Post on 07-Feb-2016
description
The WS-PS model of the labour market
The Macro approach to the Labour market
The WS-PS model of the Labour market
IS-LM model examines 2 markets : the goods market and the money market
This allows us to determine 2 variables: The equilibrium Output The equilibrium rate of interest
But we’ve assumed that prices stay fixed!! This might be OK in the short run But is otherwise unrealistic
The WS-PS model of the Labour market
Problem: We want to determine prices (inflation) as well as output and interest rates How do we do that?
We have to add another market (i.e. Another equilibrium equation) It turns out that the required market is the
labour market This is because it is the market for the main
factor of production
The WS-PS model of the Labour market
Definitions
The Wage-Setting equation
The structural rate of unemployment
The Price-Setting equation
Definitions
Employed population (ILO definition)
1. People that are at least 15 years of age;
2. People that have worked (even for a single hour) during the reference period even if self employed, or employed in a family business;
3. People that are employed but on temporary leave of absence (illness, maternity leave, training, etc.);
4. Members of the armed forces, apprentices, paid interns, are part of the active population.
Definitions
Not
Economically
active
population
33 799,2
55%
Unemployed
2 854,0
4%
Employed
population
25 146.5; 41%
Economically Active population in France (ILO definition, 2004)
Definitions
Unemployed (ILO definition) According to the 1982 definition, a person is
unemployed if he/she is a member of the working age population (15 years or more) and fulfils the following conditions:
1. Is not employed : has not worked a single hour during the reference period;
2. Is available for work within 15 days ;
3. Is actively searching for employment.
Definitions
Total French Population(60 Million)
Working Age Population (39) Economically Inactive Population(21)
Labour force (Economically active population) (27)
Economically Inactive Population(12)
Employed population(25)
Unemployed (2)
Definitions
Total French Population(60 Million)
Working Age Population (39) Economically Inactive Population(21)
Labour force (Economically active population) (27)
Economically Inactive Population(12)
Employed population(25)
Unemployed (2)
Population Age Working
ForceLabour rateion Participat
Definitions
Total French Population(60 Million)
Working Age Population (39) Economically Inactive Population(21)
Labour force (Economically active population) (27)
Economically Inactive Population(12)
Employed population(25)
Unemployed (2)
ForceLabour
Population Employed-ForceLabour ratent Unemployme
Definitions
Employed
24,6
Unemployed
3,2
Inactive
12,0
221
138
216
527
19 140
44 070
82 398
98 418
Average monthly flows (France, 2005)
Definitions
0
2
4
6
8
10
12
14
1970 1975 1980 1985 1990 1995 2000 2005
Firs
t Oil
Sho
ck
Sec
ond
Oil
Sho
ck
Rec
essi
on
Eco
nom
ic r
ecov
ery
The unemployment rate in France
The WS-PS model of the Labour market
Definitions
The Wage-Setting equation
The structural rate of unemployment
The Price-Setting equation
The WS Equation
Wages can be determined in several ways Individual negotiations Branch agreements (Trade union negotiations) National legislations
Two main factors play a role: The reservation wage
The wage at which one is indifferent between working or remaining unemployed
Market conditions These determine the bargaining power of the
employee.
The WS Equation
The bargaining power (BP) of a worker is a function of two factors:The ease with which the firm can
replace him Higher likelyhood of replacement ⇒ ↓ BP This is linked to the skills of the worker
and/or the job characteristicsThe ease with which he can find another
job Higher likelyhood of finding job ⇒ ↑ BP This is linked to the level of unemployment
The WS Equation
The nominal wage W is a function : Of the expected level of prices Pe
Negotiations occur at discrete intervals (every X years)
They are based on the expected purchasing power for the duration of the interval
Of the rate of unemployment u High unemployment reduces the BP of workers
Market factors z Institutional factors (unemployment benefits) Structural changes in the economy (skill biased TC)
,eW P F u z
The WS Equation
Unemployment rate u
Real Wage
Real wages are a negative function of the rate of unemployment
WS
P
W
zuFP
We
,
The WS Equation
Unemployment rate u
Real Wage
Real wages are a positive function of market conditions
WS(z)
zuFP
We
,P
W
WS’(z’>z)
The WS-PS model of the Labour market
Definitions
The Wage-Setting equation
The structural rate of unemployment
The Price-Setting equation
The PS Equation
The actual level of prices is determined by the wage rate W represents the marginal cost of production
In the SR, output is a function of labour: Y=N Assumption : constant returns to scale
(1 + μ) : markup on the goods markets μ=0 : perfectly competitive market μ>0 : Imperfectly competitive market In choosing μ, the firms influence the level of the
real wage
1P W
The PS Equation
o Rearranging the PS equation allows us to express the real wage as a function of the markup rate...
o This way we can draw the PS equation in the same space as the WS equation
1
1
1
1
P
WW
P
WP
The PS Equation
Real Wage
The real wage induced by the PS equation is independent of the rate of
unemployment
PS
P
W
Unemployment rate u
1
1
The WS-PS model of the Labour market
Definitions
The Wage-Setting equation
The structural rate of unemployment
The Price-Setting equation
The structural rate of unemployment
The structural rate of unemployment un equalises WS and PS
o The structural rate of unemployment: Is independent of short-term fluctuations As a result it is often called “natural” but this is
incorrect
o un is a function of the structural parameters on the labour
market z Unemployment benefits, production technology, etc.
o un is a function of the structural parameters on the goods
market μ Barriers to entry, level of competition, etc.
1
1, zuF n
The structural rate of unemployment
The labour market equilibrium implies that the wages determined through the bargaining process are consistent with the price setting behaviour of firms
A
un
WS
PS
Real Wage P
W
Unemployment rate u
1
1
The structural rate of unemployment
A
un
WS
PS
WS’
1. An increase in unemployment benefits shifts WS to the right
(better labour market conditions)...
A’
u’n2. ...Which increases the structural rate of unemployment
Real Wage P
W
Unemployment rate u
1
1
The structural rate of unemployment
A
un
WS
PS
PS’
1. An increase in the level of competition reduces the markup...
u’n
A’
2. ... Which reduces the structural level of unemployment
Real Wage P
W
Unemployment rate u
1
1'1
1