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Labor Demand, Supply Relations

equilibrium - where price, wage setting relations intersect  

  • W/P = F(u,z) >> W/P = 1/(1+m)
  • F(un,z) = 1 / (1+m)
    • un = equilibrium unemployment rate, aka natural rate of unemployment
  • curve shifts - important to note that only markup m can affect the price-setting relation
    • catch-all variable z affects wage-setting relation
    • unemployment changes affect mov't along the wage-setting relation curve

 

  • original wage-setting relation
  • new wage-setting relation
  • suppose unemployment benefits increase >> z increases >> wage-setting relation shifted up >> workers want higher wages
  • price-setting relation stays constant (firms unwilling to pay higher wages) >> unemployment increases to restore equilibrium (firms forced to hire less or lay-off)

 

  • to keep unemployment the same, firms could have decreased markup at the same time

 

  • suppose firms form a monopoly >> can mark-up prices more >> real wage decreases
  • workers will accept the lower real wage as unemployment increases
Subject: 
Economics
Subject X2: 
Economics

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