Econ 130: Labor Market & Wage Formation

• Econ 130 Macroeconomics: Lecture notes 7 focuses on the labor market and wage formation, based on Holden chapter 7
• This comes in the middle of "Keynesian track," to discuss inflation by looking at wage formation

Shortcomings of Simple Keynesian Models

• There is a consideration of interest rate formation and how monetary policy impacts economic activity
• Analysis of floating exchange rates is needed to understand the role of exchange rates in restoring competitiveness

Labor Market Facts

• Employment and labor force participation are high in Norway, but other countries are higher
• There is a high rate of disability benefits claims in Norway
• There is high participation among older individuals
• High female participation in the labor force, but the difference with other countries is diminishing
• "NEET" (Not in Education, Employment, or Training) for 25-29 year olds: 20% in EU, 10% in Norway, which is a cause for concern

Employment and Working Hours

• In Norway, individuals work relatively few hours per employee, with much vacation, time off, plus high rate of part time work among women
• Working hours per capita are comparable to other countries due to high labor force participation and later retirement

Unemployment

• Unemployment rates are displayed for Euro area, Norway and US from 1991-2016 (predictions for 2015 and 2016)

Long Term Demographics

• There is a focus on global population trends and median age

Labor Shortage

• There are concerns around a potential labor shortage due to an aging workforce and an approaching wave of retirees

Fertility Rates

• Fertility rates are falling and family policies are not improving the situation

Unemployment Types

• Frictional unemployment occurs
• Structural unemployment causes long-term real wage rigidity
• Cyclical unemployment is caused by short-term nominal wage rigidity

Equilibrium Unemployment

• Equilibrium unemployment is the sum of frictional and structural unemployment
• NAIRU (Non-Accelerating Inflation Rate of Unemployment) is another term for equilibrium unemployment
• The term "natural unemployment" is considered misleading as there are actions that can be taken to address structural unemployment

Wage Formation

• Wage tends to fall to market clearing values in perfect competition
• Efficiency Wages: based on issues such as recruitment, turnover, discipline and nutrition
• Worker power from unions in organized countries like Norway
• Unemployment benefits, welfare programs, and minimum wages act as a minimum wage floor, affecting both efficiency wages and negotiated wages

Wage Model

• The competitive sector negotiates wages first, based on competitiveness, inflation, productivity growth and industry profitability
• The rest of the economy follows the pattern, so 30,000 workers set the standard for 3 million
• Idea: Sheltered sector should not destroy the competitive sector, however there is less flexibility

TBU 2025

• Projections are a 2.5% inflation rate
• Autumn 2024 annual wage forecast is NB/SSB: 4.2%-4.3%
• There is a slightly lower inflation forecast, estimated at 4.0%
• 1.5% potential real wage increase and competition exposed industry is doing well and potential end to the decade of little to no real wage growth

The Wage Curve

• The aim is to create a theory on how equilibrium unemployment is determined using wage bargaining
• Priskurven (Price Setting Curve) is a component involving mark-up pricing
• Lønnskurven (Wage curve): A description of negotiated wages is coming

Wage and Price Equations

• W = PeAeW(u, zW) is the wage equation, where W is wages, Pe is expected price level, Ae is a general productivity/technology factor, u is unemployment rate, and zW represents other factors affecting wage setting
• The wage equation indicates that unemployment decreases real wage increases
• Y = AN is the aggregate production function
• MPN = A, marginal productivity of labor
• P = (1 + μ)W/A is the price setting behavior, where P is price level, W is wages, A is productivity, and μ is markup

Equilibrium

• The wage is independent, for example, of 'wage pressure', which may not be realistic
• Assumptions can be made that lead to a rising price curve
• A/(1 + μ) = W/P = AW(un, zW) in the equilibrium of the labor market