THE ECONOMY: THE CORE PROJECT

UNIT 9: THE LABOUR MARKET

T9.1 Measuring the economy: Labour force statistics You are given the following data for the five countries. The numbers are in thousands. Of the five countries, which of the following statements is correct?   Greece Italy Japan UK USA Population of working age 9,213 52,058 110,780 52,812 253,538 Labour force 4,804 25,770 66,480 33,239 159,187 Employed 3,674 22,758 64,400 31,640 151,436 Select one answer UK has the smallest number of unemployed people. USA has the highest participation rate. Italy has the lowest employment rate. Japan has the lowest unemployment rate. Section 9.2

ANSWER: T9.1 Measuring the economy: Labour force statistics You are given the following data for the five countries. The numbers are in thousands. Of the five countries, which of the following statements is correct?   Greece Italy Japan UK USA Population of working age 9,213 52,058 110,780 52,812 253,538 Labour force 4,804 25,770 66,480 33,239 159,187 Employed 3,674 22,758 64,400 31,640 151,436 Feedback The number of unemployed in the UK is 33,239 – 31,640 = 1,599 thousand. On the other hand the number of unemployed in Greece is 4,804 – 3,674 = 1,130 thousand. Therefore this is incorrect. The participation rate in the USA is 159,187/253,538 = 62.8%. This is just beaten by the UK’s participation rate, which is 33,239/52,812 = 62.9%. Italy’s employment rate is 22,758/52,058 = 43.7%. This is higher than Greece’s employment rate of 3,674/ 9,213 = 39.9%. Japan’s unemployment rate is (66,480 – 64,400)/66,480 = 3.1%. This is indeed the lowest of the five countries. Select one answer UK has the smallest number of unemployed people. USA has the highest participation rate. Italy has the lowest employment rate. Japan has the lowest unemployment rate. Section 9.2

T9.2 The wage-setting curve Which of the following statements about the wage-setting curve is correct? Select one answer The wage-setting curve depicts the workers’ reservation wage for different levels of economy-wide employment. At each point (U,w) on the wage-setting curve, the workers are choosing their best response effort level given the real wage w and unemployment rate U. A lower unemployment rate shifts down the wage-setting curve. An exodus of European workers as a result of the Brexit would result in a downward shift of the UK’s wage-setting curve. Section 9.3

ANSWER: T9.2 The wage-setting curve Which of the following statements about the wage-setting curve is correct? Feedback The wage-setting curve depicts the real wage necessary to provide workers with incentives to work hard (which is higher than their reservation wage), for different levels of economy-wide employment. This is true. Each point (U,w) on the wage-setting curve is derived as the point of tangency between the workers’ best response function (their best choice of effort per hour for each w, given U) and the employers’ isocost line. A lower unemployment rate shifts the workers’ best response function for effort exerted given the wage level to the right. This means that the employers need to offer a higher wage to induce a higher effort level. This is a movement up along the wage-setting curve and not a shift of the entire curve, since employment is endogenous (the horizontal axis variable). With the balance of job seekers and vacancies shifting in favour of the remaining workers, their best response function shifts to the right, resulting in the wage-setting curve shifting up. Select one answer The wage-setting curve depicts the workers’ reservation wage for different levels of economy-wide employment. At each point (U,w) on the wage-setting curve, the workers are choosing their best response effort level given the real wage w and unemployment rate U. A lower unemployment rate shifts down the wage-setting curve. An exodus of European workers as a result of the Brexit would result in a downward shift of the UK’s wage-setting curve. Section 9.3

T9.3 The price-setting curve Which of the following statements about the price-setting curve is correct? Select one answer The price-setting curve depicts the firms’ profit-maximising price level for different levels of economy-wide employment. Firms have to pay a higher real wage when the employment rate is higher. Therefore the price-setting curve is upward-sloping. At points below the price-setting curve, the firms are setting prices too high compared to their profit-maximising level. The falling European competition due to Brexit would result in the UK price-setting curve shifting up. Section 9.5

ANSWER: T9.3 The price-setting curve Which of the following statements about the price-setting curve is correct? Feedback The price-setting curve depicts the real wage paid when firms choose their profit-maximising price, for different levels of economy-wide employment. The price-setting curve represents the level of the real wage consistent with the firms’ profit-maximising markup over costs. It is independent of the level of employment in the economy, and therefore it is a horizontal line. The price-setting curve represents the profit-maximising real wage. At points below the curve the real wage is lower than the level consistent with the firm’s profit-maximising markup, and therefore the markup, and hence the price, is too high. Lower competition means a higher markup. With the workers’ APL unaffected this leads to a fall in the real wage. Therefore the price-setting curve shifts down. Select one answer The price-setting curve depicts the firms’ profit-maximising price level for different levels of economy-wide employment. Firms have to pay a higher real wage when the employment rate is higher. Therefore the price-setting curve is upward-sloping. At points below the price-setting curve, the firms are setting prices too high compared to their profit-maximising level. The falling European competition due to Brexit would result in the UK price-setting curve shifting up. Section 9.5

T9.4 The price-setting curve The figure depicts the labour market model. Ceteris paribus, in which of the following cases would the equilibrium real wage level rise? Select all correct answers Higher labour productivity. Higher competition in the output goods market. An exodus of immigrant workers. Higher unemployment benefit. Section 9.6

T9.4 The price-setting curve The figure depicts the labour market model. Ceteris paribus, in which of the following cases would the equilibrium real wage level rise? Feedback With a higher APL but a constant markup, the price-setting curve rises. The wage-setting curve is unaffected. This leads to a higher real wage. With a lower markup but a constant APL, the price-setting curve rises. The wage-setting curve is unaffected. This leads to a higher real wage. With the balance of job seekers and vacancies shifting in favour of the remaining workers, the wage-setting curve shifts up. The price-setting curve is unaffected. This decreases the equilibrium unemployment level but the real wage remains the same. A higher unemployment benefit raises the reservation wage of the workers. Their best response curve shifts to the right and we move rightwards along the wage-setting curve. With the real wage too high and markup too low, firms raise price, and given demand, both output and employment fall. The real wage thus returns to its initial level. Select all correct answers Higher labour productivity. Higher competition in the output goods market. An exodus of immigrant workers. Higher unemployment benefit. Section 9.6