Macroeconomics week 3 + 4
Module code: EC108
Lecturer: Stefania Paredes Fuentes
Topics
● The labour market
● Wage setting curve
● Price setting curve
● The Phillips curve
The labour market
- Determines the price of labour (wages) + the quantity of labour (employment rate)
- Firms set prices (profit maximisers) + decide how many people they want to hire
Involuntary unemployment - unemployed looking for work but cannot get a job offer
Reservation wage - if not at current job, what an employee would get in alternative
employment or from unemployment benefits
Efficiency wage setting - incentive for employers to pay more than market clearing wage to
inc productivity + reduce turnover
- Firms set nominal wages > reservation level so employees are motivated to work
→ labour market DOES NOT CLEAR → involuntary unemployment
Wage setting curve (EMPLOYMENT AND WAGES)
- How changes in the unemployment rate affect the wage set by employers
- Real wage needed at each level of employment to give workers incentive to work hard
- As real wages increase so does employment rate, real wage = nominal wage (w) / p
- Upwards sloping: less employment = low wages as more comp for jobs, willing to
work for less
, - More employment = less unemployment = high wages → incentive to
switch jobs etc
- W = nominal wage
- P^E = expected price level
- B = +ive function of the level of unemployment N + a set of wage push variables Zw
- Can rewrite as the wage setting equation
Shifting the WS curve
Downwards = willing to work for less:
- Fall in unemployment benefits
- Fall in disutility of effort → improving working conditions
- Fall in union markup or weaker unions
→ The unemployment benefit + disutility of work curve will shift downwards
- Workers are more willing to accept lower wages
Price setting curve (PRICE AND WAGES)
- Real wage (adjusted for inflation) paid when firms choose profit maximising price
Under perfect competition
- Profit = total revenue - total cost
- Profit max condition → MR = MC
- Consider labour as the only FOP
- TC = W x L → MC = dTC / dL (marginal cost = change in the TC
function)
- W x dL / dQ
- How Q increases when we increase labour by 1 unit / MPL
- MR = P
Module code: EC108
Lecturer: Stefania Paredes Fuentes
Topics
● The labour market
● Wage setting curve
● Price setting curve
● The Phillips curve
The labour market
- Determines the price of labour (wages) + the quantity of labour (employment rate)
- Firms set prices (profit maximisers) + decide how many people they want to hire
Involuntary unemployment - unemployed looking for work but cannot get a job offer
Reservation wage - if not at current job, what an employee would get in alternative
employment or from unemployment benefits
Efficiency wage setting - incentive for employers to pay more than market clearing wage to
inc productivity + reduce turnover
- Firms set nominal wages > reservation level so employees are motivated to work
→ labour market DOES NOT CLEAR → involuntary unemployment
Wage setting curve (EMPLOYMENT AND WAGES)
- How changes in the unemployment rate affect the wage set by employers
- Real wage needed at each level of employment to give workers incentive to work hard
- As real wages increase so does employment rate, real wage = nominal wage (w) / p
- Upwards sloping: less employment = low wages as more comp for jobs, willing to
work for less
, - More employment = less unemployment = high wages → incentive to
switch jobs etc
- W = nominal wage
- P^E = expected price level
- B = +ive function of the level of unemployment N + a set of wage push variables Zw
- Can rewrite as the wage setting equation
Shifting the WS curve
Downwards = willing to work for less:
- Fall in unemployment benefits
- Fall in disutility of effort → improving working conditions
- Fall in union markup or weaker unions
→ The unemployment benefit + disutility of work curve will shift downwards
- Workers are more willing to accept lower wages
Price setting curve (PRICE AND WAGES)
- Real wage (adjusted for inflation) paid when firms choose profit maximising price
Under perfect competition
- Profit = total revenue - total cost
- Profit max condition → MR = MC
- Consider labour as the only FOP
- TC = W x L → MC = dTC / dL (marginal cost = change in the TC
function)
- W x dL / dQ
- How Q increases when we increase labour by 1 unit / MPL
- MR = P
