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EXAM2 GUIDE

EXAM2 GUIDE - Macro Exam 2 11:38:00 Chapter 6 Unemployment...

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Unformatted text preview: Macro Exam 2 13/05/2009 11:38:00 Chapter 6 Unemployment Rate- Ratio of unemployed to the workforce. Unemployment can be from 2 things • Many separations/ hires • Sclerosis – stagnant economy (hardening tissue) CPS – Current Population Survey • Flow of workers in and out of employment is very large • Most separations are “quits” (3/4 of separations) other quarter is layoffs • Amount people move in and out of employment is very large relative to unemployment. • Duration of unemployment is about 2-3 months Movements in unemployment • In mid 80’s unemployment seemed as if it was on rise… • However, trend reversed and we stabilized at a lower rate • Year-to-year rates are correlated with recessions and expansions. • How do these fluctuations affect individuals? o Fewer hires = less chance of employment, more unemployed, more applicants for jobs. Higher unemployment and very hard to move out of unemployment. o High layoffs – employed are at a higher risk of losing their job • Conclusion – Higher unemployment rates entail. o Harder to find jobs o More chance of getting laid off Wage Determination • Collective Bargaining – firms and unions • Facts o Workers are paid wage that exceeds their reservation wage (wage which would make them indifferent of working or not) o Wages depend on labor market conditions. Lower unemployment, higher wages Bargaining • Bargaining Power o How costly is it to replace me by a firm? o How easy is it for me to find another job? Efficiency Wages • Pay more than reserve wage • Makes workers feel good about their job • Encourage morale Wages, Prices, Unemployment • W = P e F( u,z) (-,+) • Aggregate nominal wage, W, depends on… o Expected Price Level, P e o Unemployment Rate o Catchall Variable, Z, that stands for all other variables that may have an affect. Expected Price Level • Workers do not care about how many dollars they receive but how many goods they can obtain with these dollars • Firms care about this relationship as well • Wages are set in nominal dollars Unemployment Rate • U • Higher unemployment weakens bargaining power, lowers wages… Other Factors • Z • Things to consider here, o Unemployment insurance o Minimum wage level Price Determination • Prices are set by firms based on their costs • Production function – Y = AN o Y – output, A – labor productivity, N – Employment o (very simplified function) • However, firms are not perfectly competitive… price function o P = (1 + μ )W o Where μ is the markup of the price over cost o In perfectly competitive markets, μ = 0 Wage Setting Relationship •...
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EXAM2 GUIDE - Macro Exam 2 11:38:00 Chapter 6 Unemployment...

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