Macroeconomics: Unemployment and Real Wages

• Unit 1 covers the supply side of macroeconomics, focusing on unemployment and real wages
• The unit asks why high-income nations with access to the same global markets and technologies experience differences in unemployment and wage growth.
• The unit describes how to measure unemployment and real wages.
• The unit develops a supply-side model featuring wage-setting (WS) and price-setting (PS) curves.
• The unit explains the presence of involuntary unemployment at equilibrium.

Measuring the Economy

• The economy involves interactions between households, firms, and government within the biosphere.
• Labour market statistics include:

Labour Market Statistics

• Participation rate is calculated as labour force divided by the population of working age.
• Unemployment rate is calculated as unemployed divided by labour force.
• Employment rate is calculated as employed divided by the population of working age.

Nominal Wage, CPI, and Real Wage

• Nominal wage can be defined as the monetary amount received for work in a given currency.
• The Consumer Price Index (CPI) measures the price of a "basket" of goods and services commonly purchased by households.
• Real Wage Index = (Nominal Wage Index / Consumer Price Index) × 100

Supply-Side Model

• The supply side of macroeconomics involves the choices of:
  • Business owners who employ workers and sell their products
  • Households who purchase these products, whether employed or not
• The labour market and the product market are where firms and households interact.
• Self-employed individuals or those outside the labor force are not included in the model.
• The total quantity produced is Y, the price per unit of output is P, and total employment is N, all employees receive same salary W.
• Output per worker, Y/N, is assumed constant and measures labour productivity.
• The real wage is expressed as w = W/P.
• The labour market diagrams:

Decision Making

• Company decisions include:
  • Department of Human Resources ('RH') makes the wage-related decision to ensure employees can be recruited and work productively.
  • The marketing department decides a price in order to maxime profits.

Wage Setting (WS) Curve

• The wage setting curve show unemployment and salaries.

Price Setting Curve

• The price setting curve show the link between output, wages, and cost.

WS-PS Model

• The WS-PS Model is a model that integrates the various aspects of the economy.

Recruitment and Reservation Salary

• Focus on workers not changing positions within the company; unemployed being hired, offers a "take it or leave it" deal where all workers get paid same.
• A candidate’s decision hinges on their alternative, which is to look for another job while unemployed.
• This alternative minimum is the reservation wage.

"No-Shirking" Salary

• The HR will propose a salary above the reservation wage to encourage work commitment

Aggregate Wage Curve

• When unemployment is low, the wage is greater
• When employment is low, the wage is lower

Price Setting

• An individual company;
  • Employs several workers, paying a nominal wage (W), determined by the HR department depending on employee numbers desired.
  • Sells product at price (P), selected to maximise profits.

Price Setting Curve

• Elasticity of demand is the percentage reduction in quantity demanded for each percentage increase in price.
• Company's profit margin is price difference and marginal cost
• Markup is profit margin proportion of price.
• When a firm sets its optimal price, a markup is inversely proportional to the price elasticity of demand, PED.
• PED (P - MC)/P = 1/PED

Involuntary Unemployment

• There is always involuntary unemployment at equilibrium
• The cost of job loss would be zero without unemployment because a worker could immediately find another job at equal pay.
• Employees would not be concerned about being fired if there were no costs to losing job.
• Without worker motivation, there won't be sales or production.
• Some amount of unemployment is necessary for a company to drive and motivate its workers.
• Salaries are always set above workers' reservation salary.
• There has to be unemployment at equilibium, where the price and salary curve intersects

General vs Partial Equilibrium

• Understanding the entire economy requires the inclusion of aggregation
• Analysing the general equilibrium is how players impact direct or indirect factors.
• The partial contrasts with the equilibrium where the economy tends to constant.
• The WS-PS combines two partial equilibrium models to observe the impacts fo salaries on the market and prices firm set.

In Summary

• The wages and price model WS-PS combines a range of factors where households and businesses interact in labour and product markets.
• Business managers fix a salary to attract and motivate workers.
• There is involuntary unemployment at equilibrium i.e. the WS-PS intersection.