Collective bargaining is the bargaining between a union (or a set of unions) and a firm (or a set of firms)
• The 2 common forces at work are: 1) Workers are typically paid a wage that exceeds their reservation, which is the wage that would make them indifferent between working or being unemployed. 2) Wages typically depend on labour market conditions. The lower the unemployment rate, the higher the wages.
• 2 factors that determine the bargaining power: 1) The cost of the firms to find other workers. 2) The difficulty for workers to find another job if they were to leave the firm
• The costlier it is for firm to replace the workers, the more bargaining power they will have
• The easier for workers to find another job, the more bargaining power they will have
• The higher the skills needed to do the job, the more likely there is to be bargaining between employers and individuals employee
• When the unemployment rate is low, it is more difficult for firms to find acceptable replacement workers. At the same time, it is easier for workers to find another jobs, therefore, workers are in a stronger bargaining positions and may be able to obtain a higher wage
• Efficiency wage theories are theories that link the productivity or the efficiency of workers to the wage they are paid. It suggests that wages depend on both the nature of the job and the labour market conditions.
• Firms pay more than the reservation price because firms want their workers to be productive, and a higher wage can help them achieve that goal. Paying a wage above the reservation wage makes it more attractive for workers to stay.
• Firms avoid an increase in quits when unemployment is low through increasing wages as it will induce workers to stay with the firm. Therefore, lower unemployment leads to higher wages.
• The formula for wage determination is W = P^e F(u, z)
• W stands for aggregate nominal wage, P^e stands for the expected price level, u stands for unemployment rate, z stands for other variables that may affect the outcome of the wage setting

  
• Workers and firms care about the real wage (W/P), and not nominal wage. Workers do not care about how many dollars they receive but about how many goods they can buy with those dollars. Meanwhile, firms do not care about the nominal wage they pay but about the nominal wage (W) they pay relative to the price of the goods they sell (P). So, they also care about the real wage (W/P). Therefore, the expected price level affect the nominal wage.
• Wages depends on the expected price level (P^e), rather than the actual price level (P) because wages are set in nominal (dollar) terms, and when they are set, the relevant price level is not yet known.
• The minus sign under "u" indicates that an increase in unemployment rate decreases the wages

  
• If we think of wages as being determined by bargaining, the higher unemployment weakens worker's bargaining power, forcing them to accept lower wages

  
• If we think of wages as being determined by efficiency wage consideration, then higher unemployment allows firms to pay lower wages and still keep workers willing to work

  
• The positive sign under "z", the other factors indicates that an increase in z implies an increase in wages

  
• The 2 factors that affect wages are unemployment insurance and employment protection

  
• Unemployment insurance is the payment of unemployment benefits to workers who lose their jobs
• Unemployment insurance exists because it allows unemployed workers to hold out for higher wages. In this case, we can think of z as representing the level of unemployment benefit. At a given unemployment rate, higher unemployment benefits increase the wages
• Employment protection makes it more expensive for firms to lay off workers. Such a change is likely to increase the bargaining power of workers covered by this protection, therefore increasing the wages for a given unemployment rate
• The prices set by firms depend on the costs they face, these costs depend, in turn, on the nature of the production function.
• 2 factors of price determination: 1) The price set by firms 2) Nature of the production function
• A production function is the relation between the inputs used in production and the quantity of output produced, and on the prices of these inputs