Unit 9: The Labour Market
Assume labour is the only
input wage is the only
cost
Price-setting firms produce differentiated products. We assume:
firms have power and are able to set the price of their products
this price is set by a marketing department
The principal-agent model explains the conflict of interest between the employer and the
employee over worker’s effort, and why contracts are not enough to resolve this. Contracts
are offered under the assumption of effort.
In the product market, the product or service is visible with the buyer aware of what
they receive from the supplier. In contrast, in a labour market, deliverables are not
always clear and are not always defined.
In the labour market, real wages and the unemployment rate are key outcomes to
monitor.
The relationship between real wages and the price levels: direct. The relationship between
real wages and the unemployment rate: indirect.
Profits are determined by just three things: the nominal wage (the actual amount received
for work in a particular currency), the price at which the firm sells its goods, and the average
output produced by a worker in an hour.
Who are the unemployed?
are not in paid employment or self-employment (formal & informal sectors)
are available for work (excludes students or homemakers etc.)
are actively seeking work
working age (15-64)
expanded definition also includes discouraged workers
Labour Market Statistics
Two countries with the same unemployment rate can differ in their employment rates if one
has a high participation rate and the other has a low one. The structure of the labour market
differs widely across countries.
labour force
participation rate =
population of working age
, unemployed
unemployment rate =
labour force
employed
employment rate =
population of working age
The Real Wage
The real wage is the nominal wage divided by the price level of the bundle of consumer
goods purchased.
1. each firm decides on its: price, wage, how many people to hire
2. adding up all of these across all firms gives the total employment in the economy and
the real wage
• HR sets the nominal wages
• Marketing sets the price immediately after wages.
• Employees care about the level of the real wages they will receive.
• Real wages= nominal wage relative to the price-level.
The Wage-setting Curve
The wage-setting curve = the real wage necessary at each level of economy-wide
employment to provide workers with incentives to work hard and well.
This wage-setting curve is the mathematical equivalent of an if- then statement. If the
employment rate is X, then W on the wage-setting curve shows the best response for
workers and employers. On this wage-setting curve, no workers have an incentive to reduce
their effort in response to the wage, while employers have no incentive to change the wage
for the given effort level.
Therefore, this wage-setting curve represents the Nash Equilibrium.
If the employment rate is X, then the equilibrium wage will be Y.
, Unemployment rate and the real wage are inversely related.
Deriving the Wage-setting Curve
Unemployment rate increases bargaining power decreases as employers have more
potential workers to choose from reservation wage decreases as RBF shifts left wage
decreases.
Simplifying the Model
Assume labour is the only
input wage is the only
cost
Price-setting firms produce differentiated products. We assume:
firms have power and are able to set the price of their products
this price is set by a marketing department
The principal-agent model explains the conflict of interest between the employer and the
employee over worker’s effort, and why contracts are not enough to resolve this. Contracts
are offered under the assumption of effort.
In the product market, the product or service is visible with the buyer aware of what
they receive from the supplier. In contrast, in a labour market, deliverables are not
always clear and are not always defined.
In the labour market, real wages and the unemployment rate are key outcomes to
monitor.
The relationship between real wages and the price levels: direct. The relationship between
real wages and the unemployment rate: indirect.
Profits are determined by just three things: the nominal wage (the actual amount received
for work in a particular currency), the price at which the firm sells its goods, and the average
output produced by a worker in an hour.
Who are the unemployed?
are not in paid employment or self-employment (formal & informal sectors)
are available for work (excludes students or homemakers etc.)
are actively seeking work
working age (15-64)
expanded definition also includes discouraged workers
Labour Market Statistics
Two countries with the same unemployment rate can differ in their employment rates if one
has a high participation rate and the other has a low one. The structure of the labour market
differs widely across countries.
labour force
participation rate =
population of working age
, unemployed
unemployment rate =
labour force
employed
employment rate =
population of working age
The Real Wage
The real wage is the nominal wage divided by the price level of the bundle of consumer
goods purchased.
1. each firm decides on its: price, wage, how many people to hire
2. adding up all of these across all firms gives the total employment in the economy and
the real wage
• HR sets the nominal wages
• Marketing sets the price immediately after wages.
• Employees care about the level of the real wages they will receive.
• Real wages= nominal wage relative to the price-level.
The Wage-setting Curve
The wage-setting curve = the real wage necessary at each level of economy-wide
employment to provide workers with incentives to work hard and well.
This wage-setting curve is the mathematical equivalent of an if- then statement. If the
employment rate is X, then W on the wage-setting curve shows the best response for
workers and employers. On this wage-setting curve, no workers have an incentive to reduce
their effort in response to the wage, while employers have no incentive to change the wage
for the given effort level.
Therefore, this wage-setting curve represents the Nash Equilibrium.
If the employment rate is X, then the equilibrium wage will be Y.
, Unemployment rate and the real wage are inversely related.
Deriving the Wage-setting Curve
Unemployment rate increases bargaining power decreases as employers have more
potential workers to choose from reservation wage decreases as RBF shifts left wage
decreases.
Simplifying the Model
