unit 9 - the labour market: wages, profits and unemployment

3 factors that determine profit

• nominal wage

• the price firms sell the goods for

• average ouput per worker

wage setting curve

gives the real wage necessary at each level of economy-wide employment to provide workers with incentives to work hard and well

price setting curve

gives the real wage paid when the firms choose their profit maximising price

population of working age

total population - children and people over 64

labour force

only people who can be considered employed or unemployed

those who are active in the labour market

participation rate

labour force / population of working age

unemployment rate

unemployed / labour force

employment rate

employed / population of working age

wage setting curve as a Nash equilibrium

both employers and employees are doing the best they can considering the choices of the other party

why n* (optimal number of people employed) = q*

because average product of labour is assumed to be 1

 λ = 1

markup equation

(p-W) / p

OR

1- (W/p)

price per unit split into

profit per unit

wage cost per unit

output per worker split into

real profit per worker

real wage

what determines height of price setting curve

• competition

• labour productivity

equation of the price setting curve

𝜆−𝜆𝜇

average product of labour - average product of labour x markup

if 𝜆 = 1 → then equation is (1-𝜇)

cyclical unemployment

increased unemployment about the equilibrium unemployment caused by a fall in demand

not a Nash equilibrium

• firms would cut wages to reach a new Nash equilibrium

effects of trade unions

creation of a bargaining curve → set above the wage setting curve

production function

each hour of a worker’s time produces lambda unity of the good

labour market equilibrium

combination of the real wage and the level of emplyoment determined by the intersection of the wage-setting and price setting curves