Lecture 5

Lecture 5 - Unemployment and the Labour Market Lecture#5...

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Unemployment and the labour market Paper 2: Macroeconomics Part IIA Unemployment and the Labour Market Lecture #5 Mauricio Prado [email protected] November 17, 2010
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Unemployment and the labour market Paper 2: Macroeconomics Part IIA Today’s outline Wages, Prices, and Unemployment Price determination Natural rate of unemployment Inflation and unemployment
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Unemployment and the labour market Paper 2: Macroeconomics Part IIA Wages, Prices, and Unemployment We start by analyzing wage determination: W = P e F ( u , z ) The aggregate nominal wage depends on: I The expected price level P e . I The unemployment rate u. I A catch-all variable z that stands for all other variables which affect positively the outcome of wage setting.
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Unemployment and the labour market Paper 2: Macroeconomics Part IIA The Expected Price Level Why does the price level affect wages? The answer: Because both workers and firms care about real wages, not nominal wages 1. Workers care about w = W / P. As do firms. 2. Why expected privel level, P e , and not the actual price level, P? Because wages are set in nominal (pounds) terms, and when they are set, the relevant price level is not yet known. 3. Some union contracts may set nominal wages in advance for 3 years. Even when no unions are involved, bargaining between firms and workers typically leads to the nominal wage to be set for a year.
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Unemployment and the labour market Paper 2: Macroeconomics Part IIA F(u , z) The unemployment rate, u: 1. Think about what we just said about contracting the salary. Higher unemployment weakens workers’ bargaining power, forcing them to accept lower wages. 2. In general, an increase in unemployment leads to a decrease in the nominal wage. Other factors, z: 1. More generous unemployment benefits increase the nominal wage. 2. An increase in the minimum wage may increase not only the lowest wages, but also wages just above the threshold, leaving to an increase in the aggregate nominal wage, W. 3. Or an increase in unemployment protection (higher layoff costs)
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Unemployment and the labour market Paper 2: Macroeconomics Part IIA Production and employment Let N denote employment. We can write a simple production function as: Y = AN Since labour productivity is not our focus here, we can make a
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This note was uploaded on 03/07/2012 for the course ECON 201 taught by Professor Cowell during the Spring '10 term at LSE.

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Lecture 5 - Unemployment and the Labour Market Lecture#5...

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