Labor Market Continuation

General Population → subtract people from under 15 and over 65 which gives you the population of working age

Population of working age → two sections inactive and regular labor force

labor force → Employed and Unemployed

Labor force - Employed and Unemployed

People of working age - Labor Force and Out of Labor Force (inactive)

Formulas

Participation rate =

labor force (employed and unemployed) / population of working age = around 60%

Unemployment rate = unemployed / labor force

Labor force = unemployed + employed

Bargaining power

Reservation wage - lowest wage youre willing to accept to take a job

Wage Determination

• Workers wages typically exceed their reservation wage — the wage that would make them indifferent between working or being unemployed

• Wages typically depend on labor market conditions. In particular, the lower unemployment the higher the wages

• Workers bargaining power depends on:

  • how costly it is for the firm to find workers

  • how hard it is for workers to find another job if they were to leave the firms

• At the aggregate level, we can write the wage setting equation as:

$W=P^{e}F\left(u,z\right):F_{u}<0,F_{t}>0$

$N$

$Y$

$m=markup$

Wage Setting Curve (WS)

Exercise

1. true because 80/90 × 100

2. false because 64/80

3. false beacuse 64 / 90

4. …

Price Setting Curve (PS)

Price Determination:

• This production function implies that the marginal cost of production is equal to W

• Assume that firms set their prices according to a markup m over their marginal cost:

$P=\left(1+m\right)W$

• We can rewrite this price setting equation in terms of real wage:

$\frac{W}{P}=\frac{1}{\left(1+m\right)}$

• The higher the markup m the lower the wages

higher wages higher the prices but they aren’t equal → prices will depend on wages but will be added mark-up

W/P = real wages

A = labor productivity

$\lambda$ = lambda

Labor Productivity ($\lambda$ , A)

Output/all those who do it → Y/N

Natural / structural unemployment rate