Lecture 2

Lecture 2 - Unemployment and the labour market Paper 2:...

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Unformatted text preview: Unemployment and the labour market Paper 2: Macroeconomics Part IIA Unemployment and the Labour Market Lecture #2 Mauricio Prado jmp200@cam.ac.uk 10 November 2010 Unemployment and the labour market Paper 2: Macroeconomics Part IIA Todays outline Skilled vs unskilled Skill premium Efficiency wages Basic model More general model Example based on Summers (1988) Unemployment and the labour market Paper 2: Macroeconomics Part IIA How can we explain unemployment 1. People are lazy and do not want to work 2. Wage rigidity (minimum wage, for example) 3. Bargaining power of unions (insider-outside model) 4. Search and matching frictions (heterogeneity of workers and jobs) 5. Efficiency wages... we will see today Unemployment and the labour market Paper 2: Macroeconomics Part IIA Skilled and unskilled workers I Suppose firms hire skilled and unskilled workers for production Y = F ( L S , L U ) where F S > 0, F U > 0, F SS < 0, F UU < I Firms maximize profits: max L S , L U F ( L S , L U )- w S L S- w U L U I First-order conditions are w S = F S and w U = F U Wages are equal to the marginal productivities of each type of labour Unemployment and the labour market Paper 2: Macroeconomics Part IIA Skill premium I With perfectly competitive markets and flexible wages, there is no unemployment and we will have an equilibrium skill premium: w S w U I Now imagine we have a minimum wage policy such that w > w U I If that happen, it is not worth for firms to hire unskilled workers. There will be huge unemployment among them I If elimination of the minimum wage law is not politically feasible, govt can subsidize unskilled workers. I Or maybe govt can simply hire the unskilled....
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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 2 - Unemployment and the labour market Paper 2:...

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