14.04.2023 Labour Market#

Chapter 9

Unemployment: people who are without work for longer period and seeking new employment

Definitions:

The Labour Market#

Wage Setting: takes place in the firm: wage above unemployment rent

  • beased on unemployment rate

  • other firms wages

Price Setting: as markup above cost of production

  • other firms prices

  • own costs and wages

  • position of demand curve (elasticity)

=> adding up decisions = real wage and unemployment rate

Decision Process

Department

Knows

Sets

HR

prices, wages, unempl. Rate

nominal Wage W

Marketing

demand curve position

Price of output p

Production

labor productivity

Employment n

Procution Function of Firm: $\( Y = \underset{labor\ productiity}{\lambda} \cdot \underset{workers}{n} \)$

Wage Setting Curve#

Wages in aggregate economy:

img

Influences:

  • unemployment benefits -> curve upwards

  • labor supply increases -> curve downwards

Isoprofit Curve#

Firm maximizes profit

  • based on elasticity of demand (inverse)

  • and level of competition (inverse)

\[\begin{split} \frac{1}{elasticity} = \frac{price-MC}{price} = \mu \\ with \; MC = \frac{W = nominal \ Wage}{\lambda = labor \ productivity } \end{split}\]

leads to price setting curve: (p.w. = per worker) $\( \implies \underbrace{\frac{W}{P}}_{real \ Wage} = \underbrace{\lambda}_{output \ p.w.} - \underbrace{\lambda \cdot \mu}_{real \ profit \ p.w.} \)$ note:

  • wage = \(\lambda\)

  • high competition = low \(\mu\) = high wages

Price Setting#

based on Monopolistic Competition

  • markup depends on level of competition in market

img

Labour Market Equilibrium#

lecture from 20.04.2023

wage-setting curve: wage required at level of empl. for effort

Price-setting curve: real wage based on comp, productivitiy

img

Nash-Equilibrium:

  • firms offer least wage for effort

  • employment highest it can be

  • unemployed cannot imporve situation

leads to:

Involuntary Unemployment#

involuntary unemployment: people at working age willing to supply labor but not finding a job

  • excess supply in labor market

  • always exists

  • due to incomplete contracts, not policy!

Demand and Unemployment#

Firms labor demand depends on Demand for Goods => derived demand for labor

  • depends on aggregate demand

  • Fall in AD => demand-deficient unemployment

theory:

  • firms adjust wages to lower point

  • lower costs -> lower prices

  • increased output

reality:

  • no cuts to wages

  • lower wages = less AD

  • falling prices = deflation

=> Government Intervention helps

Inequality#

lecutre on 21.04.2023

Labor Market = Division of Output

  • employed

  • unemployed

  • Firm-owners

img

Measuring Inequality#

  • Lorenz Curve:

  • Gini Coefficient: Measure of Ineq. from 0 to 1

2022-10-13_15.03.02

Calculating Gini:

  1. \(G = \frac{1}{2*n^2*u} \sum_j \sum_i n_j * n_i * | y_j - y_i |\)

  2. \(G = \frac{A}{A+B}\)

Principles of an inequality measure

  • Anonymity : insensitive to permutations (change of rich to poor etc.)

  • Population: Clone / Double Population = no effect

  • Dalton: Transfer from rich to poor = no effect

  • relative income principle: double all incomes = no effect

Lorenz for given example with workers:

img

  • mean wage employed: \(\frac{0.6}{80} = 0.0075\)

  • mean wage capitalists: \(\frac{0.4}{0.1} = 0.04\)

  • \(u = \frac{10*0+80*0.0075+10*0.04}{n=100} = 0.01\)

\[\begin{split} G = \frac{1}{2*100^2*0.01} * [10*80* |0-0.0075]+80*10*|0.0075-0|+... ] \\ G = 0.36 \end{split}\]

Effects on Inequality#

rises with:

  • Unenplyoment rate \(\uparrow\)

  • productitivity \(\uparrow\) at constant wage

  • number of employers = market power \(\uparrow\) = lower wage \(\downarrow\)

Global Inequality#

How did Globalistaion effect Ineq.?

img

Why:

  • high rates of growth

  • especially populous southeast (China)

Redistribution#

Market Income is very inuequally distributed

img

but Redistribution leads to more equal societies!