Jessica Rolfe
economics 144
semester 2 summaries
Unit 9 : the labour market
wages, profits and unemployment
to understand unit 9 we need to remember
• Unit 7 : price-setting firms produce differentiated products
• Unit 6 : the principal-agent model can explain the conflict of interest between the
employer and the employee over a workers effort
In unit 9 we describe how
- the labour market works
- and why even in equilibrium the supply of labour (number of people seeking jobs)
- exceeds the demand for labour (number of jobs offered)
- those without work are termed the involuntary unemployed
- (to distinguish them from those who are unemployed by choice , but are looking for a
job)
9.1. the wage-setting curve , the price-setting curve and the labour market
Unit 9
• models the labour market of an entire economy (thus macro economics)
• this determines the extent if unemployment in the population as a whole
• we look at price-setting firms selling differentiated goods and a large number of
identical workers who may be employed by the firms for the same wage set by the
firm
the labour market
The labour market brings together
1. The firm and its employees (unit 6)
2. The firm and its customers (unit 7)
Simplified assumptions in unit 9
• Labour is the only input in production (only cost to firms = wage)
• Profit = f(nominal wage ; price of good ; avg output per worker per hour)
1. The firm and its employees
Firms must motivate their workers to work hard
How?
• Wage must be set high enough so that employee earns an employment rent
employment rent = difference between the value of a job and the value of the next best
alternative , which is to be unemployed and having to search for another job
*employment rent = wage - reservation wage
1
,*reservation wage is what an employee would receive in alternative employment or from
an unemployment benefit or other support
who sets the firms wages ?
• HR / human resources departments
2. The firms and its customers
how do firms determine what price to charge for a good ?
• firms want to maximise their profit
The marketing departments in firms set the price
• They have to determine the profit-maximising mark-up
• The price is set as mark-up over production cost
• Price = mark up + production cost
wages and unemployment
how is the real wage and the employment level in the economy as a whole determined ?
note that :
*real wage = the nominal wage , adjusted to take account of changes in prices between
different time periods. It measures the amount of goods and services the worker can buy.
2 step process :
1. each firm sets the price they'll charge for their product , decides how many workers to
hire and what wage to pay them each
2. when we add together each individual firms decision , we get
• total employment for the economy and the real wage
details of the steps
step 1
• the human resources department determines the lowest wage it can pay (without
having a negative impact on workers motivation levels)
• this wage = nominal wage = f (prices of other firms products ; the wages that other
firms are paying ; unemployment rate in the country)
• The info about the nominal wage is sent to the marketing department
• The marketing department sets the price , based on the
- nominal wage
- the shape and position of the demand curve (the more elastic the demand for the
product , the lower the price will be , vice versa)
- the price is then sent through to the production department
• The ruction department determines how many workers to hire (based on the firms
production function) to produce the amount of output as determined by the
marketing department
2
,step 2
adding together the individual decisions of firms is more complicated , but to keep it
simple :
• After all firms have made their price (P) or mark-up and wage (W) decisions , the
output per worker in the economy is divided into the real wage a worker receives and
the real profits that the owner receives
• If all firms are charging the same price and setting the same nominal wage , then a
higher real wage (W/P) means a lower mark-up (1 - W/P)
definitions :
• wage-setting curve = the curve that gives the real wage necessary to each level of
economy-wide employment to provide workers with incentives to work hard and well
• price-setting curve = the curve that gives the real wage paid when firms choose their
profit-maximising price
9.2. measuring the economy : employment and unemployment (incl South African labour
market definitions and labour market calculations)
good to know : information about SA’s labour market is collected by Statistics South Africa
every quarter , using the Quarterly Labour Force Survey (QLFS)
definitions :
• employed = all persons aged 15-64 years who , during the reference week, did any
work for at least one hour or had a job or business but were not at work (i.e. they were
temporarily absent e.g. due to illness)
• discouraged work-seeker = not employed in reference week , wanted to work was
available to work or to start a new business but did not take active steps to find work in
the last 4 weeks , provided that one of the following is given as reason :
- no jobs available in the area
- unable to find work requiring his/her skills
- lost hope of finding any kind of work
• unemployed (official or narrow def) = all persons aged 15-64 years who
- were not employed in the reference week
- and who actively looked for work or tried to start a business in the four week before
the survey interview
- and were available for work
3
, - or had not actively looked for work in the past 4 weeks but had a job or business to
start at a definite date in the future and were available
• unemployed (expanded def) = all persons that are unemployed according to the
official definition PLUS
- were available to work but are discouraged work-seekers
• unemployed (textbook def) = a situation in which a person who is able and willing to
work is not employed
• population of working age = a statistical convention , which in many countries is all
people aged between 15 and 64 years
• inactive population = people in the population of working age who are neither
employed nor actively looking for paid work
• labour force = the number of people in the population of working age who are , or
wish to be, in work outside the household. They are either employed or unemployed.
• population rate = the ratio of the number of people in the labour force to the
population of working age
• unemployment rate = the ratio of the number of unemployed to the total labour force
• employment rate = the ratio of the number of employed to the population of working
age
labour market statistics :
*need to KNOW these formulas
4
economics 144
semester 2 summaries
Unit 9 : the labour market
wages, profits and unemployment
to understand unit 9 we need to remember
• Unit 7 : price-setting firms produce differentiated products
• Unit 6 : the principal-agent model can explain the conflict of interest between the
employer and the employee over a workers effort
In unit 9 we describe how
- the labour market works
- and why even in equilibrium the supply of labour (number of people seeking jobs)
- exceeds the demand for labour (number of jobs offered)
- those without work are termed the involuntary unemployed
- (to distinguish them from those who are unemployed by choice , but are looking for a
job)
9.1. the wage-setting curve , the price-setting curve and the labour market
Unit 9
• models the labour market of an entire economy (thus macro economics)
• this determines the extent if unemployment in the population as a whole
• we look at price-setting firms selling differentiated goods and a large number of
identical workers who may be employed by the firms for the same wage set by the
firm
the labour market
The labour market brings together
1. The firm and its employees (unit 6)
2. The firm and its customers (unit 7)
Simplified assumptions in unit 9
• Labour is the only input in production (only cost to firms = wage)
• Profit = f(nominal wage ; price of good ; avg output per worker per hour)
1. The firm and its employees
Firms must motivate their workers to work hard
How?
• Wage must be set high enough so that employee earns an employment rent
employment rent = difference between the value of a job and the value of the next best
alternative , which is to be unemployed and having to search for another job
*employment rent = wage - reservation wage
1
,*reservation wage is what an employee would receive in alternative employment or from
an unemployment benefit or other support
who sets the firms wages ?
• HR / human resources departments
2. The firms and its customers
how do firms determine what price to charge for a good ?
• firms want to maximise their profit
The marketing departments in firms set the price
• They have to determine the profit-maximising mark-up
• The price is set as mark-up over production cost
• Price = mark up + production cost
wages and unemployment
how is the real wage and the employment level in the economy as a whole determined ?
note that :
*real wage = the nominal wage , adjusted to take account of changes in prices between
different time periods. It measures the amount of goods and services the worker can buy.
2 step process :
1. each firm sets the price they'll charge for their product , decides how many workers to
hire and what wage to pay them each
2. when we add together each individual firms decision , we get
• total employment for the economy and the real wage
details of the steps
step 1
• the human resources department determines the lowest wage it can pay (without
having a negative impact on workers motivation levels)
• this wage = nominal wage = f (prices of other firms products ; the wages that other
firms are paying ; unemployment rate in the country)
• The info about the nominal wage is sent to the marketing department
• The marketing department sets the price , based on the
- nominal wage
- the shape and position of the demand curve (the more elastic the demand for the
product , the lower the price will be , vice versa)
- the price is then sent through to the production department
• The ruction department determines how many workers to hire (based on the firms
production function) to produce the amount of output as determined by the
marketing department
2
,step 2
adding together the individual decisions of firms is more complicated , but to keep it
simple :
• After all firms have made their price (P) or mark-up and wage (W) decisions , the
output per worker in the economy is divided into the real wage a worker receives and
the real profits that the owner receives
• If all firms are charging the same price and setting the same nominal wage , then a
higher real wage (W/P) means a lower mark-up (1 - W/P)
definitions :
• wage-setting curve = the curve that gives the real wage necessary to each level of
economy-wide employment to provide workers with incentives to work hard and well
• price-setting curve = the curve that gives the real wage paid when firms choose their
profit-maximising price
9.2. measuring the economy : employment and unemployment (incl South African labour
market definitions and labour market calculations)
good to know : information about SA’s labour market is collected by Statistics South Africa
every quarter , using the Quarterly Labour Force Survey (QLFS)
definitions :
• employed = all persons aged 15-64 years who , during the reference week, did any
work for at least one hour or had a job or business but were not at work (i.e. they were
temporarily absent e.g. due to illness)
• discouraged work-seeker = not employed in reference week , wanted to work was
available to work or to start a new business but did not take active steps to find work in
the last 4 weeks , provided that one of the following is given as reason :
- no jobs available in the area
- unable to find work requiring his/her skills
- lost hope of finding any kind of work
• unemployed (official or narrow def) = all persons aged 15-64 years who
- were not employed in the reference week
- and who actively looked for work or tried to start a business in the four week before
the survey interview
- and were available for work
3
, - or had not actively looked for work in the past 4 weeks but had a job or business to
start at a definite date in the future and were available
• unemployed (expanded def) = all persons that are unemployed according to the
official definition PLUS
- were available to work but are discouraged work-seekers
• unemployed (textbook def) = a situation in which a person who is able and willing to
work is not employed
• population of working age = a statistical convention , which in many countries is all
people aged between 15 and 64 years
• inactive population = people in the population of working age who are neither
employed nor actively looking for paid work
• labour force = the number of people in the population of working age who are , or
wish to be, in work outside the household. They are either employed or unemployed.
• population rate = the ratio of the number of people in the labour force to the
population of working age
• unemployment rate = the ratio of the number of unemployed to the total labour force
• employment rate = the ratio of the number of employed to the population of working
age
labour market statistics :
*need to KNOW these formulas
4
