Dynamics of unemployment and real wages, Managerial Economics

Assignment Help:

Dynamics  of Unemployment and  Real  Wages through Productivity Shocks 

The model  that you  are  studying here  is  in  the  tradition of  the  real  business cycle theory that you have studied in earlier units. As you know,  this kind of a model works out the implications of  shocks to productivity. The model has  the following implications  to employment  and wages. 

1)  A temporary qverse shock to productivity decreases hiring (as it decreases the  marginal productivity  of  labour  and  hence  the  benefit  of  hiring  the marginal unit of labour) and  increases unemployment. As  the shock is,  by definition,  temporary, productivity  and  the  net marginal value  of  labour return  to  their original  level, but,  it can be  shown that  the unemployment rate only slowly returns to normal through increased hiring. Moreover, since it  is  cheaper for  the  firm  to  hire  when  there  are  more unemployed,  a productivity shock has greater effect on unemployment when it is high than when  it  is  low.  This is,  of  course,  implicit  in  the  non-linearity  of  the equation explaining u*, the natural rate of unemployment. 

2)  The model explains why fluctuations  in employment may be associated with smaller fluctuations in real wages. This will happen if 6,  the share obtained by workers, is constant, as is assumed  in the model, and small. Real wages vary  in the model with productivity and high rates of hiring are Associated with high real wages. The model thus explains the observed empirical fact of  a  pro-cyclical increase  in  real wages, but  to  a smaller extent  than  the increase  in employment, if the share obtained by workers is small in relation to that obtained by the hiring firms.  


Related Discussions:- Dynamics of unemployment and real wages

Short run equilibrium of a firm under monopoly, The short run equilibrium o...

The short run equilibrium of monopolist is displayed below in figure. Figure: Abnormal Profit under Monopoly AR is the average revenue curve, MR is marginal revenue cu

Price elasticity at terminal points, Price Elasticity at Terminal Points ...

Price Elasticity at Terminal Points The price elasticity at terminal point N equals 0 means that at point N, e = 0. At terminal point M, although, price-elasticity is undefined

What is marginal cost curve, Q. What is Marginal cost curve? MC curve i...

Q. What is Marginal cost curve? MC curve is also 'U' shaped as in Figure below. Marginal cost curve falls initially but then reaches a minimum point and lastly rises. Shape of

PRICE ELASTIC DEMAND, A cut in price from Br 1.50 to Br 1.20 leads demand f...

A cut in price from Br 1.50 to Br 1.20 leads demand for a product rise by 10% What would the price elastic of demand before this product ? interpret the result by identifying the t

Elasticity of Demand, Calculate point elasticity of demand for demand funct...

Calculate point elasticity of demand for demand function Q=10-2p for decrease in price from Rs 3 to Rs 2.

Williamson model, williamson model and managerial discretion about its obje...

williamson model and managerial discretion about its objective and statement of problem

Marginal Revenue Function, if market demand is Q= 30 - 3P how do you write ...

if market demand is Q= 30 - 3P how do you write the marginal revenue function as a function of Q

Demand forecasting, what is the importance of demand forecasting to manager...

what is the importance of demand forecasting to managers

Opportunity cost, Opportunity Cost This is the amount that is sacrifice...

Opportunity Cost This is the amount that is sacrificed when choosing one activity over the next-best alternative.  In organization, an example of opportunity cost is seen in th

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd