Labour Markets (include theory)

2 Main ways information asymmetry manifests

adverse selection, moral hazard

Adverse selection

consumers only willing to spend a certain amount, but the supplier knows it is worth more causing the good firms to leave the market - unravelling of the market

Moral hazard

people may shirk their job as the employer can’t perfectly monitor their employees

What is the problem with unemployment rate

masks the large flows of employment

Quits

workers leaving their jobs for better employment

Layoffs

come from changes in employment levels across firms

What is the average duration of unemployment

three months

What is path dependence

the longer they remain unemployed, the more likely they are to remain unemployed

Discouraged workers

classified as out of the labour force but they would take a job if they found it

What is the standard relationship between wages and unemployment

wage is the outcome of bargaining, when in a tight labour market, workers have more bargaining power

How long until firms will not hire anymore workers

When the marginal productivity of labour equals the wage rate

Why does the labour supply curve slope upwards

the price of leisure is higher when wages are higher

Backward bending labour supply curve

when the wage is so high that the income effect dominates the substitution effect

What does this show

increase in income tax

Monopsony

firm has pricing power over the price it pays for production factors

Supply shocks

changes in social norms, changes in technology for managing fertility, changes in immigration

Demand shocks

reduced discrimination against women, emergence of new technology enhancing productivity

What is this

Effects of globalisation

What is this

Skill-biased technological change

Natural rate of unemployment

rate that would happen if the economy did not have any boom or busts

Cyclical unemployment formula

the difference between the actual rate and the natural rate

the natural rate of unemployment includes two components

frictional unemployment, structural unemployment

Actual unemployment formula

frictional + structural + cyclical

Unemployment insurance - benefits

allows consumption smoothing, reduces stress associated with unemployment

Unemployment insurance - costs

provides disincentive to search for work, costly

Wage determination

collective bargaining, awards, individual agreements

How much bargaining power a worker has depends on

how costly it would be for the firm to replace the worker, how hard it would be for the worker to find another job