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Vista previa del material en texto

The Labor Market
Blanchard, Chapter 7
Caio Machado
Instituto de Econoḿıa
Pontificia Universidad Católica de Chile
Macroeconomia II, 2017
From the short to the medium run
• So far we have assumed that prices (and wages) were fixed.
• Firms were willing to supply any amount of output at a given price level.
• This is ok for very short run.
• Now we will drop this assumption.
• We will investigate how prices adjust over time and how that affect
employment and output.
Labor market variables
• Non-institutional civilian population: total population minus those
under working age, in armed forces or behind bars.
• Labor force: sum of people working or looking for a job.
• Participation rate: ratio of labor force to the non-institutional civilian
population.
• Unemployment rate: ration of unemployed to the labor force.
Unemployment in Chile
Unemployment in Europe
Unemployment in the US
How bad is it to be unemployed?
• If people change jobs a lot, but get a new one very quickly, we should
not worry so much.
• The real problem lies when people lose their job and can’t find a new
one for a long time.
• Below is the mean duration of unemployment for the US.
Wage determination
• Wages are set in many ways.
• Tipically workers get more than the reservation wage (the wage that
makes him indifferent between working or being unemployed).
Bargaining:
• Workers and firms negotiate on the wage.
• Sometimes it is made through unions (collective bargaining).
• A worker has a high bargaining power if:
• He can’t be easily replaced.
• He can find a job somewhere else very easily.
• If unemployment is low, both conditions tend to be satisfied.
Efficiency wages:
• Firms pay higher wages to avoid quitting...
• Or to induce effort (Shapiro and Stiglitz).
• If unemployment is low, firms tend to pay higher efficiency wages.
Wage determination
• We capture the determination of wage through the wage setting
relation:
W = PeF (u,z)
(−,+)
• W = wage
• Pe = expected price level
• u = unemployment rate
• z = catch-all variable
Wage determination
Price level Pe
• The expected price level Pe affects the wage because firms and
workers care about the real value of the wage.
Unemployment rate u
• When u increases, W falls.
• If wages are set by bargaining, a larger u reduces the bargaining power
of workers.
• If wags are set by efficiency wage considerations, a larger u makes it
easier to induce effort.
Other factors z
• z can capture anything that affects thw wage.
• Unemployment benefits;
• Employment protections;
• Minimum wages.
Price determination
• For the moment, assume firms’ production function is
Y = AN
N = number of employed workers, A > 0 (we normalize A to 1).
• Under perfect competition
price = marginal cost
P = W
• But, some firms have some market power and therefore
P = (1 + m)W (price setting relation)
The natural rate of unemployment
• For simplicity, assume now that Pe = P.
• The wage setting relation can be written as:
W
P = F (u,z)
• The price setting relation can be written as
W
P =
1
1 + m
The natural rate of unemployment
• The natural rate is given by the intersection of the wage setting
relation and the price setting relation:
(discuss shifts)
Time frame
Short-run:
• Price level may not equal the expected price.
• Consequently, unemployment rate may not equal natural
unemployment rate.
Medium-run:
• Price level tends to revert to expected price.
• Unemployment reverts to natural rate.