Econ 3 - Module 3 Learning Objectives

Module 3: The Aggregate Labor/Product Model: Unemployment, Output, and Inequality

Learning Objectives

• Understand key labor market metrics and models

• Evaluate the mechanisms of the product market and their interactions with labor

Page 1: Labor Measurement

Key Concepts

Definitions:

• Employment: The condition of having a job.

• Unemployment: The condition of being jobless while actively looking for work.

• Labor Force: The sum of employed and unemployed individuals who are actively seeking work.

• Working Age Population: Individuals aged 16 and older not institutionalized.

Metrics Computation

• Participation Rate: (Labor Force / Working Age Population) x 100Exam Application: Calculate participation rate using provided data (e.g., if the labor force is 800 and the working-age population is 1,200, the participation rate would be: (800 / 1200) x 100 = 66.67%).

• Unemployment Rate: (Unemployed / Labor Force) x 100Practice Problem: If there are 150 unemployed individuals and a labor force of 1000, compute the unemployment rate.Answer: Unemployment Rate = (150 / 1000) x 100 = 15%.

• Employment Rate: (Employed / Labor Force) x 100Exam Application: Solve scenarios using provided employment numbers (for example, if 850 are employed in the labor force of 1000, the employment rate would be: (850 / 1000) x 100 = 85%).

Labor Flows

• Typical transitions: Employed → Unemployed → Out of Labor ForcePractice Problem: Draw a labor flow diagram illustrating transitions based on numerical employment changes (e.g., a sudden layoff affecting 50 workers).

Labor Market Dynamics

Employment Relationships

• Effort and Information Asymmetry: Differentiating between worker output and employer monitoring capabilities.

• Reservation WageGraphical Representation: Create a graph showing the Reservation Wage Curve against employment levels.Exam Application: Analyze how shifts in economic conditions affect the reservation wage (e.g., if demand for low-skilled labor increases, how does that affect the reservation wage?).

• Employment Rent: Additional income over the reservation wage received by workers.Practice Problem: Calculate the employment rent if the reservation wage is $10 and the current wage is $15.Answer: Employment Rent = Current Wage - Reservation Wage = $15 - $10 = $5.

• No-Shirking Wage CurveExam Application: Discuss factors influencing shifts in the no-shirking wage curve in a written response (e.g., minimum wage laws or economic downturns).

• Wage Setting Curve (WS)Graphical Representation: Depict the WS curve showing the relationship between wages and labor demand.Exam Application: Interpret shifts in the WS curve under different economic scenarios (e.g., increased commercial tax affecting wages and employment).

Unemployment in WS Model

• Analyze determinants of unemployment using shifts from WS and PS models.Practice Problem: Given specific shifts in WS and PS curves, assess their effect on unemployment levels in a written description.

Page 2: Product Market Dynamics

Product Demand

• Firm Demand Representation: Calculate quantity demanded based on price and demand equations.Practice Problem: Using a demand equation like Qd = 100 - 2P, calculate the quantity demanded at a price of $20.

Cost Per Unit of Output

• Unit Cost of OutputExam Application: Solve problems based on total costs and output quantities to find per unit costs (e.g., if total cost is $1000 for 500 units, the unit cost is $1000 / 500 = $2).

Price Determination

• Markup: The difference between selling price and cost of production.Practice Problem: If a product costs $40 and sells for $60, calculate the markup.Answer: Markup = Selling Price - Cost = $60 - $40 = $20.

• Understanding Real Wage: Expressed in terms of markup and productivity.

Price Setting Curve (PS)

• Graphical Representation: Illustrate PS curve showing pricing strategies with real wages on the y-axis.Exam Application: Analyze the impacts of external factors on the PS curve in exams (e.g., how a surge in oil prices may shift the PS curve by increasing production costs).

Page 3: Aggregate Labor/Product Market

Equilibrium Representation

• Diagrammatic Representation: Show equilibrium in both labor and product markets.Exam Application: Assess how shifts in WS and PS curves impact market equilibrium using specific scenarios (e.g., a recession causing the WS curve to shift left).

• Nash Equilibrium: Discuss its implications in the discussion of WS and PS curves (e.g., how companies may adjust wages based on competitors’ hiring practices).

Workers’ vs. Owners’ Income Share

• Discuss the changing dynamics of income shares in relation to employment levels.

Application of Aggregate Model

• Assessing Economic Features: Compare unemployment data between countries, leveraging given datasets.Practice Problem: Analyze GDP and wage trends over specified periods, perhaps comparing Germany's GDP from 2000-2020 against Spain’s.

Income Inequality

• Lorenz Curve: A visual representation of income distribution.Practice Problem: Given data for the Lorenz curve, calculate the Gini index and explain its economic significance.

Answers to Practice Problems:

1. Unemployment Rate: 15%

2. Employment Rent: $5

3. Markup: $20

4. Lorenz Curve and Gini Index: (Specific answers depend on provided Lorenz curve data).